FE445 Investment Analysis and Portfolio Management
Spring 2019
Project Assignment 2
• This assignment is due at 11:59 pm on Friday, April 5. Please submit electronically under
“Assignments” on QuestromTools. Late submissions are subject to penalties. Submissions
after 00:01 AM on Tuesday, April 10 are not accepted.
• You should work in groups of 3-5. You may work in the same or a different group than you
did for the previous projects. Please clearly indicate who is in the group. Only one person
from the group needs to upload the solution of the project on QuestromTools. You should
not share any part of your Excel file with other groups.
• One worksheet would be good enough for this project. However, if you believe that you
need more than one worksheet, make sure that the first worksheet should contain only your
responses (including graphs).
• Reference all cells, never copy-paste any numbers. Please do all calculations in Excel using
functions (do not use a calculator). Make sure you save the file in “.xls” or “.xlsx” format
otherwise you might lose your formulas and graphs!
• There are several ways to solve some parts of this project. This means you have to make some
decisions on what is reasonable and what is not. Points will be given for reasonable approaches
that produce reasonable answers. I will not accept answers that are clearly unreasonable or
approaches that make outrageous assumptions.
• The assignment is worth 30 points in total (6 points per question).
Use the information from Reuters to answer Questions 1-3.
1) First calculate the market capitalization (annual) rate assuming a risk free rate equal to the 10yr
Treasury yield and a forecasted 7% market risk premium. Use the beta from the Reuters page.
According to the Reuters page, what is the consensus forecast on Apple’s long-term growth of
earnings per share? Is there a lot of disagreement between the analysts? What is Apple’s plowback
ratio? Given Apple’s ROE, do you agree with the management’s choice of the plowback ratio?
2) Now use the ROE and the plowback ratio, calculate the growth rate of the company. How does
this compare to analysts’ long-term earnings growth forecast? Is it realistic for Apple to sustain
this growth rate forever? (Your answer to this question can be subjective.) Based on the analysts’
forecasts what is your forecast for earnings in each of the next 5 years?
3) Now assume both Apple earnings and dividends grow at the above calculated rate for 5 years
but then dividend growth slows down. Approximately what growth rate would dividends need to
grow at from year 5 on to rationalize current share prices (closing price on March 30th)? (Hint:
Use the two-stage growth model.)
Use the information from Value Line to answer Questions 4-5.
4) Now with the beta reported in the Value Line Survey, what is the market capitalization rate
(the cost of common equity using the CAPM) for Apple?
5) What annual growth does the Value Line Survey predict for the next 3-5 years? Using a constant
dividend growth formula with this g, what is your valuation per share for Apple? Does it make
sense? If not, explain why.