Examine the Apple valuation model and compare the valuation to the actual market
ID: 2342850 • Letter: E
Question
Examine the Apple valuation model and compare the valuation to the actual market capitalization on Yahoo finance (Note if there is a difference and explain in a few sentences what the difference could be attributed to).
AAPL Residual earnings model 6/14/18 Terminal growth rate Cost of equity Low 3% 096 Mid 4% 10.6% High 5% 13.3% Earnings growth 20.0% Growth scenario Low Cost of equity scenario High 2018 2019 2020 2021 113,507,136,000 67,349,680,000 64,649,628,560 2022 2023 163,450,275,840 617,065,379,200 81,380,580,406 2024 Earnings Shareholders equity Residual earnings 65,687,000,000 128,249,000,000 48,629,883,000 78,824,400,000 193,936,000,000 3,030,912,000 94,589,280,000 272,760,400,000 8,312,146,800 136,208,563,200 480,856,816,000 72,254,606,672 196,140,331,008 780,515,655,040 92,331,748,888 PV of Residual PV Terminal value 279,255,348,250 423,774,068,452 Total value 831,278,416,701Explanation / Answer
Answer:
Findings:
We have compared the Valuation model with actual market capitalization of Apple Inc. (AAPL), and we have found the difference in the valuation model as the actual market capitalization is $1.09 Trillion whereas, according to the the valuation model the value of equity is $0.83 trillion.
Explaination:
The diference between the valuation model and the actual market capitalization arises because Intrinsic value is an estimate of the actual true value of a company using the growth assumption like discrete period and terminal peiod growth which is specfic to the valuation expert who has done the valuation, and that can be different from all the other market participants and that makes the process quite subjective, whereas, Market value is the company's value calculated from its current stock price and rarely reflects the actual current value of a company. The reason for this is that the market value reflects supply and demand in the investing market, how eager (or not) investors are to participate in the company's future.
The market value is usually higher than the intrinsic value if there is strong investment demand, leading to possible overvaluation, as in this case we can see that the positive sentiments in the market has taken the valuation to above $1.09 trillion, while the intrincic value according to the model is $0.83 trillion.
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