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Essay / Research Paper Abstract
This 5-page paper examines which model is best for estimating discount rate (rate of return) for Apple Inc -- dividend growth, Capital Asset Pricing or Arbitrage Pricing Theory. Bibliography lists 3 sources.
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5 pages (~225 words per page)
File: AS43_MTratofret.rtf
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Unformatted sample text from the term paper:
helpful as anything. However, investors do have some tools they can use to determine a discount rate. In this situation, weve been asked to discuss which model - dividend growth,
Capital Asset Pricing Model (CAP-M) or Arbitrage Pricing Theory (APT) is the best tool for estimating that required rate of return of Apple Inc. Dividend Growth
Lets first examine the dividend growth model. This model assumes that dividends grow at a constant rate in perpetuity (Harvey, 2004). Basically, the value of the
stock this year equals next years dividends, divided by the difference between a required rate of return and the assumed constant growth rate in dividends (Harvey, 2004).
The beauty of the dividend growth rate is that one doesnt necessarily just use one year, but relies on historical averages in this scenario. The scenario
here is time - basically, the annualized percentage rate of growth that the dividend undergoes during a period of time. Given that
Apple has been public for a couple of decades, it would be a fairly straightforward process to get an average dividend growth rate on this stock to provide an ideal
rate of return. The main disadvantage to this type of measurement, however, is the outlier (such as the financial meltdown of 2008 and
Apples difficulties during the 1990s). Its assumed that most dividends are cyclical. But Apple has had some ups and downs during its existence. However, the interesting aspect with Apple was
that it was struggling during the 1990s - when most high-tech companies in Silicone Valley were doing quite well. And, conversely, thanks to iTunes and the iPhone, it has done
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