Stock Price of IBM

By walking you through a set of real-time financial data for IBM, this assignment will help you better understand how theoretical stock prices are calculated; and how prices may react to market forces such as risk and interest rates. You will use both the CAPM and the Constant Growth Model (CGM) to arrive at IBM's stock price. To get started, complete the following steps.

First, find an estimate of the risk-free rate of interest, krf. To calcuate this rate, first go to Bloomberg.com: Market Data [http://www.bloomberg.com/markets/index.html], to find the 10-year Treasury bond rate. Use this interest rate as the risk-free rate. In addition, you also need a value for the market risk premium. Use an assumed market risk premium of 7.0%.

Download this IBM Stock Information document (.doc file). This document was generated from recent financial data for IBM. Using this document, find an estimate of IBM's beta (β). Also find IBM's current annual dividend and its 3-year growth rate, or g.

With the information you now have, use the CAPM to calculate IBM's required rate of return or ks.

Use the CGM to find the current stock price for IBM. We will call this the theoretical price or Po.

Now use appropriate Web resources to find IBM's current stock quote, or P. Compare Po and P. Do you see any differences? Can you explain what factors may be at work for such a difference in the two prices? This section is especially important-with more weight in grading-so you may want to do some study before answering such a question. Explain your thoughts clearly.

Now assume the market risk premium has increased from 7.0% to 10%; and this increase is due only to the increased risk in the market. In other words, assume krf and stock's beta remains the same for this exercise. What will the new price be? Explain what happened?

Recalculate IBM's stock using the P/E ratio model (pp. 350-1) and the needed info found on the Web. Explain why the present stock price is different from the price arrived at using CGM.

Please show all work, including formulae and calculations used to arrive at financial values.

Attached file(s):

IBM Doc.doc View File

Attachment Content Summary (Note: view attachment at the above link before purchasing. Actual attachment content may vary slightly from that shown below.)

IBM Doc.doc

INTERNATIONAL BUSINESS MACHINES

Top of Form

HYPERLINK "javascript:openTSL('/investments/tsl/')" Don't know the
symbol?

- HYPERLINK
"javascript:%7bfunction%20subst(sym,c,s)%7bvar%20tmp='';%20while((x=sym.
indexOf(c))%3e0)%7btmp+=sym.substring(0,x)+s;%20sym=sym.substring(x+1)%7
d;%20return%20tmp+sym%7d;%20var%20tickers=document.symbol_entry.p.value;
%20tickers=subst(tickers,'+','\\x252B');%20tickers=subst(tickers,'%20','
\\x2520');%20tickers=subst(tickers,',','\\x252C');%20location.href='/inv
estments/portfolio/AddToPort/?AddToPortfolio=1&p='+tickers+'&ref=stats&c
hannel=investments'%7d" Add to your watchlist

- HYPERLINK
"javascript:function%20ptr()%7burl=location.href+'&print=1';%20gw%20=%20
open(url,'popup','toolbar=no,width=740,height=320,directories=no,status=
no,scrollbars,menubar,resizable=no,location=no');%20gw.focus()%7d%20ptr(
)" Printer-friendly version

Bottom of Form

IBM 93.39 -0.31

Price and Valuation HYPERLINK
"javascript:go('../stats/','&defview=CHART&stats=price')" View chart

Current

Price 52-week

Range 60-month

Beta 50-day Avg

Price 200-day Avg

Price

IBM 93.39 78.13-100.43 1.47 95.73 90.16

HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=eps')" EPS
HYPERLINK "javascript:NewWindow('/glossary/glsslnch.cgi?topic=peratio')"
Price/Earnings HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=pegratio')" PEG
Ratio HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=prsales')"
Price/Sales HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=priceboo')"
Price/Book

IBM $4.32 21.70 1.9

(12/2003) 1.76

(12/2003) 5.70

Industry* N/A* 38.9 .1 1.42 N/A*

HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=totalret')" Latest

Quarterly

Total Return HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=totalret')" Latest

12-month

Total Return HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=relstren')"
Relative

Strength HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=totalret')" Latest

Fiscal

Total Return HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=totalret')" Total
Return

(5-yr trailing)

IBM 5.1% 20.4% 18.4% 20.4% -7.8%

Growth Trends HYPERLINK
"javascript:go('../stats/','&defview=CHART&stats=growth')" View chart

Latest Annual

Income (mil) 1-yr Income

Growth 3-yr Income

Growth 5-yr Income

Growth 10-yr Income

Growth

IBM $7,583.0

(12/2003) 111.9% -9.2% -4.0% N/A*

Industry* N/A* 232.43% -28.54% -19.50% NC%

HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=t_revenue')" Latest
Annual

Revenue (mil) HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=revgrow')" 1-yr
Revenue

Growth HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=revgrow')" 3-yr
Revenue

Growth HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=revgrow')" 5-yr
Revenue

Growth HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=revgrow')" 10-yr
Revenue

Growth

IBM $89,131.0

(12/2003) 9.8% -0.3% 0.5% 3.4%

Industry* N/A* 15.21% 3.68% 3.34% 3.63%

HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=eps')" Latest
Annual

EPS HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=earninggr')" 1-yr
EPS

Growth HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=earninggr')" 3-yr
EPS

Growth HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=earninggr')" 5-yr
EPS

Growth HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=earninggr')" 10-yr
EPS

Growth

IBM $4.32

(12/2003) 109.7% -8.0% -2.1% N/A*

Industry* N/A* 261.90% -33.14% -27.26% NC%

HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=divshare')" Annual

Dividend/Share HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=divyield')"
Dividend

Yield 3-yr Dividend

Growth Rate 5-yr Dividend

Growth Rate 10-yr Dividend

Growth Rate

IBM $0.64 0.7% 7.3% 9.2% 8.5%

Financial Strength HYPERLINK
"http://www.quicken.com/investments/stats/financial'" View Chart

HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=deratio')" Total

Debt/Equity HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=deratio')"
Long-term

Debt/Equity HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=debt_ass')"
Long-term

Debt/Assets HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=totdebt')" Current

Total Debt HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=longdebt')" Current

LT Debt

(mil)

IBM .85 0.61 0.16 $23,632.0 $16,986.0

HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=bookval')" Book
Value/

Share HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=curatio')" Current
Ratio HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=quickrat')" Quick
Ratio Current

Inventory

Turnover Current

Receivable

Turnover

IBM $16.44

(12/2003) 1.2 1.0 16.9 3.2

Management Effectiveness HYPERLINK
"javascript:go('../stats/','&defview=CHART&stats=management')" View
chart

HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=reassets')" Return
on

Assets HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=reassets')" 3-yr
Avg

Return

on Assets HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=reassets')" 5-yr
Avg

Return

on Assets HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=reassets')" 10-yr
Avg

Return

on Assets HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=revemp')" Revenue/

Employee

(000's)

IBM 7.3% 6.6% 7.5% 6.8% $251

Industry* 3.4% 3.5% 5.7% 5.9% N/A*

HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=roe')" Return on

Equity HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=roe')" 3-yr Avg

Return

on Equity HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=roe')" 5-yr Avg

Return

on Equity HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=roe')" 10-yr Avg

Return

on Equity HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=incemp')" Income/

Employee

(000's)

IBM 27.2% 25.2% 30.7% 27.5% $21

Industry* 9.2% 10.0% 17.2% 17.8% N/A*

Cash Flow HYPERLINK
"javascript:go('../stats/','&defview=CHART&stats=cash')" View Chart

HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=cashflow')" Annual
Oper.

Cash Flow

(mil) HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=cashflow')" 1-yr
Oper.

Cash Flow

(mil) HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=cashflow')" 3-yr
Oper.

Cash Flow

(mil) HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=cashflow')" 5-yr
Oper.

Cash Flow

(mil) HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=cashflow')" 10-yr
Oper.

Cash Flow

(mil)

IBM $12,314.0 26.8% -4.2% -2.2% N/A*

Industry* N/A* 30.43% -10.90% -7.07% 16.86%

Annual

Price/Cash

Flow 1-yr Avg

Price/Cash

Flow 3-yr Avg

Price/Cash

Flow 5-yr Avg

Price/Cash

Flow 10-yr Avg

Price/Cash

Flow

IBM 12.8 12.8% 14.4% 13.8% 11.0%

Share Information HYPERLINK
"javascript:go('../stats/','&defview=CHART&stats=share')" View Chart

HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=mark_cap')" Market
Cap

(mil) HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=outshr')" Shares

Outstanding

(000's) Number of

Institutional

Shareholders Shares Held

by Institutionas

(000's) HYPERLINK
"javascript:NewWindow('/glossary/glsslnch.cgi?topic=perinst')" % Held
by

Institutions

IBM $158,708.47 1,699,416 3,422 948,066 55.1%

Data as of 04/06/2004

*Industry - Diversified Computer Sys

*N/A - Not Available

*N/C - Not Calculable

*N/E - Negative Earnings

*N/M - Not Meaningful

*N/S - Negative Stockholders Equity

Wednesday, April 07, 2004 09:35 AM EDT. Quote delayed: 15 minutes
Nasdaq, 20 minutes others.

The theoretical stock price of IBM is calculated and compared with the actual price and the difference between the two is explained.

What is this?

By OTA - Overall OTA Rating

Parool Agarwal, CA (IP) - 4.9/5

Purchase Cost Now

$2.19 CAD (was ~$15.96)

Included in Download

Plain text response
Attached file(s):
- 35266-business-IBM stock price.xls

Why you can trust BrainMass.com

Your Information is Secure
Best Online Academic Help Service
Students find real academic Success

IBM and Theoretical Stock Prices - By walking you through a set of financial data for IBM, this assignment will help you better understand how theoretical stock prices are calculated; and how prices may react to market forces such as r ...
Stock Price of IBM - By walking you through a set of financial data for IBM, this assignment will help you better understand how theoretical stock prices are calculated; and how prices may react to market forces such as r ...
Need help in understanding how theoretical stock prices are calculated; and how prices may react to market forces such as risk and interest rates. - Please use present day rates . 1. Find an estimate of the risk-free rate of interest, krf. To obtain this value, go to Bloomberg.com: Market Data [http://www.bloomberg.com/markets/index.html] and u ...
CAPM and CGM - By walking you through a set of real-time financial data for IBM, this assignment will help you better understand how theoretical stock prices are calculated; and how prices may react to market forces ...
Find an estimate of the risk-free rate of interest, krf. Use the CAPM to calculate IBM's required rate of return or ks. Use the CGM to find the current stock price for IBM. - By walking you through a set of financial data for IBM, this assignment will help you better understand how theoretical stock prices are calculated; and how prices may react to market forces such as r ...

Business · Chemistry · Statistics · Physics · Computer Science · Math · Biology · Economics · Psychology · Law · Health Sciences · more

Legal Terms and Conditions · Privacy Policy · Copyright Notification Policy · Non-Payment Policy
Reference Desk · Advertise on BrainMass · Contact Us · Homework Help Solutions · Student Center