Question

Suppose AAPL has a beta of 0.8. If the risk-free rate is 3% and the market return is 9%, according to CAPM, the expected return for AAPL is? If the stock price for AAPL is $100 today, according to the expected return you calculate, what is the expected price for AAPL in a year if AAPL is not paying dividend? What is the expected price if AAPL will pay a dividend of $3?

Answer 1

According to Capital Asset Pricing Model,

Expected rate of return of stock (R) = Rf + B(Rm- Rf)

Where ,  Rf = risk-free rate ; B = Beta of the stock ; Rm =  return on the market

Expected rate of return of stock (R) = 3 + 0.8 (9- 3) = 7.8%

Since the expected reurn is 7.8% and stock price for today is $100, the expected price of stock if dividend is not paid can be computed as follows:

Po = (P1 +D1) / (R + g)

100 = (P1+0) / (0.078 + 0)

P1 = $100 * 0.078

P1 = $7.8

If the company pays a dividend of $3, the expected price can be computed using dividend growth model as follows:

Po = (P1 +D1) / (R + g)

100 = (P1+3) / (0.078 + 0)

P1 = $100 * 0.078 - $3

P1 = $4.8