Cost of Capital Analysis: Evaluating Apple Inc. Using CAPM and WACC

This report identifies Apple's cost of equity using the Capital Asset Pricing Model (CAPM) and determines the weighted average cost of debt. It analyzes Apple's financial data, including debt value, equity value, stock price, and dividends, to calculate the Weighted Average Cost of Capital (WACC). The pure play approach is used to estimate the cost of capital for Robert Computer, Inc., although the report acknowledges limitations due to differences in organizational structure and industry between Apple Inc. and Robert Computer, Inc. The report concludes that the estimated cost of capital for Robert Computer, Inc. may not be appropriate and suggests using a retailing organization for a more accurate determination. Desklib offers additional resources like past papers and solved assignments for students.

Running head: FINANCE
Finance
Name of the Student
Name of the University
Author Note

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Table of Contents
1. Identifying the cost of equity for apple using CAPM and detecting the weighted average
cost of debt:................................................................................................................................2
2. Background and objective of the project:..............................................................................2
3. Presenting the detailed analysis and calculations:.................................................................2
4. Conclusion and limitation of the estimation:.........................................................................3
References:.................................................................................................................................5
Appendices:................................................................................................................................6

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1. Identifying the cost of equity for apple using CAPM and detecting the weighted
average cost of debt:
The book value of long-term debt is mainly at the levels of $104,193,000. On the
other hand, the book value of fixed rate notes is at the levels of $96,086,000,000. In addition,
the current stock price of Apple is mainly detected at the levels of $186.53, while the total
market capitalization is at $879,541,000,000 and the recent annual dividend is at $2.82
(Sec.gov, 2019). Apple Inc has paid dividends 31 times on an annual basis from 1988 to 2019
(Apple.com, 2019). No, we cannot use dividend discount model in this case, as no growth
estimation and WACC of the company is provided. Moreover, we have to use CAPM for
deriving the cost of equity for Apple Inc, where 13-week treasury bill is used in the
calculation. The weighted average method is used for calculating the total cost of debt for the
fixed rate bonds of Apple Inc.
2. Background and objective of the project:
Robert Computer, Inc. is one of the successful privately-owned organisations, who
operates in retail business of computers. The company has been generating high level of
income over the period, which is invested in buying new stores. Therefore, the company’s
current cost of capital is hard to determine, as the organisation is privately owned. Hence,
Apple Inc. data has been used for detecting the accurate level of cost of capital, which can
help in understanding the capital budgeting requirements. The pure play approach is used for
determining the cost of capital for Robert Computer, Inc.

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3. Presenting the detailed analysis and calculations:
Particulars Value
Total debt value $ 96,086,000,000
Total equity value $ 879,541,000,000
Total capital $ 975,627,000,000
Debt Weight 9.85%
Equity Weight 90.15%
Cost of equity 5.96%
Cost of debt 3.05%
Tax 35%
WACC (90.15%*5.96%) + ((9.85%*3.05%) * (1-35%))
WACC 5.57%
The above table provides information regarding the weighted average cost of capital
for Apple Inc. The value has been determined by adequately utilising the weighted average
cost of capital formula, which is depicted in the above figure. This calculation has been
conducted for identifying the cost of capital by analysing the cost of debt and cost of equity
or Apple Inc. The maximum level of capital used by Apple Inc is mainly from equity, while
the debt capital only comprises of 9.85% of the total 100% capital (Finance.yahoo.com,
2019). In addition, the cost of equity is calculated to be at the levels of 5.96%, while cost of
debt is set at 3.05%. Hence, the WACC of the company is inclined towards cost of equity,
where its values are mainly at the level of 5.57%.
4. Conclusion and limitation of the estimation:
According to pure play, the estimated cost of capital for Robert Computer, Inc is
mainly at the levels of 5.57%. However, the cost of capital derived for Robert Computer, Inc

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is not appropriate, as Apple Inc organisational structure is not in line with organisation
structure of Robert Computer, Inc. Hence, the derived cost of capital will not be suitable for
the organisation, as Apple Inc is a manufacturing process, while Robert Computer, Inc falls
under retailing. There are relevant differences in the operations, aims and objective of both
companies, which nullifies the cost of capital derived from pure play approach for Robert
Computer, Inc. The organisation needs to use the pure play approach on retailing organisation
for accurately determining the cost of capital for Robert Computer, Inc.

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References:
Apple.com. (2019). Apple. Retrieved 20 March 2019, from https://www.apple.com/
Finance.yahoo.com. (2019). Finance.yahoo.com. Retrieved 20 March 2019, from
https://finance.yahoo.com/quote/AAPL?p=AAPL
Finance.yahoo.com. (2019). Finance.yahoo.com. Retrieved 20 March 2019, from
https://finance.yahoo.com/bonds
Sec.gov. (2019). Sec.gov. Retrieved 20 March 2019, from
https://www.sec.gov/Archives/edgar/data/320193/000032019318000145/a10-
k20189292018.htm

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Appendices:

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