1) You are indecisive about which stock to buy Microsoft, which is selling for $173 a share; or Apple, which is selling for $285 a share. Microsoft stock promises to pay annual dividends of $4.00, $5.00, and $5.50 over the next three years respectively, and you estimate it can be sold for $190 at the end of the third year. You expect Apple to pay a dividend of $5.50 the first year, $8.50, and $10.50 over the next two years, respectively. You also expect Apple’s stock to be trading at $330 in three years. Which stock would you buy if stocks from computer manufacturers typically yield 10%?

I would buy the APPLE stock

Explanation:

Microsoft stock price = $173  

dividends earned = $4, $5 and $5.5

value after 3 years = $190

Apple stock price = $285

Dividends earned = $5.5, $8.5 and $10.5

value after 3 years = $330

Applying the dividend discount model

IVO = present value of dividend + present value of terminal price

for Microsoft

IVO = ( 4/1.1 + (5/(1.1/2)) + ( 5.5/(1.1/3)) + ( 190/(1.1/3))

      = $154.65  

for Apple

IVO = ( 5.5/1.1 + ( 8.5/( 1.1/2)) + (10.5/(1.1/3)) + ( 330/(1.1/3))

       = $267.8

Note: the IVO's are less than the current price of the stocks ( IVO = the intrinsic value of the shares ) but Microsoft shares are overpriced compared to apple

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