INTERNATIONAL BUSINESS MACHINES
Price and Valuation View chart
Current 52-week 60-month 50-day Avg 200-day Avg
Price Range Beta Price Price
IBM 76.28 71.85 - 99.10 1.64 87.72 89.50
EPS Price/Earnings PEG Ratio Price/Sales Price/Book
IBM $4.87 15.65 1.58 1.27 4.12
Industry* N/A* 23.2 .1 1.42 7.0
Latest Latest Latest
Relative Total Return
Quarterly 12-month Fiscal
Strength (5-yr trailing)
Total Return Total Return Total Return
IBM 5.1% 20.4% 18.4% 20.4% -7.8%
Growth Trends View chart
Latest Annual 1-yr Income 3-yr Income 5-yr Income 10-yr Income
Income (mil) Growth Growth Growth Growth
$7,583.0
IBM (12/2003)
111.9% -9.2% -4.0% N/A*
Industry* N/A* 232.43% -28.54% -19.50% NC%
Latest Annual 1-yr Revenue 3-yr Revenue 5-yr Revenue 10-yr Revenue
Revenue (mil) Growth Growth Growth Growth
$89,131.0
IBM (12/2003)
9.8% -0.3% 0.5% 3.4%
Industry* N/A* 15.21% 3.68% 3.34% 3.63%
Latest Annual 1-yr EPS 3-yr EPS 5-yr EPS 10-yr EPS
EPS Growth Growth Growth Growth
IBM $4.87 109.7% -8.0% -2.1% N/A*
Industry* N/A* 261.90% -33.14% -27.26% NC%
Annual Dividend 3-yr Dividend 5-yr Dividend 10-yr Dividend
Dividend/Share Yield Growth Rate Growth Rate Growth Rate
IBM $0.80 1.05% 8.2% 9.4%
Financial Strength View Chart
Current
Total Long-term Long-term Current
LT Debt
Debt/Equity Debt/Equity Debt/Assets Total Debt
(mil)
IBM .85 0.61 0.16 $23,632.0 $16,986.0
Current Current
Book Value/
Current Ratio Quick Ratio Inventory Receivable
Share
Turnover Turnover
IBM $16.44 1.2 1.0 16.9 3.2
Management Effectiveness View chart
3-yr Avg 5-yr Avg 10-yr Avg Revenue/
Return on
Return Return Return Employee
Assets
on Assets on Assets on Assets (000's)
IBM 7.3% 6.6% 7.5% 6.8% $251
Industry* 3.4% 3.5% 5.7% 5.9% N/A*
Return on 3-yr Avg 5-yr Avg 10-yr Avg Income/
Equity Return Return Return Employee
on Equity on Equity on Equity (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 View Chart
Annual Oper. 1-yr Oper. 3-yr Oper. 5-yr Oper. 10-yr Oper.
Cash Flow Cash Flow Cash Flow Cash Flow Cash Flow
(mil) (mil) (mil) (mil) (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 1-yr Avg 3-yr Avg 5-yr Avg 10-yr Avg
Price/Cash Price/Cash Price/Cash Price/Cash Price/Cash
Flow Flow Flow Flow Flow
IBM 12.8 12.8% 14.4% 13.8% 11.0%
Share Information View Chart
Shares Number of Shares Held
Market Cap % Held by
Outstanding Institutional by Institutions
(mil) Institutions
(000's) Shareholders (000's)
IBM $158,708.47 1,699,416 3,422 948,066 55.1%
*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
NOTE: While several of the above values are fairly current, others come from previous timeframes but have been
included to demonstrate the type of information that is available on various websites. Although the data contained in this
document MUST be used for the purpose of the associated class exercise, it should NOT be used for actual investment
analysis, as only the most current information should be used for that purpose.
Business Homework Solutions
#53949
Risk and capital
By walking me through a set of financial data for IBM, this assignment will help me better understand how theoretical stock prices are calculated; and how prices may react to market forces such as risk and interest rates. I will use both the CAPM (Capital Asset Pricing Model) and the Constant Growth Model (CGM) to arrive at IBM's stock price. To get started, complete the following steps.
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 use the "U.S. 10-year Treasury" bond 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 7.5%.
2. Download this IBM Stock Information document (.pdf file). Please note that the following information contained in this document must be used to complete the subsequent questions.
1. IBM's beta (àŸ)
2. IBM's current annual dividend
3. IBM's 3-year dividend growth rate (g)
4. Industry P/E
5. IBM's EPS.
3. With the information you now have, use the CAPM to calculate IBM's required rate of return or ks.
4. Use the CGM to find the current stock price for IBM. We will call this the theoretical price or Po.
5. 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.
6. Now assume the market risk premium has increased from 7.5% 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.
7. Recalculate IBM's stock using the P/E ratio model (pp. 350-1) and the needed info found in the IBM pdf file. Explain why the present stock price is different from the price arrived at using CGM (Constant Growth Model).
Please show all work, including formulae and calculations used to arrive at financial values.
The solution explains the use of dividend discount model to calculate the stock price using the example of IBM
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Vineet Swarup, MBA - 4.9/5
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