American InterContinental University
FINA310-1301A-02: Professor Michael James
March 5, 2013
This assignment will use the CGM and the CAPM to calculate some information regarding the XYZ stock market.
XYZ Stock Market Information
XYZ’s beta =1.64
XYZ’s current annual dividend = $.80
XYZ’s 3-year dividend growth rate (g) = 8.2%
Industry P/E = $4.87
KS= (Risk Free Rate) + Beta (Market Premium)
KS= (0.2) + 1.64 (.075)
KS= (0.2) + 0.123
KS= 0.143 or 14.3%
Stock Price= Estimated dividend/ (Cost of Equity-Growth)
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2. The growth rate used to do the math was 8.2%. The present XYZ growth rate might be higher than this rate, thus a difference with the growth rate could possibly result in a different price per share.
3. The XYZ price per share had been going up over the past month. This particular raise in the share price could have caused non-experienced shareholders to spend lots on the XYZ stock, thus causing the share price to increase.
KS= (0.2) + 1.64 (.10)
KS= (0.2) + 0.164
KS= 0.184 or 18.4%
Because the rise in the risk premium depicts an increase in risk, shareholders would be hoping for a larger return on his/her investment to make up for this rise in risk, thus, an increase in the rate of return would cause a decrease in the share price.
XYZ EPS = $4.87
Industry P/E Ratio = 23.2
Stock Price= (EPS) (P/E RATIO)
The P/E Ratio Model is based on future expectations. The P/E ratio depicts shareholders’ expectations regarding the business, its ability to grow, and expectations for future returns. From looking at this, one is able to see that the Price Earnings Ratio Model is based on future expectations, and the CGM is based on past performance; thus, a difference in these two models is almost positive to show a difference in the price per share.