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# UNIT 3 INDIVIDUAL PROJECT - Essay Example

Summary
Our Calculations show us that there is a large difference between the current market stock price of IBM and the stock price reflected in our calculations. The current market stock price of IBM is \$75.480, while the stock price calculated with the Constant Growth Model method at…

## Extract of sample "UNIT 3 INDIVIDUAL PROJECT"

Individual Project IBM: Required Rate of Return (Ks) 9.1192 13.2192%(2) Current Stock Price \$75.480 Stock Price using CGM \$0.87 0.15 (2) Stock Price using P/E model
\$15.49
Table 1. ( Calculation (1) uses market risk premium7.5%; (2) uses 10% )
Our Calculations show us that there is a large difference between the current market stock price of IBM and the stock price reflected in our calculations. The current market stock price of IBM is \$75.480, while the stock price calculated with the Constant Growth Model method at market risk premium rates 7.5% and 10% are \$0.87 and \$0.15 respectively. As the market risk premium has decreased, the calculated stock price has further declined to \$0.15.the resaon for this low figure may be that the company is showing negative 3-year and 5-year growth in income, revenue as well as EPS. As a result the dividends paid by the company has fallen to the low levels of below One dollar per share. As dividend plays a crucial role in calculation of a company’s stock price, so there is a large discrepancy between the market and calculated stock price. The market stock price depends on many more factors and there is an element of speculation involved as well.
Calculations
Given:
Krf= 4.67%
 = 1.64
Rm = 7.5% (1) and 10% (2)
Current Annual Dividend (IBM) = \$0.80
3-Year Dividend Growth Rate = 8.2%
IBM’s EPS = \$4.87
Required rate of Return (Ks) = Krf +  (Rm - Krf)
= 4.67 + 1.64 ( 7.5 – 4.67) = 9.1192 (1)
= 4.67 + 1.64 ( 10 – 4.67) = 13.2192 (2)
Stock Price (CGM) = Current Annual Dividend / (Ks – 3-year Dividend Growth rate )
= 0.80 / (9.1192 – 8.2) = \$0.87 (1)
= 0.80 / (13.2192 –8.2) = \$0.15 (2)
Stock Price (P/E model) = Current Stock Price / EPS
= 75.480 / 4.87 = \$15.49 Read More
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