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Essay text:
We will use a systematic approach utilizing the Capital Asset Pricing Model (CAPM) and the Constant Growth Model (CGM) to determine IBM’s stock price.
1. An estimate of the risk-free rate of interest (krf) was obtained by going to Bloomberg.com and using the U.S. 30-year Treasury bond rate. Even though our assignment sheet asks us to use the 10-year rate, we have determined the 30-year rate is more accurate. krf = 4.375 and the market risk premium is 7.5%.
2. According to the IBM Stock Information Document:
IBM’s Beta (?) = 1.64
IBM’s Current Annual Dividend = .80
IBM’s 3-Year Dividend Growth Rate (g) = 8...
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