FIN301 Mod 5 SLP
Introduction
Apple is a leading innovator in mobile device technology, which requires their customers to accept Apple’s (ever expanding) closed ecosystem. Originally, Apple’s closed ecosystem was not as widely accepted as Microsoft’s open ecosystem, but that has since changed. Now Apple provides a full range of apps, software and products that are interlinked and support their hardware seamlessly (unlike Microsoft products). When Apple releases a new product, the customer not only receives new hardware with more features (than the previous model), but also gets an expanding ecosystem with more interactive options to further enhance the user’s experience. Apple designs their hardware (software) to be used in close proximity with their customers in order to build trust and acceptance amongst their customers. The customers in turn purchase more products and services from Apple. This “perceived” relationship (through interactive software and hardware) is the business model Apple is using to build and retain their customer base.
Weighted Average Cost of Capital (WACC) for Apple The WACC calculation is a company’s cost of capital in which each category of capital is equally weighted. A firm should use WACC as the discount rate when calculating the Net Present Value (NPV) of any typical project. All capital sources such as common stock, preferred stock, bonds and all other long-term debt are included in this calculation. As the WACC of a firm increases, the beta and rate of return on equity increases, which is an indicator of a decrease in valuation and a higher risk. By taking the weighted average, we can see how much interest the company has to pay for every dollar it finances. For this calculation, we use the following formula: WACC = rD (1- Tc ) * (D/V) + rE * (E/V) = 11.09%
We calculate the components of the WACC equation as follows:
rE = Cost of Equity rD = Cost of Debt
E = Market Value of the firm’s equity
D = Market Value of the firm’s debt
V = E +
Apple is a leading innovator in mobile device technology, which requires their customers to accept Apple’s (ever expanding) closed ecosystem. Originally, Apple’s closed ecosystem was not as widely accepted as Microsoft’s open ecosystem, but that has since changed. Now Apple provides a full range of apps, software and products that are interlinked and support their hardware seamlessly (unlike Microsoft products). When Apple releases a new product, the customer not only receives new hardware with more features (than the previous model), but also gets an expanding ecosystem with more interactive options to further enhance the user’s experience. Apple designs their hardware (software) to be used in close proximity with their customers in order to build trust and acceptance amongst their customers. The customers in turn purchase more products and services from Apple. This “perceived” relationship (through interactive software and hardware) is the business model Apple is using to build and retain their customer base.
Weighted Average Cost of Capital (WACC) for Apple The WACC calculation is a company’s cost of capital in which each category of capital is equally weighted. A firm should use WACC as the discount rate when calculating the Net Present Value (NPV) of any typical project. All capital sources such as common stock, preferred stock, bonds and all other long-term debt are included in this calculation. As the WACC of a firm increases, the beta and rate of return on equity increases, which is an indicator of a decrease in valuation and a higher risk. By taking the weighted average, we can see how much interest the company has to pay for every dollar it finances. For this calculation, we use the following formula: WACC = rD (1- Tc ) * (D/V) + rE * (E/V) = 11.09%
We calculate the components of the WACC equation as follows:
rE = Cost of Equity rD = Cost of Debt
E = Market Value of the firm’s equity
D = Market Value of the firm’s debt
V = E +
References: Investopedia. (2014). Weighted Average Cost of Capital (WACC). Retrieved from: http://www.investopedia.com/video/play/what-is-wacc/ Apple Inc. (2013). Form 10-K, Annual Report. Retrieved from: http://files.shareholder.com/downloads/AAPL/3572582107x0x701402/A406AD58-6BDE-4190-96A1-4CC2D0D67986/AAPL_FY13_10K_10.30.13.pdf Apple Press Info. (2014). Apple Reports Fourth Quarter Results. Retrieved from: http://www.apple.com/pr/library/2014/10/20Apple-Reports-Fourth-Quarter-Results.html Rogowsky, M. (2014). Apple Pay is here and it’s going to be great: Why the skeptics have it Wrong. Retrieved from: http://www.forbes.com/sites/markrogowsky/2014/10/20/apple-pay-is-here-and-its-going-to-be-great-why-the-skeptics-have-it-wrong/