Finance Assignment - Risking It All In Capital

Assignment Guidelines:

• Find an estimate of the risk-free rate of interest (krf). To obtain this value, go toBloomberg.com: Market Dataand 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 theXYZ Stock Informationby clicking the link.
• Using the information from the XYZ Stock Information document, record the following values:
• XYZ's beta (ß)
• XYZ's current annual dividend
• XYZ's 3-year dividend growth rate (g)
• IndustryP/E
• XYZ'sEPS
• With the information you recorded, use the CAPM to calculate XYZ's 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 theXYZ Stock Informationto find XYZ's 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 thekrfand the stock'sbetaremain the same for this exercise.
• What will the new price be? Explain.
• Recalculate XYZ's stock price using theP/E ratio modeland 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)?