Company-Apple Inc Name of Company/Stock Apple Ticker Symbol AAPL WACC 11.33% Cos

Question

Company-Apple Inc

Name of Company/Stock

Apple

Ticker Symbol

AAPL

WACC

11.33%

Cost of debt, iD

1.4696%

Corporate tax rate, TC

26.25%

Total debt, D

49878.5

Total equity, E

561529.630 Mil

Total firm value, V

584.71B

Cost of equity, iE

12.245%

CAPM Components

Beta,

1.43

Historical market return, iM

Assumed 11%

Risk-free rate, iF

Assumed 3%

Using data in the table confirm the accuracy of the site’s WACC calculation:

Weight of Equity

Weighted Average Cost of Equity

E

Weight of Debt

Pre-Tax Weighted Average Cost of Debt

D

After-Tax Weighted Cost of Debt

D · (1- TC)

Weighted Average Cost of Capital

= · iE + · iD · (1-Tc)

ROA =13.58%, ROE=37.90%, Net Income=47.8B

Internal growth rate = (ROA RR) / [1-(ROA RR)]                                       (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 = (ROE RR) / [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. calculate its internal growth rate for the last fiscal year:     

= (ROA RR) / [1-(ROA RR)]

       =

2. Calculate the firm’s sustainable growth rate for the last fiscal year:   

= (ROE RR) / [1-(ROE RR)]

=

Consider your results. If the chosen firm grows at its internal growth rate, increasing assets only with its retained earnings, how will this likely affect its WACC? Show calculations.

If the chosen firm 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?

If the chosen firm 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.

Name of Company/Stock

Apple

Ticker Symbol

AAPL

Explanation / Answer

Answer

Answer 1

Using data in the table confirm the accuracy of the site’s WACC calculation

Figures in $

Particulars

Amount (In billions)

Weight

Cost of capital

Weighted cost of capital

A

B

A*B

Debt

49.8785

0.0816

1.0838%

0.088%

1.4696%*(1-26.25%)

Equity

561.52963

0.9184

12.245%

11.246%

611.40813

1.0000

Weighted average cost of capital (WACC)

11.33%

Figures in $

Particulars

Amount (In billions)

Weight

Cost of capital

Weighted cost of capital

A

B

A*B

Debt

49.8785

0.0816

1.0838%

0.088%

1.4696%*(1-26.25%)

Equity

561.52963

0.9184

12.245%

11.246%

611.40813

1.0000

Weighted average cost of capital (WACC)

11.33%

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