In your paper, address the following five parts in a Word document:
Part 1: (two paragraphs)
Explain the three types of risk and beta, and how these concepts relate to a company’s required rate of return.
Part 2: (two paragraphs)
Find your company’s beta from a credible source.
You can get this information from the Mergent database or by looking it up on a financial website like
Yahoo! Finance
Calculate the company-specific required rate of return using the CAPM formula.
Show all calculations.
Use the beta you determined for your chosen company
For the market risk premium, use the following assumptions:
For a mid-cap company (between $2.0 billion and $10.0 billion in market capitalization) use 8.0% as the market risk premium.
For a small-cap company (less than $2.0 billion in market capitalization) use 11.0% as the market risk premium.
Recall that in the required rate of return (r) in Week 3 was assumed to be:
Part 3: (two to four paragraphs)
Your growth rate cannot be higher than the discount rate, because the calculations will result in a negative stock price, which is not meaningful.
Show your stock price calculation.
State whether the recalculated stock price is above or below the current market price.
State whether the recalculated stock price indicates if the stock price is currently under-valued or over-valued in the market.
The Section 4: Valuation Conclusion paper
Dividend Analysis and Preliminary Valuation of Apple Inc.
Jazmen Davis
The University of Arizona Global Campus
BUS401: Principles of Finance
Professor Leon Daniel
6/2/24
2
Introduction
Apple Inc. (AAPL) is a leading technology company based in Cupertino,
California, known for designing, manufacturing, and marketing innovative products
like the iPhone, Mac, and iPad, along with various services such as Apple Music and
Apple Pay (Apple Inc, 2024). This analysis examines Apple’s dividend growth over
the past eight years to determine its future dividend growth rate, aiding in stock
valuation.
Part 1: Dividend Analysis
Dividend Table and Growth Rates
A dividend is a portion of a company’s profits distributed to its shareholders
(Saini, D., & Sharma, P., 2022). The table below showcases Apple’s annual dividends
per share for the past eight years, along with the calculated growth rates for each year.
Table 1: Annual Dividends per Share and Growth Rates for Apple Inc. (2016-2023)
Year
Dividend per Share (USD)
2016
0.55
2017
Calculation
Growth Rate (%)
0.60
(0.60 / 0.55) – 1
9.09%
2018
0.68
(0.68 / 0.60) – 1
13.33%
2019
0.75
(0.75 / 0.68) – 1
10.29%
2020
0.80
(0.80 / 0.75) – 1
6.67%
2021
0.85
(0.85 / 0.80) – 1
6.25%
2022
0.90
(0.90 / 0.85) – 1
5.88%
2023
0.94
(0.94 / 0.90) – 1
4.44%
The table shows a 4.44% growth rate from 2022 to 2023, with each year’s rate
calculated similarly, providing a comprehensive view of Apple’s dividend growth
over the period.
3
The graph further illustrates Apple’s annual dividend growth rates from 2016
to 2023, highlighting significant increases in 2017 and 2018, followed by a gradual
decline, with the trend line indicating an overall downward trend.
Calculation of Average Growth Rates
The table below presents the average dividend growth rates for Apple Inc.
over the most recent 8 years, 5 years, and 3 years, along with the detailed calculations.
Table 2: Average Dividend Growth Rates for Apple Inc.
Period
Calculation
Average Growth
Rate (%)
8 Years
(0.0909 + 0.1333 + 0.1029 + 0.0667 + 0.0625 + 0.0588 + 0.0444) / 7
7.99%
5 Years
(0.1029 + 0.0667 + 0.0625 + 0.0588 + 0.0444) / 5
6.71%
3 Years
(0.0667 + 0.0588 + 0.0444) / 3
5.52%
Trend Analysis
The dividend growth rates for Apple Inc. have exhibited a declining trend over
the past eight years. The 8-year average growth rate stands at 7.99%, the 5-year
average at 6.71%, and the 3-year average at 5.52%, as depicted in Graph. Initially, the
growth rates were higher, notably in 2017 and 2018, but have gradually decreased
each year, indicating a more conservative growth trajectory. This trend suggests that
while Apple continues to increase its dividends, the growth rate is slowing, reflecting
a maturation in its dividend policy.
4
Estimate of Future Dividend Growth Rate
Based on historical data and current trends and above trend analysis, a future
dividend growth rate of 5% for Apple Inc. is a prudent estimate. The average growth
rates over the past 8 years (7.99%), 5 years (6.71%), and 3 years (5.52%) illustrate a
clear downward trend. Plus, Apple’s robust financial position, characterized by strong
earnings growth and substantial cash flow, supports this projection. The company’s
consistent high revenue generation and strategic reinvestments in innovation and
market expansion further validate the feasibility of a 5% growth rate. This
conservative estimate aligns with recent patterns and ensures a realistic outlook for
future dividend increases.
Part 2: Preliminary Valuation
Calculation of Stock Price Using the Constant Growth Formula
Stock price is the current price of a single share of a public company on the
stock exchange, determined by market demand and supply (Turnip, H., 2022). The
most recent annual dividend per share (𝐷0 ) is $0.94. The estimated future dividend
growth rate (𝑔) is 5%(0.05). With the required rate of return for a large-cap
5
company (𝑟) is 12%(0.12) the estimated stock price of Apple Inc. is calculated as
follows:
Step
Calculation
Result
1
2
3
Calculate future dividend: 𝐷0 × (1 + 𝑔)
Calculate difference between required rate of return and growth rate: 𝑟 − 𝑔
0.94 × 1.05
0.12 − 0.05
Apply constant growth formula:
0.987
0.07
0.987
0.07
Clearly the calculation shows that the estimated stock price for Apple Inc.
using the constant growth formula is $14.10 per share.
Comparison with Current Market Price
The market price of a stock is the current price of a single share of a public
limited company listed on the stock exchange (Mustafa, Z., Ramakrishnan, S., Ali, A.,
& Iqrayn, A., 2023). The calculated stock price of $14.10 is significantly lower than
the current market price of $192.32 (Apple Inc, 2024). This indicates that, according
to the constant growth formula, Apple Inc.’s stock is overvalued in the market. The
substantial difference suggests that market factors and investor expectations are
contributing to a much higher valuation than the formula-based estimate.
Conclusion of Stock Value
Given the significant discrepancy between the calculated stock price of $14.10
and the current market price of $192.32, it is evident that market factors and investor
sentiment play a substantial role in Apple’s valuation. Despite the lower calculated
value, the strong financial performance, consistent dividend growth, and robust
market position of Apple Inc. justify the higher market price. Therefore, the current
market value of $192.32 per share reflects a more accurate and realistic valuation,
considering the company’s overall financial health and future growth prospects.
Clearly, dividend analysis is important for making investment decisions, interpreting
6
asset price variations, predicting returns, understanding managerial adjustments, and
guiding corporate financial behavior (Chen, L., Da, Z., & Priestley, R., 2010).
7
References
Yahoo Finance. (2018). Apple Inc. (AAPL) Company Profile & Facts.
@YahooFinance. https://finance.yahoo.com/quote/aapl/profile/
Chen, L., Da, Z., & Priestley, R. (2010). Dividend Smoothing and
Predictability. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1280833
Mustafa, Z., Ramakrishnan, S., Ali Fadhil Ali, & Abdulrahman. (2023). Bibliometric
Analysis on Stock Prices through Historical Indexed Review by using Scopus
Database from 1930 to 2020. International Journal of Academic Research in
Business & Social Sciences, 13(10). https://doi.org/10.6007/ijarbss/v13i10/18889
Saini, D., & Sharma, P. (2022). A Systematic Literature Review of Factors
Influencing the Dividend Policy. Australian Journal of Business and
Management Research, 07(01), 45–63.
https://doi.org/10.52283/nswrca.ajbmr.20220701a04
Turnip, H. (2022). Determination of Fundamental and Technical Factors on Share
Prices in Large-Capitalized Companies Listed on the Indonesia Stock
Exchange for the 2015-2019 Period. International Journal of Research and
Review, 9(11), 168–177. https://doi.org/10.52403/ijrr.20221124
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