Finance Assignment – Risking It All In Capital

Assignment Guidelines:

  • Find an estimate of the risk-free rate of interest (krf). To obtain this value, go 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%.
  • 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)?

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