You wish to value the equity of Apple using the residual income valuation model (RIVM). In order to check your estimation results, you also apply the dividend discount model (DDM), the abnormal earnings growth model (AEG) and P/E multiple.

Suppose you are planning to use the CAPM to estimate the cost of capital. You estimate that the firm has a beta of 1.2 and the market risk premium is 4%. Assume the risk free rate is 2.5%. Current book value of Apple is 300 pence per share and you forecast earnings and dividends to be as follows: Earnings per share: 25 pence in year 1 and 30 pence in year 2 Dividends per share: 2.5 pence in year 1 and 4.5 pence in year 2 For year 3 and beyond, you forecast a growth rate in book values and earnings to be 5%.

(a)Calculate earnings, dividends and book values for years 3 and 4. (b)Calculate residual income and abnormal earnings growth for years 2-4.

c) Calculate the current value of Apple using the DDM, RIVM and AEG models. Also, calculate the value at the beginning of year 3 by using these three models.