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Business Finance Professional Assignment 2

Guang Yang

Westcliff University

Shawn Spath

BUS 550 Managerial Finance

06-11-2023

Business Finance

Part 1

Introduction

Evaluating the historical financial information of a company is critical in understanding and projecting its future performance. More specifically the historical stock price of a company is important as it provides insight to current and potential investors on the return on investment of the company which provides a foundation for decision making. In this regard this report evaluates Apple Inc historical stock performance. More importantly the report provides the estimated cost of capital of the company based on a 20 years historical data of the company as well as the most recent financial statements.

Overview of Apple Inc.

Apple Inc is an American multinational corporation that is famous for the production of computers and consumer electronics. The company produces, and sells wearable technology, smartphones, tablets, and personal computers. In addition, the business provides digital material from third parties as well as accessories, software, and related services (Lessambo, 2022). Some of the famous products of the company include but are not limited to, iPhone, iPad, Mac, iPod, Apple Watch, and Apple TV are among Apple's product lines. The company generated a total revenue of $ 394.328billion in the financial year ended 9/29/2022 and had a net income of $ 99.8billion

Apple Inc Beta

Beta is an important yardstick in evaluating the performance of the company’s stock. It provides a measure of variability in the company’s stock return. Beta gauges a stock's volatility, the degree to which its price changes in proportion to the entire stock market (Jeffers & Posenau,2022). It conveys a measure of the stock's risk compared to that of the wider markets. Besides, beta is used to contrast the market risk of a stock with that of other stocks.

Â	Coefficients
Intercept	0.02274598
X Variable 1	1.252679015
	Apple Beta

When a company has a beta that is more than 1 it indicates the stock is more volatile than the market. The regression analysis of the Apple Inc, stock return for the last 20 years, the beta of the company is 1.25. This shows that Apple stock is 25% more volatile than the market. However, it should be noted that technology companies such as Apple tend to have higher beta than the market benchmark. These companies often make investments in novel projects and they tend to have high debt-equity ratios are they often seek more capital to fund the research and development project. For instance, Apple has a debt capital of $ 98.956billion against equity of $ 50.672billion (Yahoo Finance,2022).

WACC of Apple.

The weighted average cost of capital in important indicator of the company’s performance. WACC measures the cost of raising capital as such it assumes that a firm’s capital structure is composed of both debt and equity (Romeijnders & Mulder,2022).

Apple Inc. Expected annual rate of return
INPUT DATA
Risk free rate of the US treasury bonds	3.73%
Beta of Apple	1.253948015
The current market return (S&P 500)	11.34%
Apple Inc expected annual return (CAPM model)	13.3%
Calculation of WACC
Estimated annual cost of debt	4.88%
Cost of equity	13.3%
Value of equity	$ 50,672,000
Value of debt	$ 98,959,000
Total capital	$ 149,631,000
Weight of equity	0.338646403
Weight of debt	0.661353597
The corporation tax rate	21%
WACC	7%

The capital structure of Apple shows that the company more debt than equity. The above calculations shows that the proportion of debt in the company’s capital structure is 0.66. On the other hand the proportion of equity is 0.33 as such multiplied by respective cost of capital and summed the weighted average cost of capital of Apple is 7%. This means that despite the company’s high debt, it can still raise capital at relatively lower cost (Fridson & Alvarez,2022).This gives it advantage of getting more funds to finance its projects.

Part 2

This section provides the results of expected return of five companies. The companies chosen for this analysis include, Ford Motors, Verizon Communication, Nike, Exxon Mobil and PepsiCo. The analysis of the companies expected return is based on the 20years historical stock prices of the companies.

The results of the calculation of annual returns of the five companies shows varying performance. For instance, the return of Ford Motors company for the month of may 2023 has been highest at 13.2% while Verizon and PepsiCo registered negative returns over the same period. On the other hand, Nike and Exxon Mobile posted returns of 0.9% and 6.8% respectively.

References

Fridson, M. S., & Alvarez, F. (2022).  Financial statement analysis: a practitioner's guide. John Wiley & Sons.

Lessambo, F. I. (2022). Apple and Microsoft. In  Financial Statements: Analysis, Reporting and Valuation (pp. 369-399). Cham: Springer International Publishing.

Fridson, M. S., & Alvarez, F. (2022).  Financial statement analysis: a practitioner's guide. John Wiley & Sons.

Jeffers, J., Lyu, T., & Posenau, K. (2022). The risk and return of impact investing funds.  Available at SSRN 3949530.

Romeijnders, W., & Mulder, M. (2022). Optimal WACC in tariff regulation under uncertainty.  Journal of Regulatory Economics,  61(2), 89-107.

Yahoo Finance (2022)

Calculation References：