Apple - Free Cash Flow Valuation - Memo

Apple FCF

a) Ke = Rf + B(Rm-Rf) 1
= 7% + 1.2 (11%)
= 20% 1

b) Ke fo Nexus Ltd 20%

- Shares not transferable 0.5% 1
- Shares subject to restriction 0.5% 1
- Growing market -1% 1
- Successful social media marketing -1% 1
- Inexperienced directors 1% 1
- Low debt to equity -1% (Max 5) 1
19%

c) Dividend valuation 2014 2015 2 016

R'000 R'000 R'000
Dividend paid 500 400 650 1
Terminal value 6 381.82 1
500.00 400.00 7 031.82
PV @ 19% 420.17 282.47 4 172.79 1
Value of equity 4 875 426 1

Dividend growth model

P3 = D4/(Ke-g) 1
= R650 x 1.08 / (19%-8%)
= R 6 381.82 1
6
d) Target capital structure:
Debt to equity = 60%
Therefore 60 debt for 100 equity 1
Weight Weight % Cost WACC
Equity 100 63% 19% 11.88% 1
Debt 60 38% 7.92% 2.97% 1
160 14.85%
equals 15%
3
 Apple - Free Cash Flow Valuation - Memo
Apple FCF

e) Market value Value Weight Cost WACC

Share capital Part c 4 875 426 60.53% 19.00% 11.50% 1
Preference share W1 600 000 7.45% 10.00% 0.74% 1
Irredeemable debentureW2 250 000 3.10% 8.64% 0.27% 1
Redeemable debentureW3 829 282 10.30% 7.20% 0.74% 1
Long term loan W4 1 500 000 18.62% 5.76% 1.07% 1
8 054 708 1 14.33%

W1 Preference shares
Pmt = R500 000 x 12%
= R60 000 1

Value = R60 000/10%

= R600 000 1

W2 Irredeemable debenture
Pmt = R300 000 x 10% OR = R300 000 x 10% x 72%
30 000.00 21 600 1

Value = R30 000 / 12% R 21 600 / 8.64% (12% x 0.72)

= R250 000 250 000 1

Rate = 10%+ 2%
=12% 1

W3 Redeemable debenture
Pmt = R800 000 x 9% x 72% = R51 840 1
FV = R800 000 + R80 000 = R880 000 1
i = 7.2% (10% x 72%) 1
n = 4 years (30/09/2013 - 30/09/2017) 1
PV = 841154.86

W4 Long term loan

Pmt = R1 000 000 x 12% OR = R1 000 000 x 12% x 72% 1
= R120 000 86 400

rate = 80 000 / 1 000 000 = 80 000 / 1 000 000

= 8% 8% 1

Value = R120 000 / 8% = R86 400 / (8% x 72%)

= R1 500 000 1 500 000 1

(Max 15) 17
 Apple - Free Cash Flow Valuation - Memo
Apple FCF
f) VALUATION
2014 2 015 2 016
Free cash flow R'000 R'000 R'000
Profit before tax 1 815 2 723 3 404 1
Add: Depreciation W5 2 333 2 667 3 333
Add: Finance charges W6 222 222 222
Less: tax expense W7 (352) (941) (920)
4 018 4 671 6 039

Inv in fixed assets W5 (3 333) (3 667) (5 333)

Working capital:
Inventory (100) - (100) 2
Receivables (100) (200) 100 2
Cash - (100) (100) 2
Payables 250 (59) 366 2
Free cash flow 735 645 972
Terminal value W8 14 994 1
Net cash flow 735 645 15 966
PV @ 15% 639 488 10 498 1
Value of company 11 624 1

Value of company 11 624 448

Add: investment in shares 500 000 1
Less: Preference shares (600 000) 1
Less: Irredeemable debentures (250 000) 1
Less: Redeemable debentures (829 282) 1
Less: Long term loan (1 500 000) 1
Equity value 8 945 166

W5 Property plant and equipment 2014 2 015 2 016

Balance 6 000 7 000 8 000 1
Addition 3 333 3 667 5 333 1 1
Depreciation (2 333) (2 667) (3 333) 1 1
Closing balance 7 000 8 000 10 000

W6 Finance charge
Preference share (Not redeemable) - 1
Irredeemable debenture 30 1
Redeemable debenture 72 1
Long term loan 120 1
222 x 28 % = R62 1

W6 Tax expense 2014 2 015 2 016

Income tax expense 454 815 1 015 1
Adjustment for tax on interest 62 62 62 1
Adjustment for deferred tax (164) 64 (157) 2
no adjustment for depreciation - - - 1
352 941 920

W7 Terminal Value
TV = FCF 2016 x 1.08 / ( 15%-8%) 1
= 971.84 x 1.08 / 7%
= R14 994.10 1

(Max 29) 34