Stock Valuation of Apple, Inc. (AAPL)

Question:

- This stock price be if the return on new investmentis 10% or 12%. Need some recommendations includingreason regarding a buy or sell.

Condition:

- The expected return on new investments (ROE) is8%. Your valuation is being performed as of Dec 2021(time 0).

Requirement and instruction:

1. Go to Yahoo Finance and enter the ticker symbol for APPLE(AAPL). From the main page for AAPL gather the followinginformation and enter it into a spreadsheet:
   1. The current stock price (last trade, at the top of thepage).
   2. The current dividend amount (forward annual dividend rate) inthe Dividends and Stock Splits panel.
2. Next, click on ‘Statistics’ at the top of thepage. From this page, gather the following informationand enter it into the same spreadsheet:
   1. The number of shares outstanding.
   2. The payout ratio.
   3. Next, click on ‘Analysis’ from the top of the page.Scroll down to the end and find the expected growth rate for thenext five years. Enter it into your spreadsheet. It willbe near the very bottom of the page.
3. To determine the value based on the dividend discount model:
   1. Create a timeline in Excel for seven years (Dec 2021 (year 0),2022, 2023, 2024, 2025, 2026, 2027).
   2. Use the dividend obtained from Yahoo Finance as thecurrent (2021) dividend to forecast the next 5 dividends using the(next) five-year growth rate estimated by analysts (up to2026).
   3. Determine the long-run growth rate based on AAPL’s payout ratioand return on new investment: growth = return on new investment *retention ratio.
   4. Use the long-run growth rate to forecast the dividend in 2027from the dividend in 2026.
   5. Determine the stock price at the end of the year 2026 using the2027 dividend and the long-run growth rate, i.e. dividends grow ata constant rate from 2027 onwards. Remember the PV of agrowing perpetuity is PV = next year’s cash flow/(r-g).
   6. Determine the current stock price as of time 0, Dec2021. (Do not include the current 2021 dividend, it ispast, in this calculation).

Answer rating: 100% (QA)

Answer For the given condition of expected return on new investments ROE at 8 the dividend discount ... View the full answer