Apple currently does not pay a dividend and they have announced to the market th
ID: 2719904 • Letter: A
Question
Apple currently does not pay a dividend and they have announced to the market that they will not pay a dividend for the next ten years. However, analysts expect that they will pay their first dividend of $1.89 in eleven years and they feel that the company will double the annual dividend payment each year for the following 3 years (i.e. years 12-14). After that time (i.e. years 15 and beyond), they expect the company to level off their growth with their dividend growing at a constant rate of 5 percent per year thereafter. What is one share of this stock worth today if the market rate of return on similar securities is 12 percent?
Explanation / Answer
Solution :
Year
Dividend
Discount factor @12%
Present value
1
0
0.892857143
-
2
0
0.797193878
-
3
0
0.711780248
-
4
0
0.635518078
-
5
0
0.567426856
-
6
0
0.506631121
-
7
0
0.452349215
-
8
0
0.403883228
-
9
0
0.360610025
-
10
0
0.321973237
-
11
1.89
0.287476104
0.54
12
3.78
0.256675093
0.97
13
3.78
0.22917419
0.87
14
3.78
0.204619813
0.77
15
*56.7
0.204619813
11.60
Value of share
14.76
*P14= d15/(k-g)
(3.78x1.05)/(0.12-0.05)
Year
Dividend
Discount factor @12%
Present value
1
0
0.892857143
-
2
0
0.797193878
-
3
0
0.711780248
-
4
0
0.635518078
-
5
0
0.567426856
-
6
0
0.506631121
-
7
0
0.452349215
-
8
0
0.403883228
-
9
0
0.360610025
-
10
0
0.321973237
-
11
1.89
0.287476104
0.54
12
3.78
0.256675093
0.97
13
3.78
0.22917419
0.87
14
3.78
0.204619813
0.77
15
*56.7
0.204619813
11.60
Value of share
14.76
*P14= d15/(k-g)
(3.78x1.05)/(0.12-0.05)
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