A headline from Forbes magazine on February 11th, 2016 proclaimed that Apple is Undervalued. You have decided to examine Apples valuation using the dividend discount model.

a. Apple just paid a dividend of $2.08. Analysts expect that Apple will grow at a rate 12% each year for the next five years. Starting in year six, Apples growth rate will fall to 4% in perpetuity. Assuming a discount rate of 10%, estimate the price per share of Apples stock. Based on its current price per share of 97.43 is Apple over- or undervalued?

b. Assume that the discount rate is 10% and Apple will grow at 12% for the next five years. What would the perpetuity growth rate need to be to equate the present value of Apples dividends with the current price per share of 97.43?