Part 1 of this paper will look at the three most common models used for estimating the rate of return for a given company; dividend growth, Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT). The board of directors for Apple Computer Corporation will receive this report, and based on the findings and analysis included, Apple will be given a recommendation as to the cost equity model they should implement to estimate their future rate of returns. This report will discuss the accuracy and ease of use of these three models. The main consideration will be determined by how realistic each model is at developing the assumed rate of return. Part 2 of this paper will discuss the cost of equity or discount rate based on hypothetical data to be calculated using the CAPM model. Considering the information presented, the cost of equity for each company will be explained and what factors influence company beta. I will explain how to apply dividend growth when estimating the cost of equity of stable companies. I will show my understanding of APT and how it relates to CAPM and dividend growth, while also applying CAPM to estimate the rate of return that a company’s investors require. In conclusion I will reiterate what I perceive to have learnt as well as give my evaluation of the module 3 case assignment. Part I
Report to Apple Board of Directors
Apple stock has been extremely stable with a beta of .74 and that number has probably risen in the last six months since Apple stock has gone into a negative trend for the first time in many years. Apple has not held any debt so there is no debt-to-equity ratio available. Apple also shows a productive profit margin over 25%. This paper will discuss the three most common models for estimating rates of return; (1) dividend growth, (2) Capital Asset Pricing Model (CAPM) and (3) Arbitrage Pricing Theory (APT). This paper will conclude with a clear position of which model to use to estimate...
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