Long-Term Financial Management - Report Writing - Finance Management Assignment Help
Question Task Id: 303442
o ESTIMATING THE COST OF CAPITAL OF APPLE INC.
Apple Inc. is an American multinational technology company headquartered in Cupertino, California, that designs, develops, and sells consumer electronics, computer software, and online services.
Estimating cost of capital
Use calculation for cost of capital for a firm. It is probably one of the most difficult tasks a financial analyst can undertake because many of the decisions that need to be made contain some element of subjectivity. In this case study, you are tasked with determining the cost of capital for Apple Inc. For this report, you will need to visit FT.Com, Reuters, Bloomberg, Yahoo! Finance and Google Finance. You will also need to visit the company’s own website for its annual reports.
Section A. Cost of Equity:
1. From the websites listed above, find the market value of equity. You can either get this directly or calculate it using the formula: share price x number of shares outstanding (provide detailed calculation and explanation.
2. Now read through the websites listed above and, arrive at an estimate of the expected market return over the next year. You will need to justify your decision, so make sure you can argue for your choice. To make a range of expected market returns (provide detailed calculation and explanation).
3. Find the annualized yield on three-month treasury bills for the US (provide detailed calculation and explanation).
4. Calculate the expected market risk premium (provide detailed calculation and explanation).
5. Finding the beta of the company should be easy. However, it is likely that different websites will have different estimates. Using historical monthly data, for the period 2015-2019, you should also calculate it yourself. Use Nasdaq index as market portfolio to compute market return (provide detailed calculation and explanation).
6. With all this information, use the CAPM to find the expected cost of equity for the company. If you have several estimates for each input, you may want to have a range of cost of equities (provide detailed calculation and explanation).
7. Also use the dividend growth model. You should have the current share price of the firm. Using the websites listed above find the most recent dividend paid by the firm and the expected growth rate of the dividends (or earnings). Use this to calculate the return on equity (provide detailed calculation and explanation).
Section B. Cost of Debt:
1. Use the websites listed above to find the total market value of the company’s debt. If you can’t find market values, use book values since many corporate bonds are not traded regularly (provide detailed calculation and explanation).
2. From those bonds that are issued, go to the stock exchange and find the most recent prices. Use them to calculate the yield to maturity of each bond. It is highly likely that only a small number of bonds will be traded, and you will have to use your own initiative here (provide detailed calculation and explanation).
3. Now find the weighted cost of debt from the outstanding bond issue data you have collected (provide detailed calculation and explanation).
Weighted Cost of Capital:
1. Find the effective tax rate for the company. This can be done through the financial websites or retrieved directly from the company’s annual report. If it is impossible to find it, use the country’s corporate tax rate (provide detailed calculation and explanation).
2. You now have all the information to calculate the weighted average cost of capital for your firm. This may well be a range of estimates because of the number of alternative inputs in your intermediary calculations (provide detailed calculation and explanation).
• Research questions:
Write a detailed report on your attempts to estimate the cost of capital by following the instructions above and answering the corresponding research questions.
1. Present your calculation and findings of sections A and B. (provide detailed calculation, theories, models, graph, and explanation).
2. Do you think your estimate is realistic? You should be honest and critically describe and discuss the problems and difficulties you have faced in your attempts. (provide detailed calculation, theories, models, graph, and explanation).
3. Comparing the company with the average performance of the industry, would you invest in it? Explain your answer. (provide detailed calculation, theories, models, graph, and explanation).
4. Close the report with the section of conclusions and your opinion about the company’s future based on your previous analysis. Last, suggest any potential management actions to be implemented in order to improve its financial performance. (provide detailed calculation, theories, models, graph, and explanation).
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