Professional Assignment 2

Name

University

Financial Management

Prof

December 2020

Apple

The most important stakeholders of a company are their investors. Investors could be someone who is part of the company where they actually serves a purpose or it could be just a person who wants to be a part of the company but every investor usually always do a research on their own about the company they intend to invest in. Cash flow, income statement and balance sheet are most important financial statements of a company that an investor can use to get insights about it. Having such insights helps the investors make a better decision on their investment plan and can help calculate the rate of return on their investment over a period of time. (Crawford, n.d.)

We have three important financial statements, income statement, cash flow and the balance sheet for the Apple inc. (Please refer appendix section). We have the historical data of Apple Inc. and we will now be using adjusted closing values in order to calculate the rate of return for the past 20 years. (Please refer financial statement IV under appendix section). Once we have the close price for past 20 years, all we have to do in put those values into our formula in order to calculate the rate of return. This is one of the very important aspect as an investor, as it helps them understand if the company is making profits or surviving losses. And this eventually helps them make decision on whether to invest or not in a particular company. (Beattie, 2020).

Formula:

ROI = Final Value of Investment – Initial value of investment / Cost of investment * 100

The above formula helps the investor calculate the profit/loss percentage based on the investment done towards a company. It is very well known that the higher the percentage value, higher the profits. Now plugging are values into the above formula:

ROI = [(444.46 – 0.92) / 0.92] * 100

= 48,210 %

The final percentage value states that the Apple Inc. has grown significantly in the last 20 years, with the return rate of 48,210% approximately. After looking at this data investors will be more inclined to make their investment in Apple Inc.

Beta is another important aspect; which investors consider before investing into any company. Beta helps the investor understand the risks that comes along with the stocks. If the value of Beta is more than one, then the returns are considered to be higher, but with higher returns comes higher risks. On the other hand, if the value of Beta is less than 1, then the returns are considered to be low, but with low risk as well. (Nickolas, 2019). In order to get the value of beta, we need to divide the value of convergence to its variance. Hence, for apple we get the value of beta as 1.29. And like I mentioned above, if the value of beta is higher than 1, then there are higher returns with higher risks. So, in this case too, Apple stocks have higher returns, but it comes with great risk.

Return on Annual rate of U.S. treasuries can be calculated using the value of beta. We need to calculate this rate as a risk-free rate hence we require U.S. treasury bond yield rate and the premium towards equity (Chen, 2019). Once we have all the intended values, we simply plug it into our formula:

Return = Yield rate + Value of Beta * Premium Equity

= (1.24 + 1.29) * 5.50

= 8.28 %

This 8.28% is the percentage of the risk-free returns that the investors will get by investing into U.S. national treasuries.

Debt is another important aspect that the investor needs to consider before investing into any company. If the company has an ample amount of debt, it won’t be a good idea to invest into such company unless they consider taking extremely high amount of risks. Cost of debt helps the investors get the insights of the company and its structure. By understanding the debt, the investors get to know the risk involved by investing in a particular company. This cost of debt is nothing but the average rate of interest that a company or a firm pays off against their debt. (Zarzycki, 2018). This cost of debt can be calculated by dividing expenses on interest paid to the tax amount subtracted by 1. We know for apple the interest amount is $3577 and the Tax rate is 1114365.

Cost of Debt = interest amount / (1 – Tax rate)

= 3.22 %

The percentage of cost of debt is only 3.22 % which is very low, and hence Apple Inc. can be a good company to do the investments for any investors.

Weighted average cost of capital (WACC) is nothing, but the analysis of company’s capital utilized on each of its equally distributed proportion of departments. WACC and Beta are inter-related where if the value of Beta goes up than the value of WACC goes up as well. On the other hand, if the value of Beta goes down then the value of WACC also goes down.

WACC = Equity / Debt + Equity * Re + Debt / Debt + Equity * Rd * (1 – T)

Where,

Re = Cost of Equity

Rd = Cost of Debt

T = Tax shield

Now, let’s calculate WACC for Apple inc.,

WACC = 7.16%

7.16% indicates a strong capital structure of apples each source.

After performing a bunch of calculations, I believe it is safe to say that the investors can invest into Apple Inc. as they can expect higher returns. Apple inc. also have a good future and will be a great investment opportunity for the investors.

Average Annual Rate of Return

We will now be calculating Average annual rate of return for 5 big companies. We will be calculating average annual rate of return for the year 2019 and 2020 (latest). You’ll find data related to average annual return for past 20 years in the Appendix.

Apple

We know that the Average price of Apple stocks in the year 2019 and 2020 were $208.2559 and $314.1174. (Apple inc., n.d.). Now in order to calculate the average annual rate of return, we use the following formula:

Average Annual rate of return = (Final stock price - Initial stock price) / Initial stock price

= 314.1174 - 208.2559 / 208.2559

= 0.5083

Hence, we get the final Average Annual rate of return as 0.5083, which is equivalent to 51%. It means that the apple had 51% of Average annual rate of return hike from the year 2019 to 2020.

Microsoft

Similarly, we know that the Average price of Microsoft stocks in the year 2019 and 2020 were $130.382 and $178.147. (Microsoft inc., n.d.). Now in order to calculate the average annual rate of return, we use the same formula as before:

Average Annual rate of return = (Final stock price - Initial stock price) / Initial stock price

= 178.147- 130.382 / 130.382

= 0.366

Hence, we get the final Average Annual rate of return as 0.366, which is equivalent to 37%. It means that the Microsoft inc. had 37% of Average annual rate of return hike from the year 2019 to 2020.

Walmart

Similarly, we know that the Average price of Walmart inc. stocks in the year 2019 and 2020 were $108.4054 and $120.8603 (Walmart inc., n.d.). Now in order to calculate the average annual rate of return, we use the same formula as before:

Average Annual rate of return = (Final stock price - Initial stock price) / Initial stock price

= 120.8603 - 108.4054 / 108.4054

= 0.114

Hence, we get the final Average Annual rate of return as 0.114, which is equivalent to 11%. It means that the Walmart inc. had 11% of Average annual rate of return hike from the year 2019 to 2020.

Marriot

Average Annual rate of return = (Final stock price - Initial stock price) / Initial stock price

= 102.9254 - 129.393 / 129.393

= -0.2045

Hence, we get the final Average Annual rate of return as -0.2045, which is equivalent to negative 20%. It means that the Marriot inc. suffered losses of 20% of Average annual rate of return from the year 2019 to 2020.

Coca Cola

Similarly, we know that the Average price of Coca Cola inc. stocks in the year 2019 and 2020 were $50.8279 and $49.4781 (Coca Cola inc., n.d.). Now in order to calculate the average annual rate of return, we use the same formula as before:

Average Annual rate of return = (Final stock price - Initial stock price) / Initial stock price

= 49.4781 - 50.8279 / 50.8279

= -0.0325

Hence, we get the final Average Annual rate of return as -0.0325, which is equivalent to negative 3%. It means that the Coca Cola inc. suffered losses of 3% of Average annual rate of return from the year 2019 to 2020.

To conclude I would say that the investors should consider all the above-mentioned aspects and factors before investing into any company. Companies with technologies are booming in today’s world. Especially due to this pandemic, all the major companies are going online, because of which some are making profits, and some are struggling to survive. I would say the best bet would be to invest in any IT company such as apple or google, who can survive and return profits even in the situations like COVID 19.

References

Apple Inc. Common Stock (AAPL). (n.d.). Retrieved on October 11, 2020 from https://www.nasdaq.com/market- activity/stocks/aapl