Question

Apple has a beta of 0.92 and just paid a dividend of 54 cents per share. Its dividends are expected to grow at a rate of 11%. If the risk-free rate is 1.8% and the market risk premium is 14%, what is the fair price of a share of Apple stock

Answer 1

Given,

Beta = 0.92

Current dividend = 54 cents or $0.54

Growth rate (g) = 11% or 0.11

Risk free rate = 1.8%

Market risk premium = 14%

Solution :-

Required rate of return = risk free rate + (beta x market risk premium)

= 1.8% + (0.92 x 14%)

= 1.8% + 12.88% = 14.68% or 0.1468

Now,

Fair price of a share = [current dividend x (1 + g)] $\div$ (required rate of return - g)

= [$0.54 x (1 + 0.11)] $\div$ (0.1468 - 0.11)

= [$0.54 x (1.11)] $\div$ 0.0368

= $0.5994 $\div$ 0.0368 = $16.29