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Apple Computer Valuation Challenge

Here is a challenge to all finance students in my U of U classes.
The first one to provide the correct solution will get to write the next blog post :-)

Assume ΔCAPEX=0, ΔNWC=0, Depr=0, no debt.

Before the dividend announcement, we can use the FCFE1=E1 valuation method. Estimated E1=45 and r=18%. So a stock price of P0=600 implies the growth of free cash flow at 10.5%.

After the dividend announcement of D1=11 = 4x2.65+e, still the same r=18%, still the same E1=45, compute what Apple's rate of return on (plowed back) retained earnings has to be to justify the $600 stock price. Do you think Apple can earn it?

Bragging rights and extra credit possible. Don't ask any questions. The race is on.
Alright, I'll take a stab at it. How does 11.47% sound? Close?

ReplyDeleteI think a little higher. How do you get your number?

ReplyDeleteA little higher, huh? Okay I'll try one more time. My new guess is 21.4%.

ReplyDeleteI didn't have a formula to use the first time so I was going off of memory from 3040. I used the original method that you used earlier, but I added in dividends with the earnings (which didn't entirely make sense at the time, but I wasn't sure what would make more sense) so I had:

11+45/(.18-g) = 600

I solved for g and then backed into what return on plowback would have to be given this growth rate if g = Plowback X ROE. I thought that there had to be a new formula because of the dividends, but I wasn't sure what it was.

In preparation for your exam on Tuesday I was flipping through my notes and found the formula you had given us to solve the problem. So my new guess is based on using that formula. If that isn't right then I'm out of guesses!

See you tomorrow.