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  • Find an estimate of the risk-free rate of interest (krf). To obtain this value, go to Bloomberg.com: Market Data and use the "U.S. 10-year Treasury" bond rate (middle column) as the risk-free rate. In addition, you also need a value for the market risk premium. Use an assumed market risk premium of 9.00%.
  • Download the XYZ Stock Information by clicking the link.
  • Using the information from the XYZ Stock Information document, record the following values:
    • XYZs beta (ß)
    • XYZs current annual dividend
    • XYZs 3-year dividend growth rate (g)
    • Industry P/E
    • XYZs EPS
  • With the information you recorded, use the CAPM to calculate XYZs required rate of return (ks).
  • Use the CGM to find the current stock price for XYZ. We will call this the theoretical price (Po).
  • Now use the XYZ Stock Information to find XYZs current stock quote (P). Compare Po and P and answer the following questions:
    • Are there any differences?
    • What factors may be at work for such a difference in the two prices?
  • Now assume the market risk premium has increased from 9.00% to 12% and this increase is due only to the increased risk in the market. In other words, assume the krf and the stocks betaremain the same for this exercise.
    • What will the new price be? Explain.
  • Recalculate XYZs stock price using the P/E ratio model and the needed info found in the XYZ Stock Information file.
    • Why is the present stock price different from the price arrived at using CGM (Constant Growth Model)?
  • If you used Microsoft Word to arrive at your answers, then you must provide an explanation of the formulas and calculations.
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