Aapl Valuation Fcff Essay
Sorry, but copying text is forbidden on this website!
Our modern economy relies upon the technology sector to improve quality, productivity, and profitability. Apple’s first computer was developed around the 1970’s. Since then they have surpass one of its biggest competitors Microsoft (MFST). Apple is not only known for its great designs, fun, and intuitive products. Their products have been productive and created a vast profitability for the private sector. Furthermore, there is no stopping point for Apple, it will continue to grow and generate wealth. There have been various events since Apple went public that have generated high returns due to the volatility of the chaining computer industry.
Therefore, I believe Apple is in high growth stage, due to the many new innovations that have came out and are about to come out such as: the Iphone 5, new Ipad Mini, and a new line of Mac computes due out in 2013. Data: To evaluate Apple’s stock, I have chosen to use the Free Cash Flow for the Firm model (FCFF). This model is a measurement of the financial performance of a company that articulates the cash generated from the firm, which is then subtracted by the firm’s expenses, taxes, Net Working Capital, Depreciation, and Capital Expenditures.
In essence, this formula is a measurement of the company’s profitability after all expenses and reinvestments. The data that I have collected to provide a future evaluation of Apple’s stock is as stated. The data began at the end of 2011 and is all expressed as millions. CAPEX was $11,768, Depreciation was $3,991, EBIT was $33,790, NWC was $17,018, total liabilities were $39,756, the number of shares outstanding were 937. 4, and the parameters given for the High growth and Low growth were Tax rate as 34%, Treasury bills were 2. %, Market Risk-Premium was 4%, and the high growth period is for 8 years; therefore, from 2012 to 2019 Apple is under high growth at 5. 5% and for 2020 apple stabilizes at 3%. Moreover, the bounds that were provided for high growth were as stated. The Debt-Equity ratio was 40%, which is used to find the weight of debt (Wd) and weight of equity (We). Lastly, the cost of debt (Kd) given is 4. 75% and the current Beta was founded through Scottrade and was . 86. However, for stable growth the data differed.
Such as the Beta, which was 4/5 of the high growth Beta, Debt-Equity ratio is 25%, and the cost of debt (Kd) is 4. 25%. All in all, the FCFF model will provide the intrinsic value of the firm and of the stock; therefore, it will be compared to the current market price of the stock. Results: The projections, along with the formulas used, for the evaluation of Apple ‘s stock can be found in the Excel worksheet provided. First, I will go over the results for the high growth phase. For instance using the Debt-Equity ratio, the weights for debt and equity were 28% and 71%.
Since the ratio was given and not a percentage expressed as weight, Wd+We=1 was used to find the weights. These weights are realistic in terms that Apple does contain too much L. T. debt. From there the CAPM model was used to solve for the (Ke), which was 5. 94%. Also, the Weighted Average Cost of Capital (WACC) was founded using the above constraints. This was 5. 14%, which states that Apple does not require a high rate of return for future mergers or expansions. This also provides the interests that Apple has to pay for every dollar it finances.
Lastly, by using one of the major valuation models, such as the DCF, the Present Value, which identifies the intrinsic value of the company, was founded for each high growth year. Second once Apple stabilized after year 2019, the prediction of growth is 3%, and Beta was projected to be . 96. Again, by using the boundaries stated above: the (Ke), weight of equity/debt, and WACC were as follow 6. 34%, 80%, 20%, and 5. 63%. These numbers were somewhat similar to its high growth stage; therefore, signifying Apple is still a strong company once it stabilizes.
Yet, another reason why Apple can provide such attractive returns. Conversely, finding the Terminal Value (Pt) of the company, which is the value of the company at a future year, projected the PV for stable growth, in this case it was 2020. The (Pt) was over $1 billion, yet again another reason why Apple creates a great investment opportunity. Moreover, by adding all of the PV, including the stable growth year, the intrinsic value of the firm is over $966 million and minus the current value of debt, Apple is still worth (value of equity) over $926 million.
This equity divided the current number of shares outstanding; Apple’s intrinsic value of stock is $988. 80 per share. By comparison the current stock price, which is $649. 79 per share, the stock value is undervalued. Likewise, making (AAPL) a rewarding opportunity that must not be taken for granted. Conclusion With outstanding projections by Apple my recommended strategy is simple and involves options. Reason being is that orthodox investments do not provide great returns in a volatile market. Therefore, by evaluating apple now considering future parameters, trading Apple as an option will provide attractive returns.
Since Apple growths rate is far greater than its P/E ratio, its long-term trend will be positive; therefore, making it an attractive somewhat safe bet. For instance, buy several calendar spreads at a strike below, at, and above the stock price. If (AAPL) moves between $10-$15 higher then sell the lowest strike spread, and replace it with a higher one around $4 to $6 more than the one sold. This should be reverse if the stock price falls in price. All in all, this is a daily trade strategy, yet it has the potential to provide good returns since the day rate for the short weeks is greater than monthly decay rates.