Reference no: EM133116395

The expected return on new investments (ROE) is 8%.  Your valuation is being performed as of Dec 2021 (time 0).

1. Go to Yahoo!Finance (https://finance.yahoo.com) and enter the ticker symbol for APPLE (AAPL). From the main page for AAPL gather the following information and enter it into a spreadsheet:
   1. The current stock price (last trade, at the top of the page).
   2. The current dividend amount (forward annual dividend rate) in the Dividends and Stock Splits panel.
2. Next, click on 'Statistics' on the top of the page.  From this page, gather the following information and enter it in 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 the next five years. Enter it into your spreadsheet.  It will be 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 the current (2021) dividend to forecast the next 5 dividends using the (next) five-year growth rate estimated by analysts (upto 2026).
   3. Determine the long-run growth rate based on AAPL's payout ratio and return on new investment: growth = return on new investment * retention ratio.
   4. Use the long-run growth rate to forecast the dividend in 2027 from the dividend in 2026. 
   5. Determine the stock price at the end of year 2026 using the 2027 dividend and the long-run growth rate, i.e. dividends grow at a constant rate from 2027 onwards.  Remember the PV of a growing perpetuity is PV = next year's cash flow/(r-g).
   6. Determine the current stock price as of time 0, Dec 2021.  (Do not include the current 2021 dividend, it is past, in this calculation). 
4. What would your stock price be if the return on new investment is 10%?  12%?
5. What recommendation can you make as to whether one should buy or sell AAPL?  What factors could cause a discrepancy between your estimate and the market price?