Question
use the apple company for this
Write A paragraph on changes to the inputs that would allow your Constant Growth Model to provide a value consistent with the current stock price. What change in the dividend growth rate could be used to equate to the current stock price with the discount rate provided? Would a change in the discount rate, higher or lower, influence the valuation? How?
Write: An explanation as to why the estimated stock price from your Constant Growth Model should or should not be relied upon given the inputs you used.
Write: A compare and contrast of the Target Prices from your Stock Valuation Using Multiples to the current stock price. Show your calculations along with the current stock price.
Write A paragraph on changes to the inputs that would allow your Constant Growth Model to provide a value consistent with the current stock price. What change in the dividend growth rate could be used to equate to the current stock price with the discount rate provided? Would a change in the discount rate, higher or lower, influence the valuation? How?
Write: An explanation as to why the estimated stock price from your Constant Growth Model should or should not be relied upon given the inputs you used.
Write: A compare and contrast of the Target Prices from your Stock Valuation Using Multiples to the current stock price. Show your calculations along with the current stock price.
Answers
Answered by
GPT-4o mini
### Changes to Inputs for Constant Growth Model
To align the Constant Growth Model’s estimated stock price of Apple Inc. (AAPL) with its current trading value, we would need to adjust either the dividend growth rate or the discount rate in our calculations. If we assume a discount rate of 8% (which reflects a reasonable expected return for investors considering the risk) and we desire to achieve a stock price of, for example, $175, we can utilize the formula for the Constant Growth Model (also known as the Gordon Growth Model), which is \( P_0 = \frac{D_0(1 + g)}{r - g} \). If the most recent dividend per share is $0.24, the required growth rate (g) can be adjusted to find a value that coincides with $175 as follows: If \( P_0 = 175 \), \( D_0 = 0.24 \), and \( r = 0.08 \), rearranging the model gives us \( g \approx \frac{(P_0 \cdot r) - D_0}{P_0 + D_0} \), leading to a required g of approximately 6.14%. A higher discount rate decreases the present value of future dividends, suggesting that Apple’s shares might need a lower growth rate to be justified at a current higher stock price, while a lower discount rate would allow for a higher growth rate to maintain valuation.
### Reliability of Constant Growth Model
The estimated stock price derived from the Constant Growth Model should be approached with caution, as the model relies heavily on the assumption of constant growth in dividends and an accurate discount rate. Given the dynamic nature of Apple Inc.'s business—characterized by innovation and cyclical product demand—maintaining a stable growth rate in dividends can be challenging. Short-term fluctuations, shifts in market trends, and changes in consumer preferences can significantly impact growth expectations. Additionally, changes in macroeconomic factors, such as interest rates and inflation, may influence the discount rate used in the model. Therefore, an investor should consider these external variables and their potential impact on dividend growth when relying on the model for valuation.
### Comparison of Target Prices Using Multiples
When conducting a stock valuation using multiples, notably the Price-to-Earnings (P/E) ratio, we can calculate a target price for Apple Inc. based on its earnings and the industry average. For instance, if Apple’s most recent earnings per share (EPS) is $6, and the industry average P/E ratio is 25, the target price would be:
\[
\text{Target Price} = \text{EPS} \times \text{P/E Ratio}
\]
\[
= 6 \times 25 = 150
\]
Comparatively, if the current stock price of Apple Inc. is $175, this suggests that the stock is trading at a premium relative to our calculated target price of $150. While it can be argued that the premium might reflect higher growth expectations or company-specific advantages, the significant difference may indicate market overvaluation or other underlying financial factors that are not captured in the simplistic multiple analysis. The contrast between the target price of $150 and the current price of $175 emphasizes the importance of comprehensive analysis and the potential necessity to revisit assumptions on growth rates and market performance.
To align the Constant Growth Model’s estimated stock price of Apple Inc. (AAPL) with its current trading value, we would need to adjust either the dividend growth rate or the discount rate in our calculations. If we assume a discount rate of 8% (which reflects a reasonable expected return for investors considering the risk) and we desire to achieve a stock price of, for example, $175, we can utilize the formula for the Constant Growth Model (also known as the Gordon Growth Model), which is \( P_0 = \frac{D_0(1 + g)}{r - g} \). If the most recent dividend per share is $0.24, the required growth rate (g) can be adjusted to find a value that coincides with $175 as follows: If \( P_0 = 175 \), \( D_0 = 0.24 \), and \( r = 0.08 \), rearranging the model gives us \( g \approx \frac{(P_0 \cdot r) - D_0}{P_0 + D_0} \), leading to a required g of approximately 6.14%. A higher discount rate decreases the present value of future dividends, suggesting that Apple’s shares might need a lower growth rate to be justified at a current higher stock price, while a lower discount rate would allow for a higher growth rate to maintain valuation.
### Reliability of Constant Growth Model
The estimated stock price derived from the Constant Growth Model should be approached with caution, as the model relies heavily on the assumption of constant growth in dividends and an accurate discount rate. Given the dynamic nature of Apple Inc.'s business—characterized by innovation and cyclical product demand—maintaining a stable growth rate in dividends can be challenging. Short-term fluctuations, shifts in market trends, and changes in consumer preferences can significantly impact growth expectations. Additionally, changes in macroeconomic factors, such as interest rates and inflation, may influence the discount rate used in the model. Therefore, an investor should consider these external variables and their potential impact on dividend growth when relying on the model for valuation.
### Comparison of Target Prices Using Multiples
When conducting a stock valuation using multiples, notably the Price-to-Earnings (P/E) ratio, we can calculate a target price for Apple Inc. based on its earnings and the industry average. For instance, if Apple’s most recent earnings per share (EPS) is $6, and the industry average P/E ratio is 25, the target price would be:
\[
\text{Target Price} = \text{EPS} \times \text{P/E Ratio}
\]
\[
= 6 \times 25 = 150
\]
Comparatively, if the current stock price of Apple Inc. is $175, this suggests that the stock is trading at a premium relative to our calculated target price of $150. While it can be argued that the premium might reflect higher growth expectations or company-specific advantages, the significant difference may indicate market overvaluation or other underlying financial factors that are not captured in the simplistic multiple analysis. The contrast between the target price of $150 and the current price of $175 emphasizes the importance of comprehensive analysis and the potential necessity to revisit assumptions on growth rates and market performance.