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%.The Risk Free Rate of Interest known as KRF is 4.250% or 0.0425. This value wasobtained from www.bloomberg.com/markets/index.html. The Assumed Market RiskPremium (Km) was previously given is the first question. Its assumed value waslisted as 7.5%.2. Download this IBM Stock Information document (.pdf fil ...view middle of the document...
5% meaningthat our beta was over one-half times more sensitive to market changes.Any stock with a beta of 1% is considered to be an average stock. Notoverly sensitive to the changes but is still affected by them. A stock with a beta ofless than 1% does not react heavily to market changesIf we calculate P from the information provided from the IBM Stock Information document (.pdf file) located at https://mycampus.aiu-online.com/courses/FIN410/Assignment_Assets/FIN410_u3ips.pdf we would obtain a value for P of $76.28. The difference between the P and Po in problem 4 is P-Po= ($76.28)-($58.84057971) = $17.43942079 ($17.44). So Po or thetheoretical price is $17.43942079 ($17.44) less than the current IBM stock quote.However we all know that IBM's current stock quote has the potential to change throughout the day. The given range over the past 52 weeks is $71.85-99.10. Currently as of October 29, 2005 the opening price or P is at $82.32. This varies from the theoretical price Po which we calculated as $58.84057971 by P-Po= ($82.32)-($58.84057971) = 23.47942029 ($23.48).Depending on what web site you have visited and when, you will find a difference in the current stock quote for IBM. If we were to view the site provided for us for the duration of this assignment, we would find the current price to be $76.28, but, according to the IBM Investor Relations website, http://www.ibm.com/investor , which shows an update of 10-28-05 at 16:00 hours, the current price is $81.42. Amazingly enough, both of these numbers still fall into the 52 week range of $71.85-99.10 provided by the IBM pdf file.From the assignment we figured our PO= 58.84057971, the difference when looking at either of the two amounts listed could be contributed to a number of factors. Beta would be the first factor to consider. As a company becomes more diversified, the beta or measure of market risk will decrease because the company is also investing in other areas that help soften the blow of changes in market. When we first viewed our assignment, the beta was 1.64 according the IBM website, the beta was lowered a few points to 1.60.The P/E ratio also determines the price. The P/E ratio serves as an indicator of the stocks earning power in the future. As stated in our text, the more secure a company feels about their stock and its future, the higher the P/E.The EPS or Earnings Per Share also play a role in the current price. This figure show on the pdf file as $4.87and on the investor website as $5.09 takes into account and measures the actual gain or loss associated with each share. This is important when figuring cost because if there is a huge loss, the price of the share must increase to attempt and compensate for the loss. As the stock experiences gains, it is reflected as the price of the common stock drops.The variability can also be a cause. Variability in a security's returns resulting from fluctuations in the aggregate market is known as market risk. All securities are exposed...
