Xyz Stock Company

Abstract

Over the next few pages I will discuss a series of questions on regards to the XYZ stock information. I will find an estimate of the risk-free rate of interest which is known as the krf. I will also not the following values as I find them on the data provided to me in the assignment guidelines: XYZ's beta, XYZ's current annual dividend, XYZ's three year dividend growth rate, the Industry P/E and the XYZ's EPS. I will also calculate the XYZ's required rate of return as well, known as the ks. After this information I will answer some questions in regards to the stock quote and stock prices.

Q. 1. Find an estimate of the risk free rate of interest (krf). To obtain this value go to 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%.

A. 1. After reviewing the above listed website I have discovered that the estimate of the risk-free rate of interest (krf) is 2.625%. (Bloomberg LP, 2011)

Q. 2. Download the XYZ Stock Information by clicking the link.

Q. 3. Using the information from XYZ Stock Information document, record the following values:

- XYZ's Beta (B)

- XYZ's current annual dividend

- XYZ's 3 year dividend growth rate (g)

- Industry P/E

- XYZ's EPS

A. 3.

- XYZ's Beta (B) = 1.64

- XYZ's current annual dividend = $0.8

- XYZ's 3 year dividend growth rate (g) = 8.2%

- Industry P/E = 23.2

- XYZ's EPS = $4.87 (Course Materials, 2011)

Q. 4. With the information you recorded, use the CAPM to calculate XYZ's required rate of return (ks).

A. 4. Using the information that I had recorded:

Under CAPM:

Ks = Krf + B (Market risk premium)

Ks = 2.625 + 1.64 (7.5)

Ks = 14.93%

Q. 5. Use the CGM to find the current stock price for XYZ. We will call this the theoretical price (Po).

Using the CGM:

Po = D1/ks - g

Since the current Annual Dividend (Do) is $0.8, and the growth rate is 8.2%, then expected stock dividend (D1) = $0.8 * 1.082 = $0.8656

Po = $0.8656/0.1493 - 0.082

Po = $12.87

Q.6. Now use appropriate Web recourses to fin XYZ's current stock