ACC 345 Final Project

Summary Business Valuation Report

of

Apple, Inc.

Apple, Inc.

Report Date, 2020

Contents INTRODUCTION 3 Nature, Background, and History 4 Facilities 4 Customers 4 Management 4 Competition 4 Strengths and Weaknesses 4 Ownership 4 Major Shareholder Transactions 4 Business Risks 4 FINANCIAL ANALYSIS 5 Financial Analysis Overview 5 Balance Sheets 5 Assets 5 Liabilities 5 Stockholder’s Equity 6 Income Statements 6 Normalization Adjustments 6 ECONOMIC OUTLOOK 7 Industry Analysis 7 Industry Overview 7 Competitive Landscape 7 Products, Operations and Technology 7 Sales and Marketing 7 Finance and Regulation 7 Regional and International Issues 7 Labor Trends 7 General Economic Analysis 7 Interest rates 7 GDP 7 International and Domestic Trade Policy 7 Monetary Policy 7 Fiscal Policy 7 BUSINESS VALUATION 8 Valuation Approaches 8 Asset Approach 8 Income Approach 8 Market Approaches 8 Selected Method - Income Approach 8 Prospective Analysis 8 Discount rate 9 Valuation calculation 10 DISCOUNTS AND PREMIUMS 11 Discount for Lack of Control 11 Discount for Lack of Marketability 11 FINAL CALCULATION OF VALUE 12 SOURCES 13

INTRODUCTION

The purpose for the valuation of Apple, Inc. is for the sale of a minority stake of the company. The date of this valuation will be January of 2020. 20% ownership will be valued. Assume the premise of value is that the business is a “going concern” as opposed to liquidation or other premise. Assume the standard of value is fair market value, as opposed to fair value, investment value, liquidation value or some other standard.

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. Apple was founded by Steve Jobs, Steve Wozniak, and Ronald Wayne in April 1976 to develop and sell Wozniak's Apple I personal computer, though Wayne sold his share back within 12 days. It was incorporated as Apple Computer, Inc., in January 1977, and sales of its computers, including the Apple II, grew quickly. Within a few years, Jobs and Wozniak had hired a staff of computer designers and had a production line. Apple went public in 1980 to instant financial success.”

Apple, Inc. has 506 facilities in 25 different countries around the world. Apple, Inc. has approximately 1.4 billion customers.

Apple, Inc. main competitors are Microsoft, Dell, Samsung, Lenovo, HP, Sony, ASUS, Google, Huawei and Philips.

Apple, Inc. has done an extremely well job adapting and maintaining to what their customers want and need. Apple, Inc. is on top of current trends and technology.

There are three main business risks associated to Apple, Inc. and they are: material risk, market risk and competing risk.

4

FINANCIAL ANALYSIS

Financial Analysis Overview

Guidance: This section should provide a general overview of the balance sheet, the major items present, the company’s capital structure, and any changes over time in these items. A common-size analysis (which is built in to your workbook) will help with this. Ask yourself questions such as, “Has the company taken on additional debt? If so, why?”, or “Does the company have a lot of Intangible Assets? If so, are they at risk for impairment?”

Balance Sheets

Assets

Liquidity ratios are the ratios that can be easily converted to cash. Current ratio can be found by taking the current assets and dividing it by the current liabilities. The current ratio for Apple, Inc. implies that they have the ability to pay their current liabilities. This is a good thing in business.

Liabilities

Apple, Inc. ratio proves that their asset to liability ratio is good, and that Apple, Inc. has the assets to pay off all current liabilities.

Stockholder’s Equity

Income Statements

Guidance: Similar to the balance sheet write-up, discuss major line items and drivers of those line items. For example, are there increases in Cost of Goods Sold? If so, what are the drivers of those costs?

Normalization Adjustments

Guidance: Discuss any normalization adjustments you’ve made. Remember, normalization adjustments are changes to the incomes statement (or balance sheet) that smooth out or “normalize” any anomalies that the company may have experienced. An example would be expenses related to a corporate merger or restructuring. This helps you in your prospective analysis by not including any unusual expenses or income.

ECONOMIC OUTLOOK

Industry Analysis

Guidance: Research your industry by reviewing a select group of your company’s peers. By reviewing the annual report of 2-3 competitors you will get an understanding of these items below. You may also search the web for scholarly articles on your chosen industry or recent industry reports. Focus on the suggested items below:

Industry Overview

Competitive Landscape

Products, Operations and Technology

Sales and Marketing

Finance and Regulation

Regional and International Issues

Labor Trends

General Economic Analysis

Guidance: Research the primary economy in which your company operates. Use the U.S. as the default if it’s a global firm, but try to incorporate any important global factors if a majority of its operations is abroad. Focus on the factors suggested below:

Interest rates

GDP

International and Domestic Trade Policy

Monetary Policy

Fiscal Policy

BUSINESS VALUATION

Valuation Approaches

Guidance: Discuss the major approaches below even though you’ll only be calculating the Income Approach. Explain what they are and how they’re derived.

Asset Approach

Income Approach

Market Approaches

Selected Method - Income Approach

Guidance: Explain the mechanics of the calculation below. Discuss your selection for the cells in yellow – annual growth rate, and percentage of revenue for Gross Profit and Operating Expenses.

Prospective Analysis

Discount rate

Guidance: Discuss the purpose of the discount rate in the valuation process. You do not have to explain each of these components, but note that they assign risk to different categories of the company. The risk-free rate is what a company would earn on a riskless government security. The equity risk premium is the risk above the risk-free rate one should expect on an equity security. The industry premium is the risk associated with a particular industry (i.e. manufacturing or retail). The specific company risk is a subjective amount applied by the valuation analyst based on his or her perception of the company’s risk.

Valuation calculation

Guidance: Discuss the mechanics of the calculation below. Provide your reasoning for the amounts chosen for the items in yellow (Depreciation, Capital expenditures, and Debt Reduction).

DISCOUNTS AND PREMIUMS

Discount for Lack of Control

Guidance : You may choose a default discount amount of 15% or if you want to justify a higher or lower amount then you may do so. The following factors below should be considered in this discussion. Explain why each of these factors could only be done by a party with majority control and why a lack thereof could affect the value.

Ability to appoint or change management

Ability to determine management compensation and perquisites.

Able to negotiate and consummate mergers and acquisitions.

Can liquidate, dissolve, sell out or recapitalize the company.

Able to declare and pay cash dividends.

Able to decide what investments to hold and to sell.

Block any or all of the above actions.

Discount for Lack of Marketability

Guidance : Similar to the DLOC, you may choose a default value. Use 25% or if you want you may justify a higher or lower amount. The following factors should be considered because these factors affect a company’s liquidity, which in turn affects its marketability.

Suggested factors that should be considered:

Company’s Dividend Policy

Nature of the Company

Company Management

Amount of Control to be Transferred

Restrictions on Transferability of Stock

Holding Period for Stock

Company’s Redemption Policy

Costs Associated with a Public Offering

Note : In practice there is a lot of effort spent on determining these discounts, but due to a lack of free resources and time it is impractical to require that in this course.

6

FINAL CALCULATION OF VALUE

SOURCES

The following sources were used to derive the conclusions in this report and the ultimate calculation of value:

· Current and historical financial statements were obtained for years ended: https://finance.yahoo.com/quote/AAPL/balance-sheet/ BALANCE SHEET

https://finance.yahoo.com/quote/AAPL/financials?p=AAPL INCOME STATEMENT

https://finance.yahoo.com/quote/AAPL/cash-flow?p=AAPL CASH FLOW

· Industry data from:

https://www.equities.com/companies/aapl

https://money.cnn.com/quote/profile/profile.html?symb=AAPL

https://www.nasdaq.com/market-activity/stocks/aapl

· Economic data from:

https://csimarket.com/stocks/eco.php?code=AAPL

https://investor.apple.com/investor-relations/default.aspx

https://www.apple.com/newsroom/2019/10/apple-reports-fourth-quarter-results/

· Other sources:

Wikipedia contributors. (2020, January 10). Apple Inc.. In Wikipedia, The Free Encyclopedia.Retrieved20:33,January12,2020,from https://en.wikipedia.org/w/index.php?title=Apple_Inc.&oldid=935171549

13

Company ABC Inc.

Statements of Income (in millions)

December 31, 2014 through 2018

2015201620172018201920152016201720182019

Sales215,639,000$ 229,234,000$ 265,595,000$ 260,174,000$ - %100.0 %100.0 %100.0 %100.0 %

Cost of Sales- 131,376,000 141,048,000 163,756,000 161,782,000 - 60.9 61.5 61.7 62.2

Gross Profit- 84,263,000 88,186,000 101,839,000 98,392,000 - 39.1 38.5 38.3 37.8

General, administrative and

non-operating expenses- 14,184,000 15,261,000 16,705,000 18,245,000 - 6.6 6.7 6.3 7.0

Operating Income- 70,079,000 72,925,000 85,134,000 80,147,000 - 32.5 31.8 32.0 30.8

Other Income (Expense)

Interest (expense)- (1,456,000) (2,323,000) (3,240,000) (3,576,000) - (0.7) (1.0) (1.2) (1.4)

Gain (loss) on sale of assets- 60,024,000 61,344,000 70,898,000 63,930,000 - 27.8 26.8 26.7 24.6

Other- 1,348,000 2,745,000 2,005,000 1,807,000 - 0.6 1.2 0.8 0.7

- 59,916,000 61,766,000 69,663,000 62,161,000 - 27.7 27.0 26.3 23.9

Normalization adjustments

Non-recurring items- - - - - - - - - -

Legal settlements- - - - - - - - - -

Other- - - - - - - - - -

- - - - - - - - - -

Net income, before tax-$ 129,995,000$ 134,691,000$ 154,797,000$ 142,308,000$ - %60.2 %58.8 %58.3 %54.7 %

Common-size analysis

Company ABC Inc.

Projected Income Statement (In millions)

20202021202220232024Terminal

Revenue266,678,400$ 273,345,400$ 280,179,000$ 287,183,500$ 294,363,100$ 301,722,200$

Growth2.5%2.5%2.5%2.5%2.5%2.5%

Gross profit18,667,488 19,134,178 19,612,530 20,102,845 20,605,417 21,120,554

Percentage of revenue7.0%7.0%7.0%7.0%7.0%7.0%

Operating expenses13,333,920 13,667,270 14,008,950 14,359,175 14,718,155 15,086,110

Percentage of revenue5.0%5.0%5.0%5.0%5.0%5.0%

Other income (expense)

Interest income (expense)- - - - - -

Other- - - - - -

- - - - - -

Percentage of revenue0.0%0.0%0.0%0.0%0.0%0.0%

Net income5,333,568$ 5,466,908$ 5,603,580$ 5,743,670$ 5,887,262$ 6,034,444$

Company ABC Inc.

Development of Discount Rate and Capitalization Rate

RateNote

Risk-free long term U.S. Government bond rate2.6 %(A)

Equity risk premium6.0 (B)

Industry premium estimate1.5 (C)

Specific company risk3.0 (D)

Cost of equity (Discount rate)13.1 Sum of (A) - (D)

Less: Long-term sustainable growth rate(2.5) (E)

Capitalization rate10.6 %

(A) Yield on the twenty-year U.S. Treasury bond as of December 31, 20XX, per the U.S. Treasury

(B) Long-horizon expected return of large stocks over risk free securities, U.S. Equity Risk Premium (6.0%)

(C) SIC code XX, 1.5%

(D) Appraiser's judgement concerning company-specific risk

(E) Estimated long-term growth rate based on inflation, Federal Reserve Bank of Philadelphia

Sources:

United States Treasury

***You may use other sources to update any of these values; list the applicable source if used. Existing

values are actual figures obtained from sources used in prior years. You may use these as default

values since a detailed development of the discount rate is beyond the scope of this class.

Company ABC Inc.

Discounted Cash Flow Method (In millions)

Terminal

20202021202220232024Value

Forecasted Net Income5,333,568$ 5,466,908$ 5,603,580$ 5,743,670$ 5,887,262$ 6,034,444$

Plus:

Depreciation- - - - - -

Less:

Capital expenditures- - - - - -

Debt reduction- - - - - -

Net Cash Flow5,333,568$ 5,466,908$ 5,603,580$ 5,743,670$ 5,887,262$ 6,034,444$

Present value of cash flows4,715,798$ 4,273,823$ 3,873,270$ 3,510,258$ 3,181,269$

Discount rate:13.1%

Terminal period cash flows6,034,444$

Capitalization rate:10.6%÷10.6%

Capitalized terminal cash flow56,928,717$

Net present value of terminal cash flow, discounted into perpetuity30,762,300$

Net present value - five years ending YE: 202419,554,400$

Net present value of terminal cash flow 30,762,300

Total indication of value (rounded)50,316,700$

Projected for Years Ending December 31,

Company ABC Inc.

Final Computation of Value

As of December 31, 2018

Income Approach:

Discounted Cash

Flow Method

Indicated Value of Equity 50,316,700$

Weight

100 %

Weighted Value (rounded)

50,316,700$

Indicated value with voting rights50,316,700$

Less: DLOC (Discount for Lack of Control)15.0%(7,547,505)

Marketable, minority value42,769,195

Less: DLOM (Discount for Lack of Marketability)25.0%(10,692,299)

Nonmarketable, minority value32,076,896$

Value of a one-percent interest (in millions)320,769$