Term Project

Group 1

Jennifer Gogova

Yennifer Fabian

Carlton Ferdinand

Sheena Wills

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Background and Objectives:

Our group has been hired by Robert Computer Inc. (RCI) into the new treasury

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 management department. RCI is a privately owned company which was founded 8 years ago by

Bob Robert and his family. The company’s last year sales have reported to have reached an

outstanding amount of 100 million across their 74 stores in the Southeast. RCI sales strategy is

based on B2C in stores, which encourages their consumers to come to the brick and mortar store.

With this consumers can have one on one time with a staff member in order to examine their

current situation and decide which device will be the best fit. After a decision has been made and

a device has been chosen, the consumer proceeds to pay for the product which is then delivered

within the next 30 days.

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There is a direct correlation between RCI’s growth and profits. Having sufficient capital,

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enables the company to look up new stores. Throughout the company’s capital budgeting

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process, RCI doesn’t gather a lot of formal analysis, as they primarily rely on scouting out
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potential new store locations. As Bob Robert has very minimal knowledge on capital budgeting

techniques, he would like our group to calculate the cost of capital with the pure play approach.
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Apple Inc. is a public company and we are therefore able to access their data in order to predict
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the capital cost, so we will be using them as a representative company. However, it will be more

challenging to calculate the cost of equity since they’re a private company.

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Data Collections and Calculations

1)What is the total book value of long-term debt? What is the total book value of all the
fixed-rate notes?

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 Found on page 56 and Appendix 1, the total book value of long-term debt is $104,193 million
USD.

Then according to page 56 and Appendix 1, the total book value of all the fixed-rate notes is
$97,086 million USD.
(8,500+8,500+24,410+23,059+25,617+1,000+1,000+750+1,500+1,500+1,250=97,086)

2)To estimate the cost of equity for Apple:

1: What is the most recent stock price listed for Apple? What is the market value of equity,
or market capitalization? What is the most recent annual dividend? How many times that
dividends have been paid in the history of Apple? Can you use the dividend discount model
in this case? What is the beta for Apple?

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Apple’s most recent listed stock price is $246.58 dollars per share. Market capitalization or

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market value equity is 1.114 trillion USD. Found in Appendix 2, in 2019 Apple paid dividends

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three times. In 2018, Apple paid dividends four times. The four dividends paid in 2018: first one
was 0.63, the seconds was 0.73, the third one was 0.73 and the fourth was 0.73. Once put

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together to make the annual dividend equivalent to 0.63+0.73+0.73+0.73 = 2.82 USD.
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From Appendix 2, we can see that the number of times the dividends have been paid in the
history of Apple, from 1987 to the beginning of the third quarter of 2019 is 64 times.
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The dividend growth model is a valuation model which is used to calculate the fair value of stock
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within a firm. This model expects dividends to grow at a constant percent per period. In this case,
we cannot use the dividend growth model because Apple Inc.’s dividends do not grow at a
constant percent per period, which is shown in Appendix 2.
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The beta for Apple Inc is 1.10, found in Appendix 2.

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2: What is the yield on three-month (13-week) Treasury bills? (Note: The numbers
in the table are in percentage format.
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According to Appendix 2, the yield on three months (13 weeks) Treasury bills is 1.63%.

We know that the risk-free rate is 1.63% so Rf = 1.63%. The beta for Apple is 1.10 so , β = 1.10.
Market risk premium is 8%, so E(Rm) - Rf = 8%

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 CALCULATION
The cost of equity for Apple using CAPM

In order to calculate the cost of equity, we took the risk-free rate which was added to the beta for
Apple and then multiplied by the market risk premium value as demonstrated below.

RE = Rf+β*(E(Rm)-Rf)
RE = 0.0163+1.10*(0.08)
RE = 0.1043
RE = 10.43%

3) And the following information for each of Apple’s fixed-rate bonds: bond symbol, maturity,
coupon rate, book value, bond price, and yield to maturity. What is the weighted average cost of
debt for Apple using the market value of bonds as the weights?

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We calculated the MVD by summing up the market value column (million $) on excel which

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gave us the total amount.

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Debt:
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There are 45 bonds.
According to excel MVD = $78,525.74 million USD
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The MVE was provided by Appendix 2, under the market cap row which stood for 1.114 trillion
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USD and we converted that to $1,114,000.00 million USD so all units are equal on our excel
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sheet.

Equity:
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MVE = $1,114,000.00 million USD

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We calculated the total market value by adding the MVD and MVE values together.
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Total Market Value:

V = MVE+MVD
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V = $1,114,000.00+$78,525.74 = $1,192,525.74 million USD

In order to get the WD we took the MVD value and divided it by the total market value so we
can get the weighted average cost of debt for the company.

WD = MVD/V

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 WD = $78,525.74/$1,192,525.74
WD = 0.065848258

The weighted average cost of debt for Apple using the market value of bonds as the weights is
0.065848258

4. You now have all the necessary information to calculate the weighted average cost of capital
for Apple. Calculate this using market value weights, assuming Apple has 35 percent marginal
tax rate.

In order to calculate the weighted average cost of capital we followed the same steps as
explained in the section above in regards to the MVD and total market value calculations.

Debt:

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There are 45 bonds.

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According to excel MVD = $78,525.74 million USD

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V = MVE+MVD
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V = $1,114,000.00+$78,525.74 = $1,192,525.74 million USD
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WD = MVD/V
WD = $78,525.74/$1,192,525.74
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WD = 0.065848258
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WD = 0.065848258
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To calculate the weighted average cost of equity we took the MVE value which was provided in
Appendix 2 as well as the excel sheet and divided that by the total market value.
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Equity:
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MVE = $1,114,000.00 million USD

WE = MVE/V
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WE = $1,114,000.00/$1,192,525.74
WE = 0.934151742

WE = 0.934151742

Total Market Value:

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 V = MVE+MVD
V = $1,114,000.00+$78,525.74 = $1,192,525.74 million USD

The cost of debt is equal to the yield to maturity average which we calculated by adding all
values in the yield to maturity*weight column on excel.

Cost of debt:
RD = Yield to Maturity from Excel
RD = 2.30

The cost of equity was retrieved through the method which was explained previously by taking
the risk-free rate and adding it to the beta value for Apple and then multiplying it by the market
risk premium.

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Cost of equity:

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RE = Cost of equity

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RE = 0.1043 or Re = 10.43%

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Tc = 35% (this value was provided from the project instructions)
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The Weighted Average Cost of Capital for Apple is:
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In order to calculate the weighted average cost of capital, we used all the answers from
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the previous calculations and then plugged them into the formula. The WD was multiplied by the
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RD which was then multiplied by (1-Tc) and added to the answer of WE multiplied by RE.
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WACC = WD*RD (1-Tc) + WE*RE

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WACC = 0.065848258*2.30*(1-35%)+0.934151742*0.1043
= 0.1958 or 19.58%
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5) You used Apple as a pure play company to estimate the cost of capital for HCI. Are there
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any potential problems with this approach in this situation?

Conclusion:
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We can conclude that the calculations from Apple Inc. are unrelated to RCI. The scale of

operations is the biggest challenge between the two companies. Apple Inc. has over 500 stores

across the nation, whereas RCI has 74 stores and only sells within the United States. Therefore,

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 using the calculations and results from Apple Inc. as a way to portray RCI would not result to a

proper comparison.

In addition, Apple Inc. is acknowledged for being a multi-industry, multi-product

company, and the pure play method is used primarily on a single industry and single product

companies, for example, Apple Inc. sells a variety of products such as Ipads, Ipods, Iphones so

they have a wider product differentiation whereas RCI only sells PC’s, therefore using the

method will be invalid. Moreover, from the calculation, the retrieved numbers from Apple Inc.

are not applicable to RCI and WACC. For example, the Beta from Apple Inc. The Beta is

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calculated using stock return values, which is a major problem for RCI as it is not a publicly

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traded stock. Similarly, Apple Inc.’s bonds are utilized to calculate WACC. It is irrational to

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compare RCI to a publicly traded company as their business procedures are on completely
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different terms. In order to calculate the equity cost, which would help us find the YTM (RD) for

RCI, we used the market risk premium, Beta, and T-bill rate. We combined our market cap with
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the value of debt and divided by the total market value. We then used these values to calculate
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the WACC. As mentioned before, RCI is private, therefore many of these values are unavailable

which makes it more difficult to effectively compare them to Apple Inc.

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As a group, we strongly believe that Bob Robert should not trust this information entirely.

Even though, it may enable Bob Robert to gain some useful data and analysis, Apple Inc. could
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be misleading due to the multiple differences they have in comparison to RCI.

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