Apple became the world’s most valuable publicly traded company in 2020 and shows no signs of slowing down in their growth.
Rebecca Cline
For this discussion, I have chosen to use Apple as the company that I will analyze.
dividend yield – 146.39/2.62 = .55%
required rate of return – (2.65/146.39) + 5% = 6.8%
current P/E ratio – 32.86
Apple became the world’s most valuable publicly traded company in 2020 and shows no signs of slowing down in their growth. Even throughout the pandemic when other companies were struggling, apple was able to make a profit (Bursztynsky, 2020).
The relationship between Apple’s Ke and P/E ratio shows that Apple is anticipated to have a positive future. According to our text, a company “A stock that has a high required rate of return (Ke) because it’s risky will generally have a low P/E ratio” (Block, Hirt, & Danielsen, 2019). The text goes on to say that “Similarly, a stock with a low required rate of return (Ke) because of the predictability of positive future performance will normally have a high P/E ratio” (Block, Hirt, & Danielsen, 2019). Although “These are generalized relationships. There are, of course, exceptions to every rule of thumb” (Block, Hirt, & Danielsen, 2019).
Due to the low Ke and the high P/E ratio for Apple, one can assume that the company will have a positive future when it comes to cash flows. The general relationship between low Ke and high P/E ratio is supported by the data for Apple.
Unless there was a significant increase in the growth of dividends, there would not be a significant impact on the company’s stock price.
The P/E ratio for Samsung is 19.15 and the P/E ratio for Microsoft is 38.71. When looking at the competitor’s P/E ratio in comparison to that of Apple, it appears that Apple is doing comparatively well in the market. Although Samsung’s P/E ratio is slightly lower that Apple’s, it is still considered a high P/E ratio.
Based on the P/E comparisons, Microsoft should have the lowest Ke. Due to the fact that Microsoft has the highest P/E and Samsung has the lowest, I would hypothesize that Microsoft would have the lowest Ke and Samsung would have the highest Ke.
There is a connection between a company’s growth rate, its required rate of return, and its value. When utilizing the Gordon growth model, an investor can utilize the required rate of return, the growth rate of dividends, and the current dividend payment to generate the maximum price that they should pay for a stock (Lee, 2018).
Resources:
Block, S. B., Hirt, G. A., & Danielsen, B. R. (2019). Foundations of financial management (17th ed.). McGraw-Hill Higher Education.
Bursztynsky, J. (2020, September 1). Apple surpasses Saudi Aramco to become world’s most valuable company. CNBC. https://www.cnbc.com/2020/07/31/apple-surpasses-saudi-aramco-to-become-worlds-most-valuable-company.html.
Lee, M. (2018, February 16). Required Rate of Return and Gordon Growth Model. Investopedia. https://www.investopedia.com/ask/answers/06/reqratereturnstockprice.asp
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