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
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)] (required rate of return - g)
= [$0.54 x (1 + 0.11)] (0.1468 - 0.11)
= [$0.54 x (1.11)] 0.0368
= $0.5994 0.0368 = $16.29
Apple has a beta of 0.92 and just paid a dividend of 54 cents per share....
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