1. The risk-free rate of return (Krf) is the rate of return that investors demand from a project that contains no risk (Gallagher & Andrew). In order to find this amount, we must go to Bloomberg.com and find the current rate for today, July 28, 2006, which happens to be 5.05% (Bloomberg.com). This means that 5.05% is the least that an investor will accept for a return on their investment.
2. The values for IBM stocks that are given in the stock information document that accompanied this assignment:
IBM's beta (â average = 1) = 1.64
IBM's current annual dividend = $0.80 per share
IBM's 3-year dividend growth rate (g) = 8.20%
Industry P/E = $23.20
IBM's EPS (net income/shares) = $4.87
3. The CAPM formula and the interpretation of its components are as follows:
kp = kRF + (kM kRF) x â
In this formula, the capital asset pricing model, we calculate the required rate of return on an investment project given its degree of risk as measured by beta. So the meanings of each......
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