UNIT 3 INDIVIDUAL PROJECT - Essay Example

Individual Project IBM: Required Rate of Return (Ks) 9.1192 13.2192%(2) Current Stock Price $75.480 Stock Price using CGM $0.87 0.15 (2) Stock Price using P/E model$15.49Table 1. ( Calculation (1) uses market risk premium7.5%; (2) uses 10% ) Our Calculations show us that there is a large difference between the current market stock price of IBM and the stock price reflected in our calculations. The current market stock price of IBM is $75.480, while the stock price calculated with the Constant Growth Model method at market risk premium rates 7.

5% and 10% are $0.87 and $0.15 respectively. As the market risk premium has decreased, the calculated stock price has further declined to $0.15.the resaon for this low figure may be that the company is showing negative 3-year and 5-year growth in income, revenue as well as EPS. As a result the dividends paid by the company has fallen to the low levels of below One dollar per share. As dividend plays a crucial role in calculation of a company’s stock price, so there is a large discrepancy between the market and calculated stock price.

The market stock price depends on many more factors and there is an element of speculation involved as well. CalculationsGiven:Krf= 4.67% = 1.64Rm = 7.5% (1) and 10% (2)Current Annual Dividend (IBM) = $0.803-Year Dividend Growth Rate = 8.2%IBM’s EPS = $4.87Required rate of Return (Ks) = Krf +  (Rm - Krf) = 4.67 + 1.64 ( 7.5 – 4.67) = 9.1192 (1) = 4.67 + 1.64 ( 10 – 4.67) = 13.2192 (2) Stock Price (CGM) = Current Annual Dividend / (Ks – 3-year Dividend Growth rate ) = 0.80 / (9.1192 – 8.2) = $0.87 (1) = 0.80 / (13.2192 –8.2) = $0.15 (2)Stock Price (P/E model) = Current Stock Price / EPS = 75.480 / 4.87 = $15.49