Introduction and conclusion--company is apple inc.

5

Week 4- Apple Inc.

Amanda Farah

Part 1

Three types of risks that affect a company including the selected company; Apple Inc. are business, compliance, and investor risk. Business risk refers to the exposure of a company to some factors that might lower the profits earned by the company and possibly even lead to the failure of a business(Risk, 2020). Another common risk is the compliance risk; where a company or business could generate losses from failure of compliance with state or federal laws. For instance, for Apple it has to comply with various laws and make sure that all customers are protected through safety of products.

Investor or investment risk happens when a company makes bad financial decisions and thus have a hard time maintaining good cashflows from the investments and also getting the money invested in a certain investment(Akan&Tevfik, 2020). For example, when a company does not conduct sufficient risk analysis of the investments there is a possibility that changes in the economy could result into them losing the money invested.

Part 2

I looked up Apple Inc’s beta from yahoo finance and found out that the company has a beta of 1.19 which is higher when compared to the beta of 1.0. This means that the price of Apple Inc’s security is more volatile when compared to the market.

When calculating the expected return using CAPM the formula is

R = rf+B(Rm)

Where R is expected return

Rf is the risk-free return

Rm is expected market return

R= 2.0%+1.19(6%)

R= 2.0%+7.14%

The expected return for Apple Inc. is thus 9.14%. In week 3 the rate of return that was computed was 10%. Thus, the specific expected return computed in week 4 is lower when compared to the expected return which was computed by incorporating the constant growth rate. The difference between the two valuations is because the CAPM method incorporates more factors than just the dividends alone(Harvey et al., 2021). It considers the systemic risk and this is why the expected return using CAPM is seen to be lower.

Part 3

The constant growth rate formula is Price= D(1+g) / (r-g) where; dividend(D), growth rate (g) and discounted rate (r). The low-end growth rate from the previous assignment was 7% while the high-end growth rate was at 9%. The next step will involve computing the price using a constant growth rate of 9% which is the high-end growth rate. The annual dividend currently for the company is 0.88 and the discount rate is 10%

Price calculations using high end growth rate:

Price = 0.88(1+0.09)/(0.1-0.09)

=$95.92

Price calculations using the low-end growth rate

Price= 0.88 (1+0.07)/ (0.1-0.07)

=$31.39

In comparison to the current market price both the high end and the low-end valuations show a lower value for the company. The company’s stock seems to be overvalued from the analysis and the forecasts done on the company show that the value of the stock will continue increasing. In conclusion, the recommendation for the company is that it should review the valuation of the company and this is because overvaluation of the company may result into the stock underperforming.

References

Akan, M., &Tevfik, A. T. (2020). Fundamentals of finance. In Fundamentals of Finance. De

Gruyter.

Harvey, C. R., Ramachandran, A., & Santoro, J. (2021). DeFi and the Future of Finance.

John Wiley & Sons.

Risk, C. R. I. I. (2020). A fundamental reshaping of finance.