You are on page 1of 7

Final Project Apple

Luiz Guilherme Hamparian


X130A Basic Managerial Finance summer 2014
UCLA Extension







1 Introduction

The purpose of this final paper is analyze and evaluate two projects of the same
public company. The paper contains assumptions, valuation analysis and an investment
recommendation about each project. Its included in the paper cash flow projections,
discounted cash flow (DCF), capital asset pricing model (CAPM), net present value
(NPV) and internal rate of return (IRR) for each projected selected.
I chose Apple Inc. for many reasons. Firstly, the company is very innovative. Apple
Inc. made a revolution in mobile device and computers. Like, iPhone, iOS system, iPad
and other products that promoted a great innovation in technology industry.
Secondly, the company has a high market value. Nowadays Apples worth close to
U$602 billion
1
. Finally, the firm is much admired around the world. For example, Apple
was elected by Fortune magazine the most company admired of the world
2
.
I really interested about Apple. So I chose this public company for my final
project. Also, the two projects selected to do a valuation and project analysis are iPhone
6 and iWatch.
The main sources are from Yahoo Finance, Apple 10-K (2013) and Bloomberg. All
calculations and projections was made in excel. Its attached an appendix.
2 iWatch assumptions

Apple Inc. has an excellent credibility and famous brand. The credibility and brand
will increase the profit.
In general, markets have great expectations about iWatch.
iWatch has an innovation factor and Apple need innovation. By the definition Apple
is a innovate company.
Economic conditions will contribute to increase the sales. As gross domestic
product (GDP) will increase in United States and China over next years. As The
Economist show a progressive increase of GDP for both countries
3
. Consequently
consumers going to buy more and Apple will produce more. US and China are very
important market for Apple.
I assumed 10% growth sales per year.
I assumed iWatch cost per unit $300.00.
Fixed costs are $2 billion per year.
Depreciation is $500 million per year.
The total investment required to develop iWatch is $2.5 billion.

1
http://finance.yahoo.com/q?s=AAPL
2
http://archive.fortune.com/magazines/fortune/most-admired/2012/snapshots/670.html?iid=splwinners
3
http://www.economist.com/blogs/graphicdetail/2014/08/chinese-and-american-gdp-forecasts
2.1 CAPM
The risk free for iWatch project is 10 yr treasury bill
4
.
The beta used 1. Because iWatch has more risk than Apple Inc (Beta: 074). Because
its a new product.
The E(Rm) was chose S&P 500
5
. Because S&P 500 covers great part of market
return and increases accurate of calculation.
After I applied CAPM in iWatch project, the result is 22.02%. Just to remember all
calculations were made in excel.

E (Ri) =rf +i [E (Rm) rf]
rf = 2.41
= 1.00
E (Rm)= 22.02% (date: 08/22/2014)
E(Ri) =22.02%
2.2 WACC calculations

Apple debts is 83.45 million
6
is based in Yahoo Finance.
Apple stock price is $100.00 based on Yahoo Finance.
Equity was calculated stock price x shares outstanding 602 billion.
35.00% taxes based taxable income in Ross, Westerfield, Jordan (2012)
Fundamentals of Corporate Finance.
Re is 22.02% based CAPM calculations.
Rd = 3.83
7

The WACC theory was applied in iPhone project is below.

WACC=(E/V) x Re +(D/V) x Rd x (1-Tc)
Debt= 83,45 million
Equity= stock price x shares outstanding = 100 x 6,02 billion = 602 billion
V=Debt + Equity= 685,45 billion
Tc = 35%
Rd= 3.83%
Re= 22.02%
WACC=19,56%
2.3 DCF, NPV and IRR


4
http://www.treasury.gov/resource-center/data-chart-center/interest-
rates/Pages/TextView.aspx?data=yield
5
http://www.bloomberg.com/quote/SPX:IND
6
http://finance.yahoo.com/q?s=AAPL
7
http://online.wsj.com/news/articles/SB10001424127887324482504578454691936382274
Im going to apply the DCF, NPV and IRR methods to ensure the feasibility of this
project and profitability. The DCF, NPV and IRR are based in cash flow projections and
WACC. In Appendix A has iWatch income statement, cash flow and other issues.




So, iWatch should be accepted. Because iWatch has a NPV positive (3.2 bi),
63% IRR and a 2 years payback.
3 iPhone 6 assumptions

The second project analyzed is iPhone 6. Im going to suppose some assumptions
that will affect the cash flow and valuation.
Apple Inc. has an excellent credibility and famous brand. The credibility and brand
will increase the profit. Because people trust and want iPhone 6.
I think Apple will sell 70 million iPhone 6 in 2015. In next two years iPhone sales
will increase 3% per year. In 2018 and 2019 Apple will decrease 30% sales. The
sales decrease can be explained because Apple will launch the iPhone 7.
I considered the iPhone 6 cost per unit $300.00. Because Wall Street Journal article
8

said the cost of unit iPhone 5 is around $215.00. But iPhone 6 will have more
gadget, technology and sapphire screen. In my point of view, I believe these
variables will increase $300.00 cost per unit.
Fixed costs are $8 billion per year.

8
http://blogs.wsj.com/tech-europe/2013/09/30/how-much-does-it-cost-to-make-an-iphone/
Depreciation is $200 million per year.
The total investment required to iPhone 6 is $7 billion.
3.1 CAPM

The risk free for iPhone 6 project is 10 yr treasury bill
9
.
The beta used 0.74 based on Yahoo Finance
10
.
The E(Rm) was chose S&P 500. Because S&P 500
11
covers great part of market
return and increase accurate of calculation.
E (Ri) =rf +i [E (Rm) rf]
rf = = 2.41
= 0.74
E (Rm)= 22.02% (date: 08/22/2014)
E(Ri) =16,92%
3.2 WACC model

Apple debts is 83,45 million
12
is based in Yahoo Finance.
Apple stock price is $100.00 based on Yahoo Finance.
Equity was calculated stock price x shares outstanding 602 billion.
35% taxes based taxable income in Ross, Westerfield, Jordan (2012) Fundamentals
of Corporate Finance.
Rd is 3.83
13
.
Re is 16,92% based CAPM calculations.
The WACC theory was applied in iPhone project is below.

WACC=(E/V) x Re +(D/V) x Rd x (1-Tc)
Debt= 83.45 million
Equity= stock price x shares outstanding = 100 x 6.02 billion = 602 billion
Debt + Equity= 685.45 billion
Tc = 35.00%
Rd= 3.83%
Re= 16.92%
WACC=15.16%

9
http://www.treasury.gov/resource-center/data-chart-center/interest-
rates/Pages/TextView.aspx?data=yield
10
http://finance.yahoo.com/q/ks?s=AAPL+Key+Statistics
11
http://www.bloomberg.com/quote/SPX:IND
12
http://finance.yahoo.com/q?s=AAPL
13
http://online.wsj.com/news/articles/SB10001424127887324482504578454691936382274
3.3 DCF, NPV and IRR



iPhone has NPV positive ($14.31 bi), 104% IRR and a 1 year payback. So iPhone
6 should be accepted.
4 Conclusion

My investment recommendation is Apple should accept both projects. Because for
4 factors. Firstly, Apple needs innovation and iWatch can bring it back. As I mentioned
before by definition Apple is innovative. Secondly, the financial and project analysis
show an excellent return, payback and IRR.
On the one hand Apple can assure your profitability with iPhone. On the other hand
Apple can bring back your innovation with iWatch. Finally, world economic conditions
will incentive Apple sales. So Apple should take both projects. There is a table that
shows financial indicators for each project.






Appendix A
iWatch Income Statement and Cashflow






















Appendix B
iPhone 6 Income Statement and Cashflow