Question
Apple. Earnings per share estimates for the next 5 years for Apple are $4.44 in year 1, $4.65 in year 2, $5.02 in year 3,
Apple. Earnings per share estimates for the next 5 years for Apple are $4.44 in year 1, $4.65 in year 2, $5.02 in year 3, $5.56 in year 4, and $6.10 in year 5. Apple is expected to pay out 19% of its earnings as dividends in year 1 and to reduce the payout ratio by 1% per year for the next 4 years (so 18% in year 2, down to 15% in year 5). The current price of Apple stock is $126.21 and an appropriate discount rate (cost of equity) is 8%. Suppose that we value Apple stock using the following approach. We will use the dividend discount model. But in estimating the terminal value at the end of year 5, instead of assuming that dividends grow at a constant growth rate in perpetuity, the terminal value is estimated as a multiple of year 5 earnings per share. What terminal price-to-earnings per share multiple would justify the current stock price?
a. 27 to 28
b. 28 to 29
c. 29 to 30
d. 30 to 31
e. 31 to 32
f. 32 to 33
g. 33 to 34
h. 34 to 35
i. 35 to 36
j. 36 to 37
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