Question

Supposing you are an investment advisor in an investment bank. A potential client is interested in Apple Inc’s stock. However, this client is very sensitive to investment risk. How will you explain Apple’s risk to your client if you use the Yahoo Finance Webpage as information resource? Your client might ask you whether Apple’s stock is over-priced now. Since Apple just announced its new iphone and i-watch products, your anticipate its sales revenues and dividend will grow at 20% in next 4 years and after year 4 the dividend growth rate will remain 5% constantly. Apple paid $9.68 per share dividend last year. You see the T-bill yield is 2% currently and SP500 return is 10.8%. What is the fair value of Apple’s stock? If your client plans to buy and hold Apple’s stock for two years and sell it two years from today, what will be the selling price?

Answer 1

From Yahoo Finance page, beta of Apple is 1.

Cost of equity, r = Rf + beta x (Rm - Rf) = 2% + 1 x (10.8% - 2%) = 10.8%

Forecast dividends given the growth rate as shown below

Year	Dividend
0	$      9.68
1	$   11.62
2	$   13.94
3	$   16.73
4	$   20.07
5	$   21.08

Price in year 4, P4 = D5 / (r - g) = 21.08 / (10.8% - 5%) = $363.38

Price in year 3, P3 = (D4 + P4) / (1 + r) = (363.38 + 20.07) / 1.108 = $346.08

P2 = (346.08 + 16.73) / 1.108 = $327.44 is the price in year 2

P1 = (327.44 + 13.94) / 1.108 = $308.10

P0 = (308.10 + 11.62) / 1.108 = $288.56 is the fair value of Apple's stock