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Apple Cost of Capital & Valuation

Apple Cost of Capital & Valuation. February 12, 2014 Kristen Bachteler Module 6. Agenda. Review of Estimating Cost of Capital, WACC, & CAPM Cost of Equity Capital Bloomberg Results Betas from Other Sources Regression Analysis My Calculation Cost of Debt Capital Debt Rating

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Apple Cost of Capital & Valuation

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  1. Apple Cost of Capital & Valuation February 12, 2014 Kristen Bachteler Module 6

  2. Agenda Review of Estimating Cost of Capital, WACC, & CAPM Cost of Equity Capital Bloomberg Results Betas from Other Sources Regression Analysis My Calculation Cost of Debt Capital Debt Rating My Calculation Cost of Enterprise Capital My Calculation Comparison to Bloomberg WACC Revisiting Valuation

  3. Estimating Cost of Capital • Cost of Enterprise Capital • Risk of company’s enterprise operations • Does not shift due to changes in financing • Cost of Debt Capital • Risk of company’s debt holders of default • Adjusts to changes in amount of debt outstanding & maturity dates • Cost of Equity Capital • Risk to company’s equity holders of getting distributions (dividends or increases in share prices) • Adjusts to changes in debt/maturity debts as well as enterprise activities • Estimate Enterprise Capital by calculating cost of debt capital then cost of equity capital • Because each group provides capital aware of other’s investment • Equity ownership riskier because risk of enterprise & risk of debt obligations

  4. WACC & CAPM • Value of Enterprise • VEnt = VD + VEq • Weighted Average Cost of Capital • rEnt = (rD x VD/ VEnt) + (rEqx VEq/ Vent) • Assume investors only concerned with non-diversifiable risk • Capital Asset Pricing Model (CAPM) • rEq = rrf + [βx (rMkt – rrf)]

  5. Cost of Equity Capital • Bloomberg (for 2/08/12 – 2/07/14) • Raw Beta : 0.918 • Beta Estimates from other sources

  6. Regression Analysis Estimate of Beta: 1.09 – how Apple does comparative to market Estimate of Alpha: 0.0181- how much better Apple did than predicted 95% Confidence Interval: 0.781 to 1.404 – range of Beta values

  7. Cost of Equity Using CAPM • Capital Asset Pricing Model (CAPM) • rEq = rrf + [βx (rMkt– rrf)] • rrf = 3.69% • from Bloomberg of 30 Yr T Bills • β = .918 • from Bloomberg, rather than regression or other sources • If market moves by 1%, AAPL moves by 0.918% • Desired market premium 5% • Historically between 4% and 8% • rEq = 3.69 % + [.918 x (8.69% -3.69%) = 8.28%

  8. Debt Capital • Debt Ratings by Agencies

  9. Cost of Debt Capital • Using reformulation in Module 2, approximate cost of debt capital as RNFL using FEAT & NFL • RNFL = FEAT / avg (NFL)

  10. Cost of Enterprise Capital • rEnt = (rD x VD / VEnt) + (rEq x VEq/ Vent) • (0.0697%) x (-126,382/433,968,692) + (8.28%) x (434,095,075/433,968,692) = 8.28% • $ amounts on financial statements in millions, shares in thousands • Utilized calculated costs of debt & equity • Value of debt from book value of NFA • Value of equity is market value of equity on Sept. 28., 2013 (closing share price x shares outstanding) • Value of Enterprise = value of debt + value of equity • WACC on Bloomberg: 9.8%

  11. Bloomberg WACC

  12. Revisiting Valuation Incorporated new cost of enterprise capital, however fairly certain there is an error in the model as my enterprise value is too far off. Concern to be addressed promptly.

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