“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 to.bloomberg.com/markets/index.html””>Bloomberg.com:
Market Data
and 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 7.5%.
Download the.aiu-online.com/courses/FINA310/Assignment_Assets/FINA310_U3_f1.pdf””>XYZ Stock Information by clicking the link.
Using the information from the
XYZ Stock Information document, record the following values:

XYZ’s beta ()
XYZ’s current annual dividend
XYZ’s 3-year dividend growth
rate (g)
Industry P/E
XYZ’s EPS

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 the.aiu-online.com/courses/FINA310/Assignment_Assets/FINA310_U3_f1.pdf””>XYZ Stock
Information
to 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 7.5% to 10% and this increase is due only to
the increased risk in the market. In other words, assume the krf
and the stock’s beta remain the same for this exercise.

What will the new price be?
Explain.

Recalculate XYZ’s stock price
using the P/E ratio model and 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:

A double-spaced Word
document of 23 pages that contains the following:

All of the numerical values listed
in the assignment guidelines.
Your answers to the four
questions in the assignment guidelines.
The formulas and
calculations that you used to arrive at your answers

You must include your
explanation of how you used Microsoft Excel for your calculations if
applicable.

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:Your submitted assignment (125
points) must include the following:”