PE3

1 Project Exercise 3

1. Evaluate the stock price of Apple using two techniques. One stock must pay dividends to

use Dividend Discount Model.

• DDM

• Relative Valuation

Go to yahoo finance. Enter the ticker AAPL.

1. D1 = Forward Dividend found on the summary page of yahoo finance.

2. To find g, go to yahoo finance and click on the ”Analysis” link. Use next 5 years

growth estimate.

3. To calculate r use the CAPM assuming the equity risk premium is 7.6%:

CAPM = ri = 10 year Treasury yield + beta * (7.6%).

Then calculate the model price using the DDM:

V = D1

r − g (1)

4. To use the relative valuation approach find the P/E, P/BV, and P/S ratios of 2 to 3

related companies. Do not use Apple’s ratios. Use the comparables example we did in

class to help.

Table 1: Comparables Table 1

Ratio Peer1 Peer2 Peer3 Mean

P/E

P/BV

P/S

1

Table 2: Comparables Table 2

Metric Apple’s Metric Industry Avg. (P/E/, P/B, P/S) Stock Estimate

EPS

BV/Share

Sales/Share

Mean

5. Determine if Apple over or under valued using both techniques.

2.

1. Determine if Apple’s put/call parity holds. Go to yahoo finance. Enter APPL in ticker

search box. Click on options. Find the date that is closest to one year from today.

2. Find the call (C) and put (P) premium for a strike price (X) that is close to Apple’s

current price (S).

3. Find the yield on a one year Treasury bill, (r)

4. Determine if the put/call parity holds using the equation. Each side of the equation

should be equal of one can make a riskless profit. (Probably off by a dollar or two per

share.)

C + X

(1 + r)t = P + S (2)

• C = call option price,

• P = put option price,

• S = the current stock price,

• X = the strike price at maturity,

• r = the Treasury yield,

• t = the time to maturity,

2