Financial Management Calculating Financial Data for IBM - Essay Example

Financial Management Calculating Financial Data for IBM krf = 4.77 market risk premium = 7.5% 2. IBM's beta 25 IBM's current annual dividend = $0.78 IBM's 3-year dividend growth rate = 11.42%, 11.11%, 1.69%, average = 8.07% Industry P/E = 34.45 IBM's EPS = $4.873. The CAPM can be stated as: ks = krf + (km - krf) Using the figures above, ks is computed as : ks = .0477 + 1.25 (0.075) ks = 14.145%4. The constant growth model states that the value of a company's stock can be computed as its value of its future dividend earnings.

In equation, its: Value of stock = DPS (1)/ ks-g where : DPS (1) is the dividend expected in one year ks = required rate of return g = growth rate in dividendsThus, using the figures derived from IBM's annual report, the value of IBM's stock is: Value of stock = $0.78 *(1.0807)/ (0.14145-0.0807) = $0.842946/ 0.06075 0.92 IBM's theoretical price = $13.8755. IBM's stock is currently traded for $83.33. From this information, we can see a large discrepancy between the company's current stock price and the computed Po ca n be explained by looking at the constant growth model (CGM).

It should be noted that the CGM calculates the value of stock only by looking at the growth rate of the dividends. However, in the real world, the value of stocks is not only determined by the expected dividend to be announced by IBM but by any change in the prices due to company's positive performance, new technology, etc. We can see that most investors rely on their perception of what will happen in the operations and development of IBM than on the dividends to be given. Also, the valuation of a stock also reflects the relative attractiveness of a company to its competitors.

Thus, market price is affected by other computer company's stock price. 6. If market risk premium changed to 10%, then ks will become 17.27%. This will lead to a drop in IBM's stock value to $0.91.7. Using the P/E ratio, IBM's stock price is computed as P/E ratio multiplied to earnings per share. Plugging in the values from IBM's annual report, we get: = ($4.87) (15.66) = $76.2642.The discrepancy between the Po and IBM's stock price computed by the CGM is due to the fact that CGM incorporates all expected future earnings based on the past dividend growth rates while the P/E model only looks at the earning for the specific period.