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Paper Topic:

Apple Incorporated (APPL.O) Cost of Equity







The cost of equity is the return demanded by owners of the company . The cost of equity is always high because investing in a company 's stock comes with high risks

Equity stock is a high return high risk investment and thus equity holders must be compensated at a return higher than the risk free rate

In a diversified portfolio , there is that risk which cannot be eliminated and is called systematic risks . It is the risk affecting

all securities in a market . It is usually measured using beta coefficient

Securities with high betas usually have higher returns because the security return is affected by the level of beta . High beta indicates high risk and hence the corresponding security returns should be high to counter the high risk . The reverse is the same

The beta of Apple Incorporated is 2 .18 ( HYPERLINK "http /finance .yahoo .com /q /ks ?s AAPL http /finance .yahoo .com /q /ks ?s AAPL

This is a relatively high beta which means the expected equity returns should be equally high

The beta of the market is 1 .0 . Securities with betas equal to 1 .0 move at the same level as the market securities . Securities with betas 1 .0 fluctuate at a higher rate than the market securities while those with 1 .0 fluctuates at a lower rate than the market securities

Apple 's beta of 2 .18 means that it is a highly volatile stock hence its stock equally moves at a higher rate relative to the market securities Therefore the expected returns should be high

Yield to Maturity is the opts not to sell the bond before maturity . It is in essence the internal rate of return of the bond

The formula for calculating the yield to maturity of a bond is

YTM interest annual price charge of the bond (Market price coupon price /2

Where interest par value x coupon rate

Annual price change market price - par value

Year of maturity

The current yield of 1 year treasury securities is 4 .2 in October from HYPERLINK "http /www .forecasts .org /1yearT .htm http /www .forecasts .org /1yearT .htm

The beta of Apple Inc . securities 2 .18

The risk free rate (1 year government bond 4 .2

Return of the market RF risk premium

The risk premium is given as 7

Hence RM 7 4 .2 11 .2

To calculate the return of the security we use the capital assets pricing model . CAPM is defined by the following formula

Rj Rf Bj (Rm-Rf

Bj 2 .18

Rm-Rf 7

Rf 4 .2

Rj 4 .2 2 .18 (7 19 .46

The calculation above shows that the return on equity of Apple Inc stock is 19 .46 . This attests to the fact that the higher the beta the higher the return of security

The risk premium of Apple Inc is 7 . Risk premium is calculated as return of the market minus return of risk free securities...

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