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In: Finance

Apple, Inc. just paid a dividend of $2.28 a share. Dividends are expected to grow at...

Apple, Inc. just paid a dividend of $2.28 a share. Dividends are expected to grow at a rate of 12% per

year for the next three years and then at a rate of 3.5% thereafter. If your required rate of return is 9%,

what is the most that you should be willing to pay for a share of Apple stock today?

Solutions

Expert Solution

Calculation of stock's current price:
Year Particulars Amount PVF @9% Present value
1 Dividend                       2.55 0.917                       2.34
2 Dividend                       2.86 0.842                       2.40
3 Dividend                       3.20 0.772                       2.47
3 Terminal value                     60.22 0.772                     46.49
Total                     53.71
So current price is $53.71
Working:
Calculation of dividend:
Year 1= Dividend(1+growth)= 2.28(1+0.12)=$2.55
Year 2= Dividend(1+growth)=2.55(1+0.12)=$2.86
Year 3= Dividend(1+growth)=2.86(1+0.12)=$3.20
Terminal value= Dividend(1+growth)/(return-growth)
                              =3.20(1+0.035)/0.09-0.035=3.312/0.055=$60.22

jeff jeffy answered 3 years ago
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