Ticker Symbol: AAPL Financial Analysis Exercise IV Part A: Weighted Average Cost of Capital ( WACC)

Ticker Symbol: AAPL

Financial Analysis Exercise IV Part A: Weighted Average Cost of Capital ( WACC) Here again is the formula for WACC. For simplicity the term for preferred stock has been removed: WACC = E+D'+E+D *(1-T.) 1. Go to http://thatswacc.com/' and enter the ticker symbol for Apple Inc. and click on the tab entitled “Calculate WACC." 2. Complete the following tables: Apple Inc. Name of Company/Stock Ticker Symbol From the http://thatswacc.com/results for Apple Inc.: WACC Cost of debt, in Corporate tax rate, Tc Total debt. D Total equity. E Total firm value, V Cost of equity is CAPM Components Beta, ß Historical market return, IM Risk-free rate, is Assumed 11% Assumed 3% 3. Using data in the table confirm the accuracy of the site's WACC calculation: Weight of Equity EtD Weighted Average Cost of Equity Weight of Debt . Pre-Tax Weighted Average Cost of Debt After-Tax Weighted Cost of Debt E-0 (1-TO) Weighted Average Cost of Capital = + (1-T.) Part B: Dividend Payout and Growth Ratios Recall from Module 1 the following two ratios: Internal growth rate = (ROARR) / [1-CROARR)] (Eq.3-30) where RR = Retention ratio = (Addition to retained earnings) Net income (Eq. 3-31) - The internal growth rate measures the amount of growth a firm can sustain if it uses only internal financing (retained earnings) to increase assets Sustainable growth rate = (ROERR)/(1-(ROE. RR)] (Eq. 3-33) - If the firm uses retained earnings to support asset growth, the firm's capital structure will change over time, i.e., the share of equity will increase relative to debt To maintain the same capital structure managers must use both debt and equity financing to support asset growth The sustainable growth rate measures the amount of growth a firm can achieve using internal equity and maintaining a constant debt ratio 1. For Apple Inc., calculate its internal growth rate for the last fiscal year: = (ROARR)/(1-(ROARR)] 2. Calculate the Apple Inc's sustainable growth rate for the last fiscal year: = (ROERR)/(1-(ROE. RR)] Part C. 1. Consider your results for Parts A and B. If Apple Inc. grows at its internal growth rate, increasing assets only with its retained earnings, how will this likely affect its WACC? Show calculations. 2. If Apple Inc. grows at its sustainable growth rate with increases in both its retained earnings and debt, maintaining a constant debt ratio, how will this affect its WACC? 3. If Apple Inc. attempts to grow faster than its sustainable growth rate with modest increases in its debt ratio, how will this likely affect its WACC? What about very large increases in its debt ratio? Explain.