Explore BrainMass

ROR of Apple Inc

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

The cost of equity capital and the CAPM

You are asked by your board of directors to write a report explaining the challenge of estimating or coming with a good 'feel' for the "cost of equity capital" or the rate of return that you feel your company investors require as the minimum rate of return that that expect of require your company to earn on their investment in the shares of the company. Note that the investment is not the amount shareholders spent buying the share of the company in the past. The true investment is in terms of today's share prices because shareholders COULD have sold their shares today, and if they decided to hang on to these shares instead of selling these shares off this is their true investment in the shares of the company as of today. (This is the correct concept of the opportunity cost to the investors or the shareholders.)

Write a report to the board of directors in the APPLE company in a paper addressing the following issue:

Which of the three models (dividend growth, CAPM, or APT) is the best one for estimating the required rate of return (or discount rate) of your company?

In your paper include discussion of the following issues:

1. Ease of use of these three models

2. Accuracy of each of these three models

3. How realistic the assumptions of each model are

For this paper you need to take a clear stand and pick one of these three models to defend to the Board of Directors. You cannot tell the Board of Directors that "I like all three models", they want you to come to them with a decisive choice of just one model.

© BrainMass Inc. brainmass.com October 17, 2018, 12:20 am ad1c9bdddf

Solution Preview

The company selected is Apple Inc. This is computer hardware/software company based n the USA. It is a multinational corporation and investors from different parts of the world would be interested in investing n the company. The company is well known for its hardware products like Mackintosh computers, the iPod, and the iPhone. The company is seeking to expand into consumer electronics. In the year ended 2008, Apple Inc had a revenue of 32.48 billion dollars. The company has a strong consumer base in the USA and the company enjoys strong brand loyalty among its customers.

There are three methods of estimating the required rate of return of Apple Inc. These are the dividend growth model, the CAPM model and the APT. In the dividend growth model the expected return is yield plus expected growth. This model requires the input of the current dividend rate, the constant growth rate of dividend, and a required rate of return for the stock that remains constant at k which is the cost of equity. The model requires the summing of an infinite series that gives the value of the current price. The arithmetical calculations can easily be carried out , however, the person making the computation must supply the value of g, the constant rate at which D (current rate of dividend) grows. The difficulty in using this model is that the model must be given one perpetual growth rate. This rate varies with the cost of capital from year to year and assigning one growth rate is very difficult. Another difficulty arises if the company does not pay a dividend.

The second model is the capital asset pricing model (CAPM) that is used to determine the appropriate required rate of return of an asset, if that asset is added to an already well-diversified portfolio. So the 'asset's' sensitiveness to market risk must be taken into account. According to the CAPM model the expected excess return on capital asset is the risk-free rate of interest plus beta multiplied by the market premium. The market premium is calculated by subtracting from the expected excess return of the market the risk free rate. The beta co-efficient is the sensitivity of the expected excess asset returns to the expected excess ...

Solution Summary

This answer investigates which model - dividend growth, CAPM or APT, is best for estimating Apple's ROR. 1388 words with references.

Similar Posting

"Software as a Service"

Why "software as a service" is (or is not - pick one) going to dominate the next several years in information management.

The case for this module calls for you to explore some of the divergent opinions about this new approach to organizational information systems and weigh some of the competing claims. First off, if you don't know anything about computer networking or what a client/server netwiork is in particular, it's recommended that you start with this reasonably good short guide to network terminology (if you're already on top of this stuff, you can probably skip this one):

Sensible Computer Help (2008) Choosing the best computer network. Sensible-Computer-Help.com. Retrieved February 27, 2011, from http://www.sensible-computer-help.com/computer-network.html

With that foundation, you can now begin to learn about "the cloud." A good general reference to start with is here:

Chee, B. and Franklin, C. (2010) Applications for Clouds. Chapter 4 in Cloud Computing: Technologies and Strategies of the Ubiquitous Data Center. CRC Press. Retrieved November 15, 2010 from http://media.techtarget.com/searchSystemsChannel/downloads/Cloud_Computing_Techn_Strat_of_the_Ubiq_Data_Cent_Chapter_4.pdf (SEE ATTACHMENT)

As we noted in the introduction, a term often used more or less interchangeably with "cloud computing" (despite some significant differences of focus) is "software as a service" - described as a software distribution model in which applications are hosted by a vendor or service provider and made available to customers over a network, typically the Internet. The following article discusses some of the difficulties with organizational implementation of this model:

Fornes, D. (2010) The Software as a Service Dilemma. The Software Advice Blog. Retrieved November 10, 2010, from http://www.softwareadvice.com/articles/uncategorized/the-software-as-a-service-dilemma-104071/

Finally, this discussion would not be complete without the views of the skeptic; the following article points out some of the all-too-apparent complications that might ensue from a wholesale stampede into the clouds:

Schneier, B. (2009) Cloud Computing. Schneier on Security. Retrieved November 15, 2010 from http://www.schneier.com/blog/archives/2009/06/cloud_computing.html

But back to the enthusiasts. SaasBlogs is a website that, in its own words, is "a community centered around the idea that Software as a Service (SAAS) represents the largest shift in the software industry in decades. We cover ideas, technologies, challenges, and business strategies related to this new and exciting paradigm." Basically, it's a lot of blog posts primarily authored by three experts, addressing a very wide range of topics related to SaaS deployment, use, and effects. It's a very good place to see how people committed to this model think and what they bring to the table. In fact, it's so good at this that it's going to be your primary source material for this case assignment.

Scrolling down the SaasBlogs home page points you to the archive of posts on various aspects of this issue. You should spend some time looking through these posts for discussions of things that you find interesting relating to SaaS operation, implementation, or results. Perhaps they will relate directly to issues in your own environment; perhaps they will remain largely academic - but in either case, you should be alert to the language of the discussion and how both technical and social issues are being talked about. There are also other SaaS-related blog sites that you may wish to look at (google a few and see what you find).

In addition, the Background Readings page lists some optional readings that may be useful to you as you consider these issues, or you may find other sources yourself (be sure to reference properly whatever specific sources you draw on).

When you've read through the articles and related material and thought about them carefully, please compose a short paper on the topic:

Why "software as a service" is (or is not - pick one) going to dominate the next several years in information

View Full Posting Details