You are contemplating an investment in the stock of Apple.You know that the price of apple...

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Finance

You are contemplating an investment in the stock of Apple.Youknow that the price of apple stock is estimated using theconstant-growth dividend discount model and its required return(cost of equity) is estimated using the CAPM.
Yesterday, apple paid a dividend of $3.00 per share. Thedividend is expected to grow at an annual rate of 4% throughout theforeseeable future. Apple’s trailing P/E ratio is 18, itsdebt/equity ratio is 1.25, and its bonds are ratedBB. The yield to maturity (cost of debt) for the bondsof Apple is 8% (which represents a 500 basis point spread over therisk-free rate). You also know that the expectedmarket return (S&P 500) is 11%, with a standard deviation of14%. The correlation coefficient between Apple and the market(S&P 500) is .81, the correlation between Apple and therisk-free rate is .49, and Apple's stock has a standard deviationof 18%.
Calculate the price per share of the Apple stock.

Answer & Explanation Solved by verified expert

3.7 Ratings (441 Votes)

Under Constantgrowth dividend discount model price of a stockcan be calculated with following equation whereD last dividendg constant growth rateKe Required rate of return ofequityIn above question D3 g4 provided but we need to See Answer

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