Please answer part 2 questions 1 through 5 Company-Apple Inc Here again is the f
ID: 2745788 • Letter: P
Question
Please answer part 2 questions 1 through 5
Company-Apple Inc
Here again is the formula for WACC. For simplicity the term for preferred stock has been removed: Here again is the formula for WACC. For simplicity the term for preferred stock has been removed:
Go to http://thatswacc.com/[1] and enter the ticker symbol for the stock you selected and click on the tab entitled “Calculate WACC.”
Complete the following tables:
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
561529.630/561529.630+49878.50=.9184
Weighted Average Cost of Equity
E
561529.630/561529.630+49878.50=.9184*12.245%=.1125
Weight of Debt
4988.5/561529.630+49878.5=0.0816
Pre-Tax Weighted Average Cost of Debt
D
4988.5/561529.630+49878.5=0.0816*1.4696%=.0012
After-Tax Weighted Cost of Debt
D · (1- TC)
4988.5/561529.630+49878.5=0.0816*1.4696%=.0012*.7375=.0008
Weighted Average Cost of Capital
= · iE + · iD · (1-Tc)
.9184 (e/(e+d)*12.245% (cost of equity)+.0816*(d/(e+d)1.4696%(cost of debt)*1-26.25%(1-tax rate)=11.33%
PART 2
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)]
=
3Consider 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.
4If 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?
5If 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
Weight of Equity
= Equity / Total Value
= Equity / (Equity + Debt)
= 561529.63 / (561529.63 + 49878.5)
= 561529.63 / 611408.13
= 0.9184
Weighted Average Cost of Equity
= Weight of Equity * Cost of Equity
= 0.9184 * 12.245%
= 0.112458
= 0.1125
Weight of debt
= Debt / (Equity + Debt)
= 49878.5 / (561529.63 + 49878.5)
= 49878.5 / 611408.13
= 0.081579
= 0.0816
Pre tax Weighted Average Cost of debt
= Weight of debt * Cost of debt
= 0.0816 * 1.4696%
= 0.001199
= 0.0012
After Tax Weighted Cost of debt
= Pre tax weighted average cost of debt (1-tax rate)
= 0.0012 (1-0.2625)
= 0.0012 * 0.7375
= 0.000885
= 0.0009
Weighted Average Cost of Capital
= Weighted Average Cost of Equity + After tax Weighted Cost of debt
= 0.1125 + 0.0009
= 0.1134
= 11.34%