Unit 3-IP – FINA310-06 Financial ManagementMarsha JonesBy walking through a set of financial data...

Question

Unit 3-IP – FINA310-06 Financial Management
Marsha Jones
By walking through a set of financial data for XYZ, 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 (capital asset pricing model) and the constant growth model (CGM) to arrive at XYZ's stock price.
To receive full credit on this assignment, please show all work, including formulae and calculations used to arrive at financial values.
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%.

World Markets

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Treasury	Coupon	Maturity	Price/Yield	Price/Yield Change(bp)	Time
U.S. Government Bonds
2-Year	0.38	XXXXXXXXXX	99-31/0.39	+0.08/-4	16:52:33
10-Year	2.50	XXXXXXXXXX	96-29½/2.86	+0.22/-2	16:48:09
30-Year	3.63	XXXXXXXXXX	95-26½/3.86	-0.44/+3	16:49:00
U.K. Government Bonds
2-Year	4.75	XXXXXXXXXX	108.38/0.48	-0.03/+1	11:59:54
10-Year	2.25	XXXXXXXXXX	94.58/2.88	+0.26/-3	11:59:59
30-Year	3.25	XXXXXXXXXX	92.51/3.66	+0.17/-1	11:59:59
Japan Government Bonds
2-Year	0.10	XXXXXXXXXX	99.99/0.11	0.00/0	04:31:08
10-Year	0.80	XXXXXXXXXX	100.77/0.72	+0.00/0	04:31:08
30-Year	1.80	XXXXXXXXXX	100.12/1.79	0.00/0	04:31:08

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)?
If you used Microsoft Word to arrive at your answers, then you must provide an explanation of the formulas and calculations.
Your submitted assignment (125 points) must include the following:
Adouble-spaced Word document of 2–3 pages that contains the following:
- All of the numerical values listed in the assignment guidelines.
- Your answers to thefour questions in the assignment guidelines.
- The formulas and calculationsthat you used to arrive at your answers
You must include your explanation of how you used Microsoft Excel for your calculations if applicable.
Abstract

References
NASDAQ. (n.d.). Retrieved from http://www.nasdaq.com
("Nasdaq,")
New York stock exchange. (n.d.). Retrieved from https://nyse.nyx.com/
("New York Stock,")

005_82pbjo-kgcettld.doc

David · Accepted Answer

Running head:  BUSN311 - Quantitative Methods and Analysis                                        1
Unit 3-IP – FINA310-06 Financial Management 
Marsha Jones 
Given Information:-
Risk free rate of return (10 year US Treasury bond rate) (Rf) = 2.5% 
Market risk premium (Rp) = 9%
XYZ' beta (β) = 1.64 
XYZ' Current annual dividend per share = $0.80 
XYZ's 3-year dividend growth rate (g) = 8.2% 
Industry P/E = 15.65 
XYZ's EPS = $4.87
1) Computation of required rate of return using CAPM Model:-
As per CAPM model, 
Ks (required rate of return) = Rf + Rp*β 
Ks (required rate of return) = 2.5%+(9%*1.64) 
Ks (required rate of return) = 0.1726 i.e. 17.26%
2) Computation of current price using CGM method:-
As per CGM method, 
Current price per share (po) = (D0*(1+g))/(Ks-g) 
Current price per share (po) = (0.80*(1+8.2%))/(17.26%-8.2%) 
Current price per share (po) = $9.55
3) Comparison of current market price and price per share determined using CGM 
method:-
Price as per CGM method = $9.55 
Running head:  BUSN311 - Quantitative Methods and Analysis                                        2
Current market price per share = $76.28
There is huge difference between the current market price and theoretical price 
computed using constant growth model. There are various factors which contribute to this 
huge difference which are as follows:

Unit 3-IP – FINA310-06 Financial Management Marsha Jones By walking through a set of financial data for XYZ, this assignment will help you better understand how theoretical stock prices are calculated...

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