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Unit 3 Ip for Financial Management

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Submitted By suburbanmomma
Words 444
Pages 2
American InterContinental University
FINA310-1301A-02: Professor Michael James
March 5, 2013

Abstract
This assignment will use the CGM and the CAPM to calculate some information regarding the XYZ stock market.

XYZ Stock Market Information
Krf=2%
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)
.80/(14.3%-8.2%)
.80/6.1%
$13.11
The current stock price is $76.28, which depicts a difference of $63.17 between the stock price above and the current stock price. Such a large difference might be from all of these factors:
1. When figuring the rate of return, we assumed a market risk premium of 7.5%. This type of assumption is not correct because the market risk premium changes every day, and when this happens, XYZ’s required rate of return would be affected; thus affecting the stock price as well.
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%
Po= .80/(18.4%-8.2%)
Po= .80/(10.2%)
Po= $8.16
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.

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