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# Cost of Equity- Apple, Inc

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Estimate the cost of equity or the rate of return that your company's shareholders require. This is an important piece of information that every top manager must be able to estimate because it will be an important input in any effort to determine whether any particular course of action by the company will or will not add value to the shareholders.

Use the Capital Asset Pricing Model (CAPM) in order to estimate the rate of return that our shareholders require on their investment. This is the minimum rate of return that these shareholders require. As stated above - we call this rate the cost of equity and it is expressed in percentages or in a decimal format.

Estimate the cost of equity for Apple Inc.

Click on the "key statistics" link on the left hand side of the screen to find the beta and other information.

After going through these calculations, write a two to three page paper with the following information:

1) Show your work that you used to obtain the cost of equity for Apple Inc.

2) Is this cost of equity higher or lower than you expected? The average cost of capital for a firm in the S&P 500 is 10.2 percent. Would you think your firm should have a lower or a higher cost of capital than the average firm?

3) Look up the betas for Hewlett Packard and Microsoft that you compared Apple Inc to for your Module 2 SLP. These are the companies that you had to explain had a higher or lower discount rate than Apple Inc. Using these betas, compute the cost of equity for these firms. How do they compare to Apple Inc? Are you surprised that some firms have a higher or lower cost of equity than Apple Inc?

4) How would you go about finding the cost of equity using the dividend growth model or the arbitrage pricing theory for Apple Inc? Don't worry, you don't actually have to do any calculations - just explain how you would go about doing these calculations and explain what kind of additional information you might need.

#### Solution Preview

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COST OF EQUITY
RE= RF + Beta(RM - RF)
RE= 3.25% + 1.21(5%-3.25%)
RE= 5.37%
RF= Risk Free rate of return. In this case, the yield for a US Treasury bond maturing in one year was used- 0.28%, (Bloomberg, 2010). Next is Beta-or the comparative risk of an enterprise relative to the market portfolio as a whole, (Arman, J. & Biger, N., (2008). Apple commands a Beta of 1.21 (Reuters, 2011a). Finally is RM (expected aggregate market return). This represents expectations of the market as a whole across the considered time horizon. Lastly for CAPM, and clearly the most precarious assumption, is RM (expected aggregate market return). This represents expectations of the market as a whole across the considered time horizon. Certainly, if objective and fool-proof methods existed to calculate (rather than forecast) the market return over the course of the coming year, then there would be no market premium-and relatively little need for financial advisors. Most economists currently project a growth of 2% in the ...

#### Solution Summary

Provides detailed calculation of the cost of equity using the capital asset pricing model (CAPM) using Apple as case study.

3 pages, APA format with references and equations.

\$2.19