Please go to the following web site and find the stock information for Internati
ID: 2731682 • Letter: P
Question
Please go to the following web site and find the stock information for International Business Machines Corporation (IBM): http://www.google.com/finance?q=ibm
Recently a relative left you a substantial amount of money, which you wish to invest. After the recent increasing gas prices, you have decided to invest in a company's stock in the technology and consulting industry. As you know there are several ways to determine the value of the stock. The information that you have been able to find on International Business Machines Corporation (IBM) allows you to see the company’s P/E ratio, dividend yield, beta and EPS. The information that you have been able to find on International Business Machines Corporation (IBM) allows you to see the company’s P/E ratio, dividend yield, beta and EPS.
1. Please list that information for IBM and the date you found the information. There are three methods you might use to determine the stock value of International Business Machines Corporation (IBM), Price-Earnings Method, Dividend Discount Method, and using CAPM to determine value.
2. Please tell me how in detail the information you have found might be used to determine the value of the stock in one of these three methods. Using any of these methods is based information for the company at a given time. The market is merging the economic, market and firm specific factors to determine the “current” value.
3. Which of these factors do you think is best to rely on for a long-term value of a firm’s stock and why?
Explanation / Answer
1) We have follwoing information provided on the websire:
P/E ratio: 11.56, EPS=13.28, Beta = .71, shares 959.96 M, Dividend: 1.40, Dividend Yield: 3.65%; stock value: 153.26
2) We can use P/E ratio and EPS to calculate the value of stock, CAPM can not be used since information is not given about market return and Risk free rate of return, the same Dividend discount model also can not be sued because growth rate is missing here. Hence we can use P/E ratio and EPS to calculate the value of stock:
Value of stock= P/E ratio * EPS = 11.56*13.28=153.26
3) P/E ratio and EPS reflects the best among these iven options for calculating the value of stock, since the value of stock caculated through does not depend upon ther external factors, such as ,market return, growth rate, it is primarily calculating using the earning power of the share on its price, hence the is the best to rely for long term value of firm's stock.