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Student ID Number: 180906257

Name and Surname: Zeliha Kasapoglu

MSc Programme: Business Finance

Title: Business analysis and valuation of Apple, Inc.

Name of Supervisor: Dr. Panagiotis Koutroumpis

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BUSINESS ANALYSIS AND VALUATION OF APPLE, INC. M.Sc. Dissertation

Abstract

This paper investigates a target share price for Apple, Inc. using the discounted cash flow model

as the valuation technique and aims to provide an investment recommendation based on the

comparison between the market price and the estimated target price. The foundation of the

valuation approach is to forecast 10-year future cash flows based on their historical growth

trends to estimate annual free cash flow to firm. These cash flows are discounted back to 2019

with the weighted average cost of capital to find the present value of the company. Under the

guidelines of capital asset pricing model, this discount rate is estimated at 7.30%. The paper

concludes a target price of $218.62, which is +12.78% above the market price as of 10/06/2019

and provides an in-debt analysis of the price sensitivity to the model’s assumptions that impacts

Apple’s economic growth and its market position. This paper recommends investors a strong

buy position based on the estimated target price, Apple’s latest strategic decisions, its strong

bargaining power, and its liquidity management.

AUGUST 15, 2019 ZELIHA KASAPOGLU

QUEEN MARY UNIVERSITY OF LONDON

iii

Table of Contents

Abstract .......................................................................................................................... ii

Table of Contents............................................................................................................. iii

List of Tables ....................................................................................................................v

List of Figures .................................................................................................................. vi

1. Introduction ............................................................................................................. 1

2. Literature Review ..................................................................................................... 2

3. Data ........................................................................................................................ 3

3.1. Free cash flow to firm .................................................................................................. 3

3.1.1. Earnings before interest and debt ...................................................................................................3 3.1.2. Depreciation and amortization ........................................................................................................3 3.1.3. Capital expenditures ........................................................................................................................3 3.1.4. Effective tax rate ..............................................................................................................................4 3.1.5. Change in net working capital ..........................................................................................................4

3.2. Weighted average cost of capital .................................................................................. 4

3.2.1. Cost of equity ...................................................................................................................................4 3.2.2. Cost of debt ......................................................................................................................................5

3.3. Perpetuity growth rate ................................................................................................. 6

3.4. Terminal value ............................................................................................................. 7

3.5. Enterprise value and equity value ................................................................................. 7

4. Methodology ........................................................................................................... 8

4.1. Discounted cash flow model ......................................................................................... 8

4.1.1. Step 1: Forecasting cash flows .........................................................................................................8 4.1.2. Step 2: Free cash flow to firm ....................................................................................................... 10 4.1.3. Step 3: Discounted cash flows ...................................................................................................... 11

4.2. Sensitivity Analysis..................................................................................................... 12

iv

4.2.1. Internal justification ...................................................................................................................... 13 4.2.2. External justification ..................................................................................................................... 13

5. Results ....................................................................................................................14

5.1. Preliminary fundamental analysis............................................................................... 14

5.2. Forecasting cash flows ............................................................................................... 21

5.3. The discounted cash flow model................................................................................. 26

5.4. Sensitivity analysis ..................................................................................................... 31

6. Conclusion...............................................................................................................34

7. References ..............................................................................................................35

8. Abbreviations and acronyms ...................................................................................38

9. Appendix.................................................................................................................39

v

List of Tables Table 1: Revenues by product segments (Bloomberg L.P., 2019) .......................................... 16

Table 2: Profitability ratios (Bloomberg L.P., 2019) ............................................................... 18

Table 3: Solvency and liquidity ratios (Bloomberg L.P., 2019) .............................................. 18

Table 4: Working capital ratios (Bloomberg L.P., 2019) ........................................................ 19

Table 5: Assumptions for forecasting future cash flows ......................................................... 22

Table 6: Free cash flow to firm ................................................................................................ 25

Table 7: Regression analysis variables (Yahoo Finance, 2019) .............................................. 27

Table 8: The cost of equity ...................................................................................................... 27

Table 9: The cost of debt ......................................................................................................... 28

Table 10: The cost of capital .................................................................................................... 28

Table 11: The terminal value ................................................................................................... 28

Table 12: Target equity value of Apple Inc. (Bloomberg L.P., 2019) ..................................... 30

Table 13: Price sensitivity to changes of revenue and COGS ................................................. 32

Table 14: Price sensitivity to market wide factors ................................................................... 32

Table 15: Upside / downside potential of target price due to changes in market .................... 33

Table 16: Standardized balance sheet total assets (Bloomberg L.P., 2019) ............................ 40

Table 17: Standardized balance sheet total liabilities (Bloomberg L.P., 2019) ....................... 41

Table 18: Standardized balance sheet total equities (Bloomberg L.P., 2019) ......................... 42

Table 19: Adjusted income statement (Bloomberg L.P., 2019) .............................................. 43

Table 20: Standardized cash flow statement operating and investing activities (Bloomberg

L.P., 2019)................................................................................................................................ 44

Table 21: Standardized cash flow statement financing activities (Bloomberg L.P., 2019) ..... 45

vi

List of Figures Figure 1: U.S. economy real GDP growth rate. (IMF, 2019) .................................................... 6

Figure 2: Discounting cash flow model general outlook ........................................................... 8

Figure 3: Comparison of revenues, COGS, gross profit (Bloomberg L.P., 2019)................... 14

Figure 4: Growth rates of the revenues and the COGS (Bloomberg L.P., 2019) .................... 15

Figure 5: Sales distribution by products (Bloomberg L.P., 2019) ........................................... 16

Figure 6: Comparison of the gross profit, the EBIT and the FCFF (Bloomberg L.P., 2019) .. 17

Figure 7: Apple, Inc. stock price and Nasdaq composite index (Yahoo Finance, 2019)......... 20

Figure 8: Apple stock price movements in the last 5-years (Yahoo Finance, 2019) ............... 21

Figure 9: Revenues and cost of goods sold forecasted (Bloomberg L.P., 2019) ..................... 23

Figure 10: Regression analysis ................................................................................................ 26

Figure 11: The target price is $218.62 (Yahoo Finance, 2019) ............................................... 29

Figure 12: Revenue growth forecast sensitivity analysis ......................................................... 31

Figure 13: COGS growth forecasts sensitivity analysis .......................................................... 31

Figure 14: Stock price curve in the last 10-years (Yahoo Finance, 2019) ............................... 39

1

1. Introduction Apple, Inc. is a California based technology company that is developing consumer electronics

goods together with their accessories, computer software, media devices, third-party digital

content and software applications (Apple Inc., 2018). The multinational company sells and

delivers its products worldwide to retailers and wholesalers. Apple’s stock price is trading

today, 10/06/2019, at $193.85 per share in the securities market under Nasdaq Stock Exchange

(Yahoo Finance, 2019). This work aims to determine a target share price of Apple, Inc. by the

end of 2019 using the discounted cash flow model1. The model is conducted by the forecasting

free cash flow to firm based on historical trends. As a conclusion, an investment

recommendation by comparing the target price to the current price is provided.

The financial assessment of the valuation technique is based on the discounted cash flow

approach. First, the free cash flow available to the firm is forecasted for ten years including the

terminal value, then the free cash flows are discounted back to the current year using the cost

of capital to determine the present value of future cash flows. Long-term forecasting is based

on the historical trends of sales growth and its ratio to other variables. Cash flows are estimated

by applying the same historical growth trend to future cash flows assuming that the investment

policy and capital structure of the company will remain the same. The discount rate is the

weighted average of the cost of equity and the cost of debt. The cost of equity calculation is

based on the capital asset pricing model (CAPM) and the cost debt depends on the default rate

given by the credit rating agencies. The present value of all projected cash flows is the

enterprise value of the company. The equity value, or the target price, is the residual value of

the company once the net debt is paid to debt holders by liquidizing all cash and cash equivalent

securities. Hence, after obtaining the target price, its sensitivity to the assumptions is analysed.

This paper is structured as follows. Section 3 introduces the data and variables that are used for

the DCF model. Section 4 presents the ratios and methodology used for forecasting and

modelling. Section 5 indicates the results of the DCF model, presents the target price and

assesses its sensitivity to the assumptions. Finally, section 6 advises an investment strategy

based on the conclusions.

1 According to the 2018 annual statement, yearend is reported from September to September (Apple Inc., 2018)

2

2. Literature Review The work closely follows the business valuation techniques addressed by the “Business

Analysis and Valuation” book (Palepu, et al., 2013) and the “Corporate Finance” book (Ross,

et al., 2016). The financial information used in the assessment is based on the 2018 annual

report and proxy statement to the shareholders that are provided by the company itself (Apple

Inc., 2018). The Corporate Finance Institute’s guidelines are followed to provide the most

trustworthy valuation techniques (CFI, 2019).

The Bloomberg Terminal is used as a data source of financial data to support assumptions that

are taken for forecasting future cash flows and valuing the business (Bloomberg L.P., 2019).

The Terminal provides standardized and financial statements which allow easy comparison

between companies and industry benchmarks. Analyst reports and recommendations provided

in Bloomberg Terminal are studied to provide a professional outlook.

Forecasts of the International Monetary Fund are used for macroeconomic data such as

inflation and real GDP growth (IMF, 2019). Stock price movements and related up-to-date

price data are downloaded from Yahoo Finance (Yahoo Finance, 2019). The yield of the 10-

year U.S. treasury bonds is taken from Yahoo Finance to obtain the risk-free rate of return.

Online media resources such as highly reputable and trustworthy newspapers such as Financial

Times, CNBC, Time Magazine and the Guardian Magazine are referenced to provide

background information about Apple’s financial statement, its strategic decision and price

curve.

This paper references the book “Investment Philosophies” (Damoran, 2012) for financial ratio

calculation and technical assessment. Finally, the regression analysis technique is based on the

methodology explained by the “Introductory Econometrics for Finance” book (Brooks, 2014).

3

3. Data The applied valuation approach to calculate Apple’s fair value is the discounted cash flow

method (DCF), where forecasted future cash flows are discounted to the current year, 2019, to

obtain the total present value of the company (Palepu, et al., 2013, p. 278). The methodology

is based on a 10-year valuation technique starting from 27/09/2008 until 29/09/2018. Historical

financial statements of Apple are analysed to build a foundation for forecasting. This section

briefly explains the financial background of variables and addresses how to access them.

3.1. Free cash flow to firm The valuation technique used in this work is based on the total cash available to the firm that

is obtained from its operations and ready to distribute for internal purposes, paying off debt or

returning to shareholders (Damoran, 2012, p. 109). It is the free cash flow from operating

activities that is available to debt- and credit-holders when all fixed asset investments, net

working capital and tax obligations are paid (Ross, et al., 2016, p. 32).

3.1.1. Earnings before interest and debt

The DCF model focuses on the value generation from operating income, not from financing or

investing income. Hence, the foundation of the model is estimating earnings before interest

and debt (EBIT) that is generated by the sales of good and services and subtracted by the costs

of goods sold (COGS) and the other operating expenses. These items are taken from the income

statement of Apple.

3.1.2. Depreciation and amortization

Depreciation and amortization (D&A) are non-cash accountancy items from the cash flow

statement under operating activities (Ross, et al., 2016, p. 25). It amounts to the cost of assets

that are depreciating over time. The remaining asset value is the economic value of the asset

that is used up (Ross, et al., 2016, p. 25).

3.1.3. Capital expenditures

Capital expenditures are payments to purchase fixed assets, machinery, equipment or tools to

improve the operation. These are taken from the cash flow statement under “Payments for

acquisition of property, plant and equipment”.

4

3.1.4. Effective tax rate

Tax expenses are other non-cash accountancy items from the balance sheet. A business is

obliged to pay taxes from its income due to the corporate income tax. However, not only the

income but also all value generating/destroying items in a company are subject to various type

of taxes such as capital gain tax, dividend tax, payroll tax, property tax etc. Instead of

considering every single tax item separately, the effective tax rate covers all tax expenses and

computes their annual ratio to pre-tax income.

The 2017 U.S. corporate tax legislation under the President Trump administration reduced the

corporate taxes from 35% to 21%, which also reduced overseas income tax to 15.5%, which

allowed many multinational companies to reinvest in their operations using their overseas

profit (CNBC, 2018).

3.1.5. Change in net working capital

Change in net working capital is a measurement of accountancy components that identify if

the basic requirements of the business to run its daily operations are fulfilled at an adequate

level (Palepu, et al., 2013, p. 194). These balance sheet items are the change in trade

receivables, the change in payables to suppliers and the change in inventory. According to the

Corporate Finance Institute, the calculation technique might slightly vary depending on the

analysts’ perspective2.

3.2. Weighted average cost of capital The discounting rate with which present value of the company is calculated is the cost of capital

that the investors are paying to receive a minimum required rate of return to bear the risk and

achieve extra returns (Ross, et al., 2016, p. 397). The cost of capital (𝑟𝑊𝐴𝐶𝐶 ) is a function of

the cost of equity (re), the market value of total equity (E), the after-tax cost of debt (rd) and

the market value of total debt (D) (Palepu, et al., 2013, p. 335). The market value of the equity

is the market capitalization of the stock in the equities market.

3.2.1. Cost of equity

The cost of equity (re) calculation method is derived from the capital asset pricing model

(CAPM) that is the expected return-beta relationship of a security relative to its market. Its

2 https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-net-working-capital/

5

graphical representation is the Securities Market Line (Bodie, et al., 2014, p. 297). The

expected return on an asset is expressed as a function of the equity beta (𝛽𝑒), the market risk

premium 𝑟𝑝 = 𝐸(𝑟𝑀 ) − 𝑟𝑓and the risk-free rate of return (𝑟𝑓).

The risk-free rate of return is the historical daily average yield of 10-year U.S. government

bonds from 20093 until 2018 (Palepu, et al., 2013, p. 334). The average risk-free rate is at

2.46% (Yahoo Finance, 2019). The 10-year maturity of government bonds are chosen exactly

to match the forecasting period (Ross, et al., 2016, p. 400).

The market risk premium (𝑟𝑝) is the extra return investors require from the market portfolio

(𝑟𝑀 ) to bear the market wide risk above the risk-free rate of return (Palepu, et al., 2013, p. 334).

The market risk varies depending on the country and its macroeconomic state. Duff & Phelps,

a global advisory expert company in valuation and corporate finance areas, recommends 5.5%

for the U.S. market risk premium in 2018 (Duff&Phelps, 2019).

The equity beta, also called as the levered beta or the systematic risk (𝛽𝑒) is the non-

diversifiable market-wide risk that indicates the impact of the market-wide risk on the equity’s

return (Palepu, et al., 2013, p. 331). The market portfolio is usually the market index where the

company is traded or where its headquarter is located. In Apple’s case, instead of the US

benchmark S&P500 index, the tech-heavy index Nasdaq Composite Index, where Apple’s

stocks are traded, is chosen. This allows investors to compare Apple within the technology

industry and to observe its correlation to the market-wide risk that impacts technology firms

the most.

3.2.2. Cost of debt

Since the DCF model is based on after-tax cash flows, the cost of debt is calculated after-tax

basis considering the tax-deductibility of interest expenses and the tax shield that is created

(Palepu, et al., 2013, p. 334). Hence, the cost of debt is the sum of the risk-free rate and the

credit default risk of the company after-tax. The credit default is the default rate at which a

long-term corporate bond issued by a company, which is graded by the credit rating agencies

depending on their ability to repay the debt (David, et al., 2002, pp. 47, 48). Credit rating

3 Year 2008 is bypassed due to the financial crisis in the United States in order to assess normal years.

6

agencies rate the potential risk of repayment of the debt by specific degrees and define the

creditworthiness of the corporations by these rates over their lifetime. The spread is defined by

the extra cost that the investor is paying to bear the default risk of the firm. The higher a firm

is rated, the lower is the cost of debt and hence its interest rate is closer to the risk-free rate of

return (Damoran, 2012, p. 50).

The credit default of the long-term corporate bonds of Apple are rated by the Moody’s agency

at AA1 and by the Standard & Poor’s agency at AA+ (Bloomberg L.P., 2019). The AA1 level

traded corporate bonds in the United States have in average a 1.00% spread (NYU Stern, 2019).

3.3. Perpetuity growth rate The perpetuity growth rate is the constant rate at which the terminal value of FCFF growing

forever. It is assumed that in an economy, cash flows do not grow at a higher rate than the

economies perpetuity growth rate. As a benchmark rate, the expected growth rate of the U.S.

economy is taken (Damoran, 2012, p. 102). Herewith, the real GDP growth assumption by the

International Monetary Fund is applied as the perpetuity growth rate.

Figure 1: U.S. economy real GDP growth rate. (IMF, 2019)

IMF estimates the real GDP growth at 1.6% from 2022 to 2024 (IMF, 2019). After 2024 the

growth rate of the US economy is hardly foreseeable and uncertain. Therefore, the expected

perpetuity growth rate of the FCFF after 2029 is assumed to follow the same trend and remain

stable at 1.6% as the IMF projections presume.

7

3.4. Terminal value The terminal year is the last cash flow forecasting year that is covered in the DCF model.

However, cash flows beyond the terminal year are generating value as well and are important

to include in the valuation exercise. The terminal value is the estimated present value of all

cash flows beyond the terminal year and they are assumed to be growing at a perpetuity growth

rate (Damoran, 2012, p. 107).

3.5. Enterprise value and equity value The sum of all discounted cash flows determines the fair enterprise value of the company at

the calculation date that is the date to which free cash flows to firm are discounted back. The

enterprise value is defined as the asset value if the company had been financed 100% with

equity (Palepu, et al., 2013, p. 347). However, in reality, there is the tax-shield advantage of

debt that adds value to equity as a whole. As a result, the remaining equity value becomes the

residual claim to shareholders once all debt is paid. The estimated equity value is the fair

(target) value of the companies’ stocks that are driven by the cash flow structure of the

company. The target price of a share is a benchmark value for the investor when compared

with the market price. With the valuation approach, this paper introduces a target price that is

driven by the fair value of the firm and compares it with the current trading price.

8

4. Methodology The following section introduces the techniques that are used for the valuation of Apple, Inc.

following two sections: the first section explains how to obtain the target price of the company

and the valuation method behind it. The second section examines how the assumptions are

justified and assesses the sensitivity of the obtained target price to both external and internal

assumptions.

4.1. Discounted cash flow model The first step of the discounted cash flow model (DCF) is analysing historical 10-years of cash

flows and forecasting them based on their growth trend or their ratio to the sales revenues. The

second step is calculating the free cash flow to firm (FCFF). The last step is discounting FCFF

to current year to obtain the present value of the company.

Figure 2: Discounting cash flow model general outlook

4.1.1. Step 1: Forecasting cash flows

The forecasting future cash flows starts with analysing historical financial statements. The goal

is to seek trends and consistent ratios to estimate future cash flows based on that conclusion.

Below are the forecasting methods applied to obtain all necessary variables for the free cash

flow calculation.

4.1.1.1. Sales revenues growth trend

The foundation of the forecasting cash flow is sales revenues. First, the historical 10-year

growth trend is analysed considering the business cycles, the U.S. economic growth and the

recent strategies of the company. Second, the trend is extended to the future 10-years and

additionally the growth rate of the terminal year is expected be exactly to equal as the U.S.

economic growth forecasts.

9

4.1.1.2. Gross profit margin and EBIT margin

The cost of goods sold (𝐶𝑂𝐺𝑆) to revenues margin is analysed to obtain the historical gross

profit margin of the company:

𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 − 𝐶𝑂𝐺𝑆

𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠

(1)

The same gross margin interval of the past 10-years is kept as the benchmark projection of

future predictions. Next, other operating expenses such as selling, general and administration

expenses, research and development expenses and other operating expenses are summed up to

compute their ratio to the cost of goods sold. As a result, EBIT is the gross profit subtracted by

the other operating expenses and EBIT margin is simply the ratio of EBIT to the revenues.

Hence, the following equation can be applied:

𝐸𝐵𝐼𝑇 = 𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 − 𝑂𝑡ℎ𝑒𝑟 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠 (2)

4.1.1.3. Capital expenditures to depreciation and amortization ratio

First, the ratio of depreciation and amortization expenses (D&A) to EBIT is calculated to obtain

a benchmark ratio of how the future organic growth trend might evolve. Second, historical

CapEx to D&A ratio is analysed, and the same ratio is applied to future estimations to maintain

a similar performance. If the CapEx is higher than the D&A, meaning their ratio is greater than

one (or 100%), the business can not only maintain its current state but can also invest in its

fixed assets to improve production and its operating performance. However, the terminal year

is the year at which the company is just expected to maintain organic growth and to follow the

growth predictions of the economy, hence, the CapEx is assumed to be equal to the D&A in

the terminal year in order to maintain a stable growth and replace all the equipment that is

depreciating (Forensic Strategic Solutions, 2017).

4.1.1.4. Effective tax rate

The effective tax rate is the ratio of total tax expenses to the pre-tax income (Palepu, et al.,

2013, p. 210). Since annual tax payment of the company varies depending on the state tax

regimes, applied effective tax rate (t) for the future forecasts is set to the average of the past

10-years.

10

4.1.1.5. Working capital calculation

Applied methodology for calculating the change in net working capital (NWC) is based on the

annual change in working capital followed by the methods of Corporate Finance Institute (CFI,

2019):

∆ 𝑁𝑊𝐶 = ∆ 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 + ∆ 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠 − ∆ 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒

(3)

4.1.2. Step 2: Free cash flow to firm

The free cash flow to firm (FCFF) is the operating income after tax that is subtracted by the

change in the net working capital (NWC), depreciation and the capital expenditures (Palepu, et

al., 2013, p. 618):

𝐹𝐶𝐹𝐹 = 𝐸𝐵𝐼𝑇 + 𝐷&𝐴 − 𝐶𝑎𝑝𝐸𝑥 − ∆𝑁𝑊𝐶 − 𝑡 (4)

Once, the FCFFs for every forecasting year are calculated, the next step is to estimate free cash

flows beyond the terminal year, which is the terminal value.

4.1.2.1. The weighted average cost of capital

The weighted average cost of capital (𝑟𝑊𝐴𝐶𝐶 ) is the discount rate at which all cash flows are

discounted. It is calculated by weighting the cost of equity (re) to the market value of total

equity (E) and the after-tax cost of debt (rd) to the market value of total debt (D) which is the

sum of short-term and long-term debt (Palepu, et al., 2013, p. 335):

𝑟𝑊𝐴𝐶𝐶 = 𝑟𝑒 ∗ 𝐸

𝐷 + 𝐸 + 𝑟𝑑 ∗

𝐷 𝐷 + 𝐸

(5)

The cost of debt (𝑟𝑑 ) is the after-tax rate (𝑡) of the cost of borrowing based on the additional

default spread above the risk-free rate (𝑟𝑓 + 𝑠𝑝𝑟𝑒𝑎𝑑) that the investor is seeking (Ernst &

Young, 2018):

𝑟𝑑 = (𝑟𝑓 + 𝑠𝑝𝑟𝑒𝑎𝑑) ∗ (1 − 𝑡) (6)

The cost of equity (𝑟𝑒), on the other hand, is the extra return above the risk-free rate (𝑟𝑓) that

the investor is requiring to bear the market-wide systematic risk (𝛽𝑒) based on the market

conditions (𝑟𝑝):

11

𝑟𝑒 = 𝑟𝑓 + 𝛽𝑒 ∗ 𝑟𝑝 (7)

The systematic risk, also known as the equity beta or the levered beta, is the beta estimate of

the regression analysis of the market benchmark Nasdaq composite index (CCMP: IND) and

Apple’s stock index (AAPL: US). Hence, daily stock prices of both indices are downloaded

from Yahoo Finance and their daily returns are calculated.

All returns are plotted on a scatter diagram as with the x-axis defining the daily price returns

of the market portfolio and the y-axis is the daily price returns of Apple’s stock. The fitted line

that describes all data the best is the regression line. It is a function of Beta estimate (�̂�) and

Alpha estimate (�̂�). Beta estimate is the covariance of Apples’ and Nasdaq’s price returns over

the variance of Nasdaq’s price return (Bodie, et al., 2014, p. 297):

�̂� = 𝐶𝑜𝑣(𝑟𝐴𝑝𝑝𝑙𝑒 , 𝑟𝑁𝑎𝑠𝑑𝑎𝑞 )

𝑉𝑎𝑟(𝑟𝑁𝑎𝑠𝑑𝑎𝑞)

(8)

The beta estimate indicates the sensitivity of the Apple’s stock to the market-wide risks. The

alpha estimate is the intercept of the fitted line, that is expressed by the average of Apple’s and

Nasdaq’s daily price returns (Brooks, 2014, p. 81):

�̂� = �̅� − �̂��̅� (9)

4.1.2.2. Terminal value

The perpetuity growth rate is the expected growth rate of the U.S. economy as mentioned in

section 3.3. Once the perpetuity growth rate (𝑔) and the discount rate (𝑟𝑊𝐴𝐶𝐶 ) are obtained,

the terminal value (𝑇𝑉) beyond 2029 can be found using the following equation (Ross, et al.,

2016, p. 415):

𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 = 𝐹𝐶𝐹𝐹2029 ∗ (1 + 𝑔)

𝑟𝑊𝐴𝐶𝐶 − 𝑔

(10)

4.1.3. Step 3: Discounted cash flows

The goal of discounting the future cash flows is to estimate the present value (PV) of all cash

flows the company is aiming to generate in the future. The “present” year of this exercise is

the end of year 2019, at which all future cash flows will be discounted back. Therefore, yearend

2019 is the current year and market as “year 0”. The first year of the discounting period is the

end of the year 2020 and the last year is the end of the year 2029. The terminal value indicates

12

the present value of the cash flows at perpetuity in year 2029 yearend, that is the tenth

discounting year. Once all the discounting years are defined, the method is as follows (David,

et al., 2002):

𝑃𝑉 = 𝐹𝐶𝐹𝐹2020

(1 + 𝑟𝑊𝐴𝐶𝐶)1 + ⋯ +

𝐹𝐶𝐹𝐹2029 (1 + 𝑟𝑊𝐴𝐶𝐶)10

+ 𝑇𝑉

(1 + 𝑟𝑊𝐴𝐶𝐶 )10

(11)

4.1.3.1. Enterprise value and equity value

The present value of all discounted cash flows indicates the fair asset value of the enterprise

based on the cash flows assumptions that were made. However, due to the tax advantage of

interests, debt financing adds value to the firm. According to the pecking order theory of

financing, debt holders are being paid before equity holders can claim their stake. Therefore,

equity value is the total asset value subtracted by net debt and minority interest, which are non-

equity claimants (Palepu, et al., 2013, p. 347):

𝐸𝑞𝑢𝑖𝑡𝑦 𝑣𝑎𝑙𝑢𝑒 = 𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑣𝑎𝑙𝑢𝑒 − 𝑛𝑒𝑡 𝑑𝑒𝑏𝑡 − 𝑚𝑖𝑛𝑜𝑟𝑖𝑡𝑦 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡𝑠 (12)

Minority interests are payments that are made to the outside shareholders and not related to the

economic value of the business (Palepu, et al., 2013, p. 349). The net debt is the sum of all

interest-bearing debt subtracted by the cash and cash-equivalents. The reason is that the cash

equivalent marketable securities can be quickly turned into cash and the remaining debt can be

immediately paid off (Ross, et al., 2016, p. 56). In the end, net debt will be only the remaining

portion of the debt that is not payable with the current liquidity of the company:

𝑁𝑒𝑡 𝑑𝑒𝑏𝑡 = 𝑆ℎ𝑜𝑟𝑡𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 + 𝑙𝑜𝑛𝑔𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 − 𝑐𝑎𝑠ℎ & 𝑐𝑎𝑠ℎ 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡𝑠 (13)

The reached equity value is expected to be at least equal to the market capitalization that is the

selling price of the company’s equities at the secondary market, meaning the trading price of a

single share multiplied by the number of outstanding shares (Ross, et al., 2016, p. 56). Thus,

the purpose of the valuation is to obtain a target equity value that is derived from the fair

enterprise value and to compare this to the market price.

4.2. Sensitivity Analysis After obtaining the target price, its sensitivity to the assumptions is an important measurement.

This section examines sensitivity analysis in to two parts. Internal justification is the sensitivity

13

of the target price to performance-related “internal” assumptions and external justification is

the sensitivity of the target price to market-wide “external” effects.

4.2.1. Internal justification

All variables are forecasted depending on their ratios related to revenues or COGS. Thus, it is

important to justify the sensitivity of the target price to the growth assumptions of both

variables. This work presents the good and bad case scenarios for the two core variables. The

good-case scenario is when the annual growth of sales revenues is +1.00% faster and/or the

annual growth of the costs is -1.00% lower than an expected “average” year. The worst-case

scenario is when the annual growth of revenues is slower by -1.00% and/or the costs increase

+1.00% higher than expectations.

At this section, the target price is calculated multiple times applying all three steps of the

discounted cash flow model mentioned in section 4.1 and lastly, the target price is indicated in

a matrix form.

4.2.2. External justification

In this section, the market-wide external factors are examined. Two core variables have a

crucial impact on the target price: the perpetuity growth rate (𝑔) and the weighted average cost

of capital (𝑟𝑊𝐴𝐶𝐶). ∓0.50% incremental change in the perpetuity rate is computed and the

impact on the target price is calculated. Similarly, ∓1.00% incremental change in the weighted

average cost of capital (𝑟𝑊𝐴𝐶𝐶 ) is applied and the DCF model is built multiple times to obtain

the target price. Lastly, the impact of the variables to the target price is illustrated in a matrix

form.

14

5. Results Results are presented in four sections: the preliminary analysis of the 10-year historical

financial statements, the 10-year forecast of future cash flows, the discounted cash flow

model with the target price and the sensitivity analysis.

5.1. Preliminary fundamental analysis

Figure 3: Comparison of revenues, COGS, gross profit (Bloomberg L.P., 2019)

Analysing the past decade, Apple indicated fast revenue growth after the financial crisis with

the highest annual revenue growth of 66.00% in 2011. However, reports indicate that Apple’s

revenue growth has been slowing down since 2012. The extreme growth increase from 2010

to 2011 can be related to the post-financial crisis recovery period.

15

Figure 4: Growth rates of the revenues and the COGS (Bloomberg L.P., 2019)

Figure 4 indicates the historical growth rates in sales revenues and COGS. There is no evidence

of a constant revenue growth trend with Apple’s revenues. However, the diagram indicates an

exponential fall together with business cycles every two years. During 2010-2012 and 2013-

2015, there is an upward revenue growth trend whereas in years 2012-2014 and 2015-2017 a

downward trend is visible. Researches indicate that upward trending years are expansionary,

downward trending years are contractionary business cycles (Ross, et al., 2016, p. 405). Hence,

it can be concluded that the periodic fluctuation of revenues indicates overall cyclicality of

business performance which is in-line with the empirical studies (Ross, et al., 2016, p. 405).

Consequently, the future revenue projections for FCFF calculation are adapted to the

cyclicality nature of the business and the slowing growth trend.

16

Table 1: Revenues by product segments (Bloomberg L.P., 2019)

Table 1 indicates Apple’s annual revenues in each product segment. Apple stopped iPod

production in 2011 based on the reduced market demand and concentrated its sales more on

the iPhone side. The last 5-year average indicates that 61.85% of total revenues are iPhones

sales with an average sales price of $1,295 per unit. Apple has announced not to report the unit

sales in number due to the wide range of product capacity (CNBC, 2018). Furthermore, Apple

has decided to turn its focus on developing its services business by introducing more

subscription offers and original videos (Bloomberg News, 2018).

Figure 5: Sales distribution by products (Bloomberg L.P., 2019)

Revenues by product 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Last 5-years average

Revenues (mln USD) 37,491 42,905 65,225 108,249 156,508 170,910 182,795 233,715 215,639 229,234 265,595 225,396 iPhone 17.98% 30.38% 38.60% 42.49% 50.28% 53.41% 55.80% 66.34% 63.39% 61.65% 62.08% 61.85% Services 14.80% 15.03% 11.53% 8.66% 8.24% 9.39% 9.88% 8.52% 11.29% 13.08% 14.97% 11.55% Mac 38.29% 32.30% 26.80% 20.12% 14.84% 12.57% 13.17% 10.90% 10.59% 11.28% 9.49% 11.08% iPad 0.00% 0.00% 7.60% 17.71% 19.77% 18.71% 16.57% 9.94% 9.57% 8.39% 6.92% 10.28% iPod 24.41% 18.86% 12.69% 6.89% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other accessories 4.52% 3.44% 2.78% 4.13% 6.88% 5.92% 4.58% 4.31% 5.16% 5.61% 6.54% 5.24% Average Selling Price (USD) Mac 1,477 1,333 1,279 1,302 1,279 1,315 1,274 1,237 1,235 1,343 1,384 1,295 iPhone 580 629 630 651 643 607 603 671 645 652 757 666 iPad - - 665 628 557 450 445 423 452 439 422 437 iPod 167 149 164 175 160 167 159 - - - - 32

17

COGS are followed by the trend of revenue growth. There is no significant scissors effect or

cost reduction evidence found. Thus, gross profit margin stayed in the 35.00%-40.00% band

as indicated on Table 5. However, the difference occurs on the EBIT side. EBIT margin

increased from 22.21% to 35.30% until 2012, but decreased gradually to 26.69% until 2018.

That is a sign that other operating expenses such as research and marketing have increased

significantly since 2013.

Figure 6: Comparison of the gross profit, the EBIT and the FCFF (Bloomberg L.P., 2019)

The net income margin increased slowly from 16.21% to 26.67% and stabilized up until 2018

at around 21.00%. The FCFF had bad performance in 2008 and 2009, assumingly due to the

financial crisis and its ratio to sales stagnated at around 22.00% in the last 5 years. This level

of FCFF to sales margin is kept stable for further forecasting of the future cash flows.

18

Table 2: Profitability ratios (Bloomberg L.P., 2019)

Profitability measures such as the return on equity (ROE) and the return on assets (ROA) follow

the gross margin and the EBIT trends. ROE was 33.23% in 2008 and improved to 49.36% in

10 years, meaning the equity holder has 49.36% return on their investment to the common

equity stocks.

The corporate effective tax rate between 2009 and 2018 had an average of 25.84%. Due to the

high deviation in the effective tax rate, the forecasting is based on the 10-year average.

Apple has decided to pay dividends starting from 2012. The average dividend-payout ratio is

at 14.41% annually.

Table 3: Solvency and liquidity ratios (Bloomberg L.P., 2019)

Two main solvency ratios are analysed. The interest coverage ratio, that is EBIT over interest

expenses and the net debt to EBITDA ratio. The interest coverage ratio has a 10-year average

Profitability ratios (%) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 10-years average

Returns Return on Equity 33.23 30.54 35.28 41.67 42.84 30.64 33.61 46.25 36.90 36.87 49.36 37.93 Return on Assets 20.05 19.68 22.84 27.07 28.54 19.34 18.01 20.45 14.93 13.87 16.07 20.08

Margins Gross Margin 35.20 40.14 39.38 40.48 43.87 37.62 38.59 40.06 39.08 38.47 38.34 39.20 EBIT Margin 22.21 27.36 28.19 31.22 35.30 28.67 28.72 30.48 27.84 26.76 26.69 28.49 Net Income Margin 16.32 19.19 21.48 23.95 26.67 21.67 21.61 22.85 21.19 21.09 22.41 21.68

Ratios Effective tax rate 31.61 31.75 24.42 24.22 25.16 26.15 26.13 26.37 25.56 24.56 18.34 25.84 Dividend payout ratio - - - - 5.94 28.48 27.92 21.41 26.19 25.98 22.64 14.41

Solvency and liquidity ratios 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 10-years average

Solvency ratios Interest Coverage (x) - - - - - 360.29 136.73 97.18 41.23 26.41 21.88 62.15 Net Debt/EBITDA (%) (2.78) (2.73) (2.63) (2.29) (2.07) (2.33) (1.98) (1.71) (2.13) (2.14) (1.50) (2.21)

Liquidity ratios Current ratio (x) 2.64 2.74 2.01 1.61 1.50 1.68 1.08 1.11 1.35 1.28 1.13 1.65 Cash ratio (x) 1.95 2.04 1.24 0.93 0.76 0.93 0.40 0.52 0.85 0.74 0.57 0.99 Quick ratio (x) 2.16 2.33 1.50 1.12 1.04 1.23 0.67 0.73 1.05 0.91 0.77 1.23

Balance Sheet ratios Lt-Debt/Tot. Assets (%) - - - - - 8.19 12.50 18.37 23.45 25.90 25.63 10.37 Tot. Debt/Tot. Assets (%) (%) - - - - - 8.19 15.22 22.16 27.06 30.82 31.30 12.25 Com. Equity/Tot. Assets (%) 61.64 66.61 63.57 65.84 67.14 59.69 48.11 41.11 39.87 35.72 29.30 52.60

Altman's z-score 7.96 9.12 8.59 8.59 9.44 5.71 5.18 4.46 3.74 3.62 4.25 6.42

19

of 62.15x, meaning Apple can cover its interest expenses 62.15 times with its income. Because

Apple has more cash than its total debt, net debt indicates negative number. Although the

interest coverage ratio has been falling, a negative net debt is an indication successful debt

level, hence, there is no default risk observed.

Table 4: Working capital ratios (Bloomberg L.P., 2019)

The main reason for the high level of cash is Apple’s strength on cash and liquidity

management. Apple’s current assets are on average 1.65 times of its current liabilities over the

past 10 years (Ross, et al., 2016, p. 49) due to the current ratio. Working capital management

has a tremendous impact on Apple’s strong liquidity. Apple’s cash conversion cycle (CCC)

has been decreasing dramatically. A negative CCC means days payables outstanding are longer

than receivables and inventory held. On a 10-year average, Apple has been receiving payments

for its goods and services in 24.75 days, holding inventory only for 62.33 days and paying its

suppliers in 87.42 days. In other words, Apple is financed by its supplier for approximately 3

months and can pool cash for its internal needs for -56.28 days. This indicates, on one hand,

dominant bargaining power towards its supplier and persuasive sales strength towards its

customers.

Figure 7 below indicates the price movement of the Apple stocks in the securities market.

Apple’s shares are trading as of today, 10/06/2019, under Nasdaq Stock Exchange at $193.85

(Yahoo Finance, 2019). Nasdaq Composite Index, which follows all Nasdaq companies that

are traded in the open market, is trading at $7,861.19 currently (Yahoo Finance, 2019).

Working capital efficiency ratios 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

10- years average

Days sale outstanding 19.70 24.53 24.75 18.29 19.32 25.59 30.43 26.72 27.52 27.21 28.14 24.75

Days inventory held 56.83 53.28 52.51 70.53 112.12 83.45 57.94 62.82 58.64 40.37 37.17 62.33

Days payables outstanding 78.06 78.97 79.88 75.59 75.60 73.66 84.96 85.19 101.00 111.40 117.27 87.42

Cash Conversion Cycle (in days) -51.95 -47.61 -48.19 -52.14 -52.97 -43.71 -48.24 -52.68 -67.27 -75.00 -79.34 -56.28

20

Figure 7: Apple, Inc. stock price and Nasdaq composite index (Yahoo Finance, 2019)

21

Apple’s stock price has increased +108.00% over the last 5 years, and +5.00% since 2018 June.

The higher price was obtained at the beginning of October with $232.07 followed by a similar

rise in the market portfolio. With the reduction of corporate tax rate early 2018, Apple was able

to increase its cash level furthermore, which allowed Apple to reinvest in itself. In May 2018,

Apple announced a $100.00 billion worth share buyback program to be implemented gradually

starting from June (Time, 2018). With the buyback operations, Apple was able to use the excess

cash so that shareholder could appreciate the value with the price jump. The rise in stock price

continued until the beginning of October until the announcement of 25.00% additional tariffs

on Chinese goods (Guardian, 2019). Added tariffs, affected Apple dramatically since many

spare parts and components are produced in China. Analysts assume that the increase in tariff

could add +14.00% to the COGS (Fortune, 2019). According to 2018 annual report, 19.56%

of the total revenue came from Greater China (Apple Inc., 2018). An accordingly slowdown in

sales in China will be unattractive for Apple’s shareholders.

Figure 8: Apple stock price movements in the last 5-years (Yahoo Finance, 2019)

5.2. Forecasting cash flows Table 5 indicates the assumptions that are calculated based on the methodology explained in

section 4.1.1.

22

Table 5: Assumptions for forecasting future cash flows

Assumptions for forecasting (%) 20

08

20 09

20 10

20 11

20 12

20 13

20 14

20 15

20 16

20 17

20 18

20 19

E

20 20

E

20 21

E

20 22

E

20 23

E

20 24

E

20 25

E

20 26

E

20 27

E

20 28

E

20 29

E

Revenue growth 52.54 14.44 52.02 65.96 44.58 9.20 6.95 27.86 -7.73 6.30 15.86 -3.30 4.21 5.86 2.22 4.50 -5.00 2.00 -2.00 2.00 1.60 1.60

COGS to Revenues 64.80 59.86 60.62 59.52 56.13 62.38 61.41 59.94 60.92 61.53 61.66 56.00 62.00 60.00 59.00 60.00 61.00 56.00 60.00 58.00 61.00 61.00

Gross profit margin 35.20 40.14 39.38 40.48 43.87 37.62 38.59 40.06 39.08 38.47 38.34 44.00 38.00 40.00 41.00 40.00 39.00 44.00 40.00 42.00 39.00 39.00

Other Oper. Expe. to COGS 20.05 21.34 18.46 15.56 15.28 14.36 16.06 15.99 18.45 19.03 19.04 21.00 16.00 20.00 21.20 20.00 15.00 24.00 18.00 17.00 16.00 16.00

EBIT Margin 22.21 27.36 28.19 31.22 35.30 28.67 28.72 30.48 27.84 26.76 26.61 32.24 28.08 28.00 28.49 28.00 29.85 30.56 29.20 32.14 29.24 29.24

D&A to EBIT 5.96 6.25 5.59 5.37 5.93 13.79 15.13 15.80 17.50 16.56 15.43 14.19 16.19 16.38 15.29 15.33 14.90 14.34 11.34 12.34 13.77 15.28

CapEx to D&A 219.96 155.86 195.23 234.84 253.13 120.84 120.45 99.91 121.22 122.59 122.10 121.00 122.00 122.00 122.00 122.00 122.00 121.00 122.00 122.00 122.00 100.00

Net Ch.in WC to Ch. in Sales 3.08 14.85 -16.44 -7.05 -2.00 13.56 -26.29 -11.13 17.24 -50.84 -6.67 9.46 -34.74 -40.45 -92.00 -45.51 22.69 -31.17 14.31 -16.39 -92.84 -92.84

FCFF to Sales margin 12.02 15.60 25.37 24.11 23.74 19.03 21.90 24.72 20.97 21.91 21.58 23.43 21.38 22.06 22.27 21.86 22.40 22.43 21.24 23.32 22.36 23.26

Effective tax rate 31.61 31.75 24.42 24.22 25.16 26.15 26.13 26.37 25.33 24.31 18.34 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00

23

The revenues are forecasted based on the preliminary analysis results. The slowdown in

revenue growth has been adapted to future forecasts. The revenues of the terminal is set equal

to the expected economic growth rate of 1.60%. As the US economy is expected to growth at

1.60% in 10 years, the growth of the revenues is assumed to be equal to the economic growth

rate.

Figure 9: Revenues and cost of goods sold forecasted (Bloomberg L.P., 2019)

Historical values of the COGS to revenues ratio are ranging between 56.13%-64.80% with an

average of 60.80% as indicated in Table 5. The same weight is applied to future COGS

prediction. Hence, the growth rate pattern is kept similar to the revenues. Other operating

expenses ratio indicated historical figures were around 14.36%-21.34%. The same margin

range is kept for future forecasting. As a result, the EBIT margin was stable at around 29.55%

on average, similar to its historical average (28.49%).

From 2013 to 2018, D&A to EBIT ratio was ranging between 13.79% to 16.56%. Here, using

the last 10-years as a benchmark does not make any sense, since the first 5 years of the decade

and last 5 years of the decade have different ratios. 10-year forecasts are set at the range of last

5 years with an average of 14.49%. Similarly, during these years CapEx to D&A ratio is

24

consistently around 120.00%4. The same ratio is kept for future CapEx predictions. Historical

values of the ∆𝑁𝑊𝐶 to sales ratio were negative and ranging from -7.05% to -50.84%. There

has been no clear pattern found with the WC growth. However, FCFF to sales ratio indicated

consistent values around 22.22% in the last 5 years of the past decade. Hence, ∆𝑁𝑊𝐶 forecasts

are set by values that are maintaining FCFF to sales at stable 22.22% level. The effective tax

rate is adjusted to its 10-year average that is around 25.00% for forecasting.

Once all variables are forecasted using the above-mentioned ratios as summarized in Table 5,

annual FCFF predictions are calculated using the equation (4). Table 6 summarizes the annual

FCFF and the annual (%YoY) growth of cash flows.

4 Ignoring the outlier year 2015 with 99.91% CapEx to D&A ratio

25

Table 6: Free cash flow to firm

In Millions of USD except Per Share

Free Cash Flow to Firm 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E TV

(+) Revenue 256,839.55 267,656.93 283,346.94 289,625.67 302,661.50 287,528.43 293,278.99 287,413.41 293,161.68 297,852.27 302,617.91

% YoY Growth -3.30% 4.21% 5.86% 2.22% 4.50% -5.00% 2.00% -2.00% 2.00% 1.60% 1.60%

(-) Cost of Goods & Services 143,830.15 165,947.30 170,008.16 170,879.14 181,596.90 175,392.34 164,236.24 172,448.05 170,033.78 181,689.88 184,596.92

% YoY Growth -12.17% 15.38% 2.45% 0.51% 6.27% -3.42% -6.36% 5.00% -1.40% 6.86% 1.60%

(=) Gross Profit 113,009.40 101,709.63 113,338.78 118,746.52 121,064.60 112,136.09 129,042.76 114,965.37 123,127.91 116,162.38 118,020.98

% YoY Growth 10.97% -10.00% 11.43% 4.77% 1.95% -7.38% 15.08% -10.91% 7.10% -5.66% 1.60%

(-) Other Operating Expenses (R&D, SG&A)

30,204.33 26,551.57 34,001.63 36,226.38 36,319.38 26,308.85 39,416.70 31,040.65 28,905.74 29,070.38 29,535.51

% YoY Growth -3.12% -12.09% 28.06% 6.54% 0.26% -27.56% 49.82% -21.25% -6.88% 0.57% 1.60%

(=) EBIT, Operating Income 82,805.07 75,158.07 79,337.14 82,520.15 84,745.22 85,827.23 89,626.06 83,924.72 94,222.16 87,092.00 88,485.48

% YoY Growth 17.18% -9.23% 5.56% 4.01% 2.70% 1.28% 4.43% -6.36% 12.27% -7.57% 1.60%

(-) Tax 20,982.67 19,011.41 20,307.68 21,024.43 21,653.02 22,047.68 22,949.67 21,631.58 24,228.39 22,200.55 22,532.63

% YoY Growth 56.91% -9.39% 6.82% 3.53% 2.99% 1.82% 4.09% -5.74% 12.00% -8.37% 1.50%

(+) Depreciation & Amortization 11,750.30 12,167.30 12,996.91 12,614.66 12,991.81 12,787.65 12,851.81 9,517.90 11,629.63 11,988.29 13,519.58

% YoY Growth 7.77% 3.55% 6.82% -2.94% 2.99% -1.57% 0.50% -25.94% 22.19% 3.08% 12.77%

(-) Capital Expenditures 14,217.86 14,844.11 15,856.24 15,389.89 15,850.01 15,600.94 15,550.70 11,611.83 14,188.14 14,625.72 13,519.58

% YoY Growth 6.80% 4.40% 6.82% -2.94% 2.99% -1.57% -0.32% -25.33% 22.19% 3.08% -7.56%

(-) Change in Net Working Capital

(828.05) (3,757.90) (6,346.97) (5,776.41) (5,932.17) (3,433.09) (1,792.52) (839.25) (942.22) (4,354.60) (4,424.27)

% YoY Growth -65.87% 353.83% 68.90% -8.99% 2.70% -42.13% -47.79% -53.18% 12.27% 362.16% 1.60%

(=) Free Cash Flow to Firm 60,182.89 57,227.76 62,517.11 64,496.90 66,166.16 64,399.36 65,770.03 61,038.45 68,377.48 66,608.63 70,377.12 1,254,103.32

% YoY Growth 5.02% -4.91% 9.24% 3.17% 2.59% -2.67% 2.13% -7.19% 12.02% -2.59% 5.66%

26

5.3. The discounted cash flow model First, the appropriate discount rate is calculated following the methodology in section 4.1.2.1.

Equity Beta is the beta estimate of the regression analysis of the stock price of Apple Inc. and

Nasdaq Composite Index between 2009 and 20195. Figure 10 illustrates the regression analysis.

Figure 10: Regression analysis

Table 7 indicates variables that are used for the regression analysis. As a result, the analysis of

the best fitting line that explains the correlation between the Apple and the Nasdaq stocks is

𝑦 = 0.05 + 0.97 ∗ 𝑥 + 𝑢 and 𝑢 is the residuals that is the shortest vertical line from the actual

point to the fitted line.

5 2008 stock price value are ignored due to the extreme impact of financial crisis.

27

Table 7: Regression analysis variables (Yahoo Finance, 2019)

With Beta 0.97, Apple stays lower than the industry average for instance in the consumer

electronics (1.19), the computer services (1.27), the semiconductor (1.34), and the software

industries (1.46) (NYU Stern, 2019). Hence, the cost of equity is found as 7.80% using equation

(7) as follows:

Table 8: The cost of equity

After adding the risk-free rate of 2.46% to the default spread of 1.00%, as explained in section

3.2.2, the after-tax cost of debt of Apple’s is found as 2.59%. Table 9 below summarized the

calculation.

from 28/09/2009 until 30/09/2019

Apple Nasdaq

(y- Axis) (x-Axis) Apple 2.51 1.07 Nasdaq 1.07 1.1

Regression Analysis Mean 0.11 0.06 Beta 0.97 Alpha 0.05 R square 0.45 Number of observations 2,27 R square adjusted 0.45

Covariance - Variance Matrix

28

Table 9: The cost of debt

The end of the year market capitalization in 2018 was $1,073,390.54 million and the market

value of total debt $114,483 million (Bloomberg L.P., 2019). As a result, the debt-weight is

found as 0.10 whereas the equity weight is 0.90. The cost of equity and the appropriate weight

of debt and equity are imputed in the equation (5) as indicated in Table 10. As a result, the

𝑟𝑊𝐴𝐶𝐶 is 7.30%:

Table 10: The cost of capital

𝑟𝑊𝐴𝐶𝐶 and 𝑔 from section 3.3 are imputed into the equation (10) and the terminal value is found

at $1,254,103.32 million in 2029: Table 11: The terminal value

Once all FCFFs including the terminal value are obtained, they are discounted back to 2019

using 𝑟𝑊𝐴𝐶𝐶 to obtain the present value of each year. Enterprise value, which is expressed in

equation (11), is found at $1,064,237.28 million. Table 12 illustrates the DCF model.

29

In order to find the target equity value, net debt and minority interest are obtained from

financial statements. Apple did not have any short-term debt until 2014 (Apple Inc., 2018).

Cash and cash equivalent in 2018 were $66,301.00 million. Total debt, short-term and long-

term debt together were $114,483.00 million (Apple Inc., 2018). Annual net debt growth on

average is found as 18.29% and, set equal to the 2019 net debt growth assumption.

Accordingly, net debt for 2019 yearend is found at $56,993.69 million. Apple never paid

minority interest (Apple Inc., 2018), therefore minority interests are set to zero. Net debt,

minority interests and, the target enterprise value are imputed into equation (12), hence, the

target equity value is $1,007,243.59 million.

Apple’s number of outstanding shares are strongly depending on share buyback operations and

employee bonus payments. Hence, number annual outstanding shares are growing

inconsistently. In order to reach the closest possible number, the 2019 first quarter trailing

twelve months report is used. First-quarter 2019 outstanding shares are reported as 4,607.28

million (Bloomberg L.P., 2019). As a result, the target price is $218.62 per share. Table 12

summarizes the methodology. Today, Apple is trading at $193.85 in the securities market

(Yahoo Finance, 2019). Figure 11 displays the stock price movements of Apple in the last 5-

years.

Figure 11: The target price is $218.62 (Yahoo Finance, 2019)

30

Table 12: Target equity value of Apple Inc. (Bloomberg L.P., 2019)

In Millions of USD except per share

DCF Model 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E TV

(+) EBIT 82,805.07 75,158.07 79,337.14 82,520.15 84,745.22 85,827.23 89,626.06 83,924.72 94,222.16 87,092.00 88,485.48

(-) Tax 20,982.67 19,011.41 20,307.68 21,024.43 21,653.02 22,047.68 22,949.67 21,631.58 24,228.39 22,200.55 22,532.63

(+) D&A 11,750.30 12,167.30 12,996.91 12,614.66 12,991.81 12,787.65 12,851.81 9,517.90 11,629.63 11,988.29 13,519.58

(-) CapEx 14,217.86 14,844.11 15,856.24 15,389.89 15,850.01 15,600.94 15,550.70 11,611.83 14,188.14 14,625.72 13,519.58

(-) Ch. in Net WC (828.05) (3,757.90) (6,346.97) (5,776.41) (5,932.17) (3,433.09) (1,792.52) (839.25) (942.22) (4,354.60) (4,424.27)

(=) FCFF 60,182.89 57,227.76 62,517.11 64,496.90 66,166.16 64,399.36 65,770.03 61,038.45 68,377.48 66,608.63 70,377.12 1,254,103.32

DCF years - 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 10.00

Discounted cash flows 53,333.58 54,298.40 52,206.07 49,912.83 45,274.31 43,091.58 37,270.21 38,910.39 35,324.59 34,783.40 619,831.91

(+) (=) Target Enterprise Value

1,064,237.28

(-) Net debt 56,993.69

(-) Minority Interest -

(=) Target Equity Value 1,007,243.59

Number of Outstanding Shares

4,607.28

Price Target as of 30/09/2019 218.62

Market Price as of 10/06/2019

193.85

Upside Potential 12.78%

31

5.4. Sensitivity analysis The target price of $218.62 depends on performance-related or market-related assumptions.

The performance factors are revenue growth and COGS growth assumptions. As explained in

section 4.2.1, these assumptions are computed with ∓1.00% change in growth rate. Figure 12

and Figure 13 below indicate both scenarios:

Figure 12: Revenue growth forecast sensitivity analysis

Figure 13: COGS growth forecasts sensitivity analysis

According to the sensitivity matrix, Table 13, in the good-case scenario, the target price will

reach $362.89 with a 65.00%-99.00% upside potential by the end of year 2019 if the annual

growth of revenues increases +1.00% and the annual growth of COGS decreases -1.00%. The

worst-case scenario is realised if the revenue growth deteriorates -1.00% and the COGS grow

+1.00% faster than expected. As a result, the target price will be $77.39 with a -64.60%

downside risk.

32

Table 13: Price sensitivity to changes of revenue and COGS

The market-related assumptions have a significant impact on the target price. The perpetuity

growth rate, the risk-free rate, and the market premium depend on the U.S. economic state and

the market conditions. Hence, all assumptions might overperform or underperform in the

future. Therefore, the sensitivity of the target price to ∓0.50% incremental changes of the

perpetuity growth rate and ∓1.00% incremental changes in the discount rate is calculated. The

perpetuity rate of 1.60% and the discount rate of 7.30% are assumed to the neutral case

scenarios. Table 14 represents the sensitivity matrix to price changes due to the changes in the

perpetuity rate and the discount rate.

Table 14: Price sensitivity to market wide factors

1.00% 0.00% -1.00% 1.00% 0.00% -1.00%

1.00% 254.85 311.26 362.89 1.00% 16.57% 42.38% 65.99%

0.00% 162.21 218.62 270.24 0.00% -25.80% 0.00% 23.61%

-1.00% 77.39 133.81 185.43 -1.00% -64.60% -38.79% -15.18%

COGS growth (% YoY)

R ev

en ue

gr

ow th

(%

Y oY

)

Target price upside/

downside potential (%)

Target price in USD

COGS growth (% YoY)

R ev

en ue

gr

ow th

(%

Y oY

)

4.30% 5.30% 6.30% 7.30% 8.30% 9.30% 10.30%

-0.40% 311.65 253.03 212.00 181.72 158.47 140.07 125.15

0.10% 338.12 269.20 222.61 189.03 163.69 143.91 128.05

0.60% 371.73 288.82 235.07 197.42 169.59 148.19 131.24

1.10% 415.85 313.11 249.93 207.16 176.31 153.00 134.78

1.60% 476.30 343.96 267.95 218.62 184.03 158.43 138.73

2.10% 564.20 384.45 290.26 232.28 192.99 164.62 143.16

2.60% 703.76 439.92 318.59 248.84 203.53 171.72 148.16

3.10% 959.48 520.59 355.77 269.35 216.10 179.98 153.86

3.60% 1579.71 648.67 406.72 295.39 231.33 189.68 160.40

WACC (%) Target price in USD

P er

pe tu

ity g

ro w

th r

at e

(% )

33

According to Table 15 if the economy grows +0.50% more than expected, the expected target

price will be 6.25% higher than predictions. For the opposite case, the target price will

underperform -5.24% than the expectations. The higher the discount rate is, the lower the target

price will be. There is a risk of a -42.75% target price deterioration if the discount rate increases

+3% and the U.S. economy shrinks to -0.40% growth rate.

Table 15: Upside / downside potential of target price due to changes in market

4.30% 5.30% 6.30% 7.30% 8.30% 9.30% 10.30%

-0.40% 42.55% 15.74% -3.03% -16.88% -27.51% -35.93% -42.75%

0.10% 54.66% 23.14% 1.82% -13.54% -25.13% -34.17% -41.43%

0.60% 70.04% 32.11% 7.52% -9.70% -22.43% -32.21% -39.97%

1.10% 90.22% 43.22% 14.32% -5.24% -19.35% -30.02% -38.35%

1.60% 117.86% 57.33% 22.56% 0.00% -15.82% -27.53% -36.54%

2.10% 158.07% 75.85% 32.77% 6.25% -11.72% -24.70% -34.52%

2.60% 221.91% 101.23% 45.73% 13.82% -6.90% -21.45% -32.23%

3.10% 338.88% 138.12% 62.74% 23.20% -1.15% -17.68% -29.62%

3.60% 622.58% 196.71% 86.04% 35.12% 5.81% -13.24% -26.63%

Target price upside/ downside potential

(%)

WACC (%)

P er

pe tu

ity g

ro w

th r

at e

(% )

34

6. Conclusion The preliminary analysis indicates that despite a slow down in revenue growth, Apple’s 10-

year gross margin average is at 39.20% with net income margin of 21.68%. On the liquidity

side, Apple has a current ratio of 1.65 and a quick ratio of 0.99. Due to high levels of cash,

Apple’s net debt to EBITDA ratio is negative with an average of -2.21 and the cash conversion

cycle is around 56.28 days which is a sign of strong bargaining power and dominant market

position.

Apple stocks are currently trading at $193.85 and the expected target price by 30/09/2019 is

$218.62 that is 12.78% upside price potential, according to the DCF model. The discount rate

that is based on the weighted average cost of capital method is 7.30%. The perpetuity rate of

future cash flows is assumed at 1.60%. The estimated target price is highly sensitive to the

deviation of each assumption. +1.00% increase in the discount rate, reduces the target price by

-15.82% assuming that the perpetuity rate remains the same. -0.50% decrease in the perpetuity

rate, drops the target price down by -5.24% if the discount rate is constant.

Business growth assumptions have a strong impact on the estimated target price as well. Two

scenarios are investigated. First, if the revenues grow +1.00% faster than expectated and the

COGS slow down by -1.00% annually, the target price rises up to $362.89 per share. Second,

if the COGS’ growth rate increases +1.00% annually followed by a -1.00% fall on the revenues

side, the estimated target price drops down to $77.39 per share.

Apple has announced to turn its focus towards services business and to not report the number

of units sold in upcoming financial reports. This creates uncertainty about whether Apple wants

to continue developing its long-time cash-cow products iPhone or Macbook and creates

confusion about the intention of reducing the transparency of its’ sales. Despite all concerns,

refocusing in the services area will help Apple to boost its revenue growth, to relief from tariff

and trade, and to expand its business barrier-free even with possible sanctions. Considering its

strong market position, bargaining power towards its supplier, updated market strategy and the

state of the economy, Apple is currently underpriced by 12.78%. Therefore, this paper

recommends investors a strong buy strategy.

35

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38

8. Abbreviations and acronyms

Alpha estimate 𝛽𝑒 Equity beta �̂� Beta estimate CapEx Capital expenditures CAPM Capital asset pricing model CCC Cash conversion cycle COGS Cost of goods sold D Market value of debt D&A Depreciation and amortization DCF Discounted cash flow model E Market value of equity EBIT Earnings before interest and tax EBITDA Earnings before interest tax depreciation and amortization FCFF Free cash flow to firm 𝑔 Perpetuity growth rate GDP Gross domestic production NWC Net working capital ∆𝑁𝑊𝐶 Change in net working capital PV Present value 𝑟𝑑 Cost of debt 𝑟𝑒 Cost of equity 𝑟𝑓 Risk-free rate of return 𝑟𝑀 Return on market portfolio 𝑟𝑃 Market risk premium 𝑟𝑊𝐴𝐶𝐶 Weighted average cost of capital ROA Return on asset ROE Return on equity 𝑅2 Goodness of fit (R square) t Effective tax rate TV Terminal value yoy Year-on-year 𝑤𝑒 Weight of equity 𝑤𝑑 Weight of debt �̅� Mean value of x 𝑦 Mean value of y

�̂�

39

9. Appendix

Figure 14: Stock price curve in the last 10-years (Yahoo Finance, 2019)

40

Table 16: Standardized balance sheet total assets (Bloomberg L.P., 2019)

Apple, Inc. (AAPL US) - Standardized Balance Sheet In Millions of USD except Per Share

Total Assets 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 12 Months Ending 09/27/2008 09/26/2009 09/25/2010 09/24/2011 09/29/2012 09/28/2013 09/27/2014 09/26/2015 09/24/2016 09/30/2017 09/29/2018 + Cash, Cash Equivalents & STI 22,111.00 23,464.00 25,620.00 25,952.00 29,129.00 40,546.00 25,077.00 41,601.00 67,155.00 74,181.00 66,301.00 + Cash & Cash Equivalents 11,875.00 5,263.00 11,261.00 9,815.00 10,746.00 14,259.00 13,844.00 21,120.00 20,484.00 20,289.00 25,913.00 + ST Investments 10,236.00 18,201.00 14,359.00 16,137.00 18,383.00 26,287.00 11,233.00 20,481.00 46,671.00 53,892.00 40,388.00 + Accounts Receivables 2,422.00 3,361.00 5,510.00 5,369.00 10,930.00 13,102.00 17,460.00 16,849.00 15,754.00 17,874.00 23,186.00 + Accounts Receivable, Net 2,422.00 3,361.00 5,510.00 5,369.00 10,930.00 13,102.00 17,460.00 16,849.00 15,754.00 17,874.00 23,186.00 + Inventories 509.00 455.00 1,051.00 776.00 791.00 1,764.00 2,111.00 2,349.00 2,132.00 4,855.00 3,956.00 + Raw Materials - - - - 124.00 683.00 471.00 - - - - + Work In Process - - - - - - - - - - - + Finished Goods - - - - 667.00 1,081.00 1,640.00 - - - - + Other Inventory - - - - - - - - - - - + Other ST Assets 4,964.00 4,275.00 9,497.00 12,891.00 16,803.00 17,874.00 23,883.00 28,579.00 21,828.00 31,735.00 37,896.00 + Prepaid Expenses - 309.00 157.00 728.00 1,200.00 - - - - - - + Derivative & Hedging Assets - 37.00 107.00 516.00 150.00 214.00 1,635.00 1,945.00 1,399.00 1,630.00 1,274.00 + Deferred Tax Assets - 1,135.00 1,636.00 2,014.00 2,583.00 3,453.00 4,318.00 - - - - + Misc ST Assets - 2,794.00 7,597.00 9,633.00 12,870.00 14,207.00 17,930.00 26,634.00 20,429.00 30,105.00 36,622.00 (+) (=) Total Current Assets 30,006.00 31,555.00 41,678.00 44,988.00 57,653.00 73,286.00 68,531.00 89,378.00 106,869.00 128,645.00 131,339.00 + Property, Plant & Equip, Net 2,455.00 2,954.00 4,768.00 7,777.00 15,452.00 16,597.00 20,624.00 22,471.00 27,010.00 33,783.00 41,304.00 + Property, Plant & Equip 3,747.00 4,667.00 7,234.00 11,768.00 21,887.00 28,519.00 39,015.00 49,257.00 61,245.00 75,076.00 90,403.00 - Accumulated Depreciation 1,292.00 1,713.00 2,466.00 3,991.00 6,435.00 11,922.00 18,391.00 26,786.00 34,235.00 41,293.00 49,099.00 + LT Investments & Receivables 2,379.00 10,528.00 25,391.00 55,618.00 92,122.00 106,215.00 130,162.00 164,065.00 170,430.00 194,714.00 170,799.00 + LT Marketable Securities 2,379.00 10,528.00 25,391.00 55,618.00 92,122.00 106,215.00 130,162.00 164,065.00 170,430.00 194,714.00 170,799.00 + Other LT Assets 1,331.00 2,464.00 3,346.00 7,988.00 10,837.00 10,902.00 12,522.00 14,431.00 17,377.00 18,177.00 22,283.00 + Total Intangible Assets 559.00 453.00 1,083.00 4,432.00 5,359.00 5,756.00 8,758.00 9,009.00 8,620.00 8,015.00 - + Goodwill 207.00 206.00 741.00 896.00 1,135.00 1,577.00 4,616.00 5,116.00 5,414.00 5,717.00 - + Other Intangible Assets 352.00 247.00 342.00 3,536.00 4,224.00 4,179.00 4,142.00 3,893.00 3,206.00 2,298.00 - + Prepaid Expense - 844.00 799.00 1,600.00 3,000.00 - - - - - - + Derivative & Hedging Assets - - - - - - - - - - - + Misc LT Assets 772.00 1,167.00 1,464.00 1,956.00 2,478.00 5,146.00 3,764.00 5,422.00 8,757.00 10,162.00 22,283.00 (+) (=) Total Noncurrent Assets 6,165.00 15,946.00 33,505.00 71,383.00 118,411.00 133,714.00 163,308.00 200,967.00 214,817.00 246,674.00 234,386.00 (=) Total Assets 36,171.00 47,501.00 75,183.00 116,371.00 176,064.00 207,000.00 231,839.00 290,345.00 321,686.00 375,319.00 365,725.00

41

Table 17: Standardized balance sheet total liabilities (Bloomberg L.P., 2019)

Apple, Inc. (AAPL US) - Standardized Balance Sheet In Millions of USD except Per Share

Total Liabilities 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 12 Months Ending 09/27/2008 09/26/2009 09/25/2010 09/24/2011 09/29/2012 09/28/2013 09/27/2014 09/26/2015 09/24/2016 09/30/2017 09/29/2018 + Payables & Accruals 5,520.00 9,428.00 17,132.00 23,770.00 32,032.00 35,788.00 48,568.00 59,659.00 58,245.00 73,230.00 53,752.00 + Accounts Payable 5,520.00 5,601.00 12,015.00 14,632.00 21,175.00 22,367.00 30,196.00 35,490.00 37,294.00 49,049.00 55,888.00 + Accrued Taxes - 430.00 658.00 1,140.00 1,535.00 1,200.00 1,209.00 - - - - + Interest & Dividends Payable - - - - - - - - - - - + Other Payables & Accruals - 3,397.00 4,459.00 7,998.00 9,322.00 12,221.00 17,163.00 24,169.00 20,951.00 24,181.00 (2,136.00) + ST Debt - - - - - - 6,308.00 10,999.00 11,605.00 18,473.00 20,748.00 + ST Borrowings - - - - - - 6,308.00 8,499.00 8,105.00 11,977.00 11,964.00 + ST Capital Leases - - - - - - - - - - - + Current Portion of LT Debt - - - - - - - 2,500.00 3,500.00 6,496.00 8,784.00 + Other ST Liabilities 5,841.00 2,078.00 3,590.00 4,200.00 6,510.00 7,870.00 8,572.00 9,952.00 9,156.00 9,111.00 41,429.00 + Deferred Revenue - 2,053.00 2,984.00 4,091.00 5,953.00 7,435.00 8,491.00 8,940.00 8,080.00 7,548.00 5,966.00 + Derivatives & Hedging - 25.00 606.00 109.00 557.00 435.00 81.00 1,012.00 1,076.00 1,563.00 2,136.00 + Misc ST Liabilities 5,841.00 - - - - - - - - - 33,327.00 (+) (=) Total Current Liabilities 11,361.00 11,506.00 20,722.00 27,970.00 38,542.00 43,658.00 63,448.00 80,610.00 79,006.00 100,814.00 115,929.00 + LT Debt - - - - - 16,960.00 28,987.00 53,329.00 75,427.00 97,207.00 93,735.00 + LT Borrowings - - - - - 16,960.00 28,987.00 53,329.00 75,427.00 97,207.00 93,735.00 + LT Capital Leases - - - - - - - - - - - + Other LT Liabilities 2,513.00 4,355.00 6,670.00 11,786.00 19,312.00 22,833.00 27,857.00 37,051.00 39,004.00 43,251.00 48,914.00 + Accrued Liabilities - - - - - - - - - - - + Pension Liabilities - - - - - - - - - - - + Pensions - - - - - - - - - - - + Other Post-Ret Benefits - - - - - - - - - - - + Deferred Revenue - 853.00 1,139.00 1,686.00 2,648.00 2,625.00 3,031.00 3,624.00 2,930.00 2,836.00 - + Deferred Tax Liabilities - 2,216.00 4,300.00 8,159.00 13,847.00 16,489.00 20,259.00 24,062.00 31,921.00 36,562.00 275.00 + Derivatives & Hedging - - - - - - - - - - - + Misc LT Liabilities 2,513.00 1,286.00 1,231.00 1,941.00 2,817.00 3,719.00 4,567.00 9,365.00 4,153.00 3,853.00 48,639.00 (+) (=) Total Noncurrent Liabilities 2,513.00 4,355.00 6,670.00 11,786.00 19,312.00 39,793.00 56,844.00 90,380.00 114,431.00 140,458.00 142,649.00 (=) Total Liabilities 13,874.00 15,861.00 27,392.00 39,756.00 57,854.00 83,451.00 120,292.00 170,990.00 193,437.00 241,272.00 258,578.00

42

Table 18: Standardized balance sheet total equities (Bloomberg L.P., 2019)

Apple, Inc. (AAPL US) - Standardized Balance Sheet In Millions of USD except Per Share

Total Equities 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 12 Months Ending 09/27/2008 09/26/2009 09/25/2010 09/24/2011 09/29/2012 09/28/2013 09/27/2014 09/26/2015 09/24/2016 09/30/2017 09/29/2018 + Preferred Equity & Hybrid Capital

- - - - - - - - - - -

+ Share Capital & APIC 7,177.00 8,210.00 10,668.00 13,331.00 16,422.00 19,764.00 23,313.00 27,416.00 31,251.00 35,867.00 40,201.00 + Common Stock - 0.01 0.01 0.01 0.01 0.01 0.06 0.06 0.05 0.05 0.05 + Additional Paid in Capital - 8,209.99 10,667.99 13,330.99 16,421.99 19,763.99 23,312.94 27,415.94 31,250.95 35,866.95 40,200.95 + Retained Earnings 15,129.00 23,353.00 37,169.00 62,841.00 101,289.00 104,256.00 87,152.00 92,284.00 96,364.00 98,330.00 70,400.00 + Other Equity (9.00) 77.00 (46.00) 443.00 499.00 (471.00) 1,082.00 (345.00) 634.00 (150.00) (3,454.00) (+) (=) Equity Before Minority Interest

22,297.00 31,640.00 47,791.00 76,615.00 118,210.00 123,549.00 111,547.00 119,355.00 128,249.00 134,047.00 107,147.00

+ Minority/ Non Controlling Interest

- - - - - - - - - - -

(=) Total Equity 22,297.00 31,640.00 47,791.00 76,615.00 118,210.00 123,549.00 111,547.00 119,355.00 128,249.00 134,047.00 107,147.00 (=) Total Liabilities & Equity 36,171.00 47,501.00 75,183.00 116,371.00 176,064.00 207,000.00 231,839.00 290,345.00 321,686.00 375,319.00 365,725.00

43

Table 19: Adjusted income statement (Bloomberg L.P., 2019)

Apple, Inc. (AAPL US) - Adjusted Income Statement

In Millions of USD except Per Share 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 12 Months Ending 09/27/2008 09/26/2009 09/25/2010 09/24/2011 09/29/2012 09/28/2013 09/27/2014 09/26/2015 09/24/2016 09/30/2017 09/29/2018 (+) Revenue 37,491.00 42,905.00 65,225.00 108,249.00 156,508.00 170,910.00 182,795.00 233,715.00 215,091.00 228,594.00 265,595.00 + Sales & Services Revenue - 42,905.00 65,225.00 108,249.00 156,508.00 170,910.00 182,795.00 233,715.00 215,091.00 228,594.00 265,595.00 (-) Cost of Revenue 24,294.00 25,683.00 39,541.00 64,431.00 87,846.00 106,606.00 112,258.00 140,089.00 131,376.00 141,048.00 163,756.00 + Cost of Goods & Services - 25,683.00 39,541.00 64,431.00 87,846.00 106,606.00 112,258.00 140,089.00 131,376.00 141,048.00 163,756.00 (+) (=) Gross Profit 13,197.00 17,222.00 25,684.00 43,818.00 68,662.00 64,304.00 70,537.00 93,626.00 83,715.00 87,546.00 101,839.00 + Other Operating Income - - - - - - - - - - - - Operating Expenses 4,870.00 5,482.00 7,299.00 10,028.00 13,421.00 15,305.00 18,034.00 22,396.00 24,239.00 26,842.00 31,177.00 + Selling, General & Admin 3,761.00 4,149.00 5,517.00 7,599.00 10,040.00 10,830.00 11,993.00 14,329.00 14,194.00 15,261.00 16,705.00 + Research & Development - 1,333.00 1,782.00 2,429.00 3,381.00 4,475.00 6,041.00 8,067.00 10,045.00 11,581.00 14,236.00 + Other Operating Expense - - - - - - - - - - 236.00 (+) (=) Operating Income (Loss) 8,327.00 11,740.00 18,385.00 33,790.00 55,241.00 48,999.00 52,503.00 71,230.00 59,476.00 60,704.00 70,662.00 - Non-Operating (Income) Loss - (326.00) (155.00) (415.00) (522.00) (1,156.00) (1,185.00) (1,376.00) (1,435.00) (2,646.00) (1,985.00)

+ Interest Expense, Net (653.00) (407.00) (311.00) (519.00) (1,088.00) (1,480.00) (1,411.00) (2,188.00) (2,543.00) (2,878.00) (2,446.00) + Interest Expense - - - - - 136.00 384.00 733.00 1,456.00 2,323.00 3,240.00 - Interest Income 653.00 407.00 311.00 519.00 1,088.00 1,616.00 1,795.00 2,921.00 3,999.00 5,201.00 5,686.00

+ Foreign Exch (Gain) Loss - - - - - - - - - - - + Other Non-Op (Income) Loss 33.00 81.00 156.00 104.00 566.00 324.00 226.00 812.00 1,108.00 232.00 461.00

(+) (=) Pretax Income (Loss), Adjusted 8,947.00 12,066.00 18,540.00 34,205.00 55,763.00 50,155.00 53,688.00 72,606.00 60,911.00 63,350.00 72,647.00 - Abnormal Losses (Gains) - - - - - - 205.00 91.00 (461.00) (739.00) (256.00) + Impairment of Goodwill - - - - - - - - - - - + Legal Settlement - - - - - - - - - - (236.00) + Unrealized Investments - - - - - - 205.00 91.00 87.00 (99.00) (20.00) + Other Abnormal Items - - - - - - - - (548.00) (640.00) — (+) (=) Pretax Income (Loss), GAAP 8,947.00 12,066.00 18,540.00 34,205.00 55,763.00 50,155.00 53,483.00 72,515.00 61,372.00 64,089.00 72,903.00 - Income Tax Expense (Benefit) 2,828.00 3,831.00 4,527.00 8,283.00 14,030.00 13,118.00 13,973.00 19,121.00 15,685.00 15,738.00 13,372.00 + Current Income Tax - 2,791.00 3,087.00 5,415.00 9,625.00 11,977.00 11,626.00 17,739.00 10,747.00 9,772.00 45,962.00 + Deferred Income Tax - 1,040.00 1,440.00 2,868.00 4,405.00 1,141.00 2,347.00 1,382.00 4,938.00 5,966.00 (32,590.00) (+) (=) Income (Loss) from Cont Ops 6,119.00 8,235.00 14,013.00 25,922.00 41,733.00 37,037.00 39,510.00 53,394.00 45,687.00 48,351.00 59,531.00 - Net Extraordinary Losses (Gains) - - - - - - - - - - - (+) (=) Income (Loss) Incl. MI 6,119.00 8,235.00 14,013.00 25,922.00 41,733.00 37,037.00 39,510.00 53,394.00 45,687.00 48,351.00 59,531.00 - Minority Interest - - - - - - - - - - - (+) (=) Net Income, GAAP 6,119.00 8,235.00 14,013.00 25,922.00 41,733.00 37,037.00 39,510.00 53,394.00 45,687.00 48,351.00 59,531.00 - Preferred Dividends - - - - - - - - - - - - Other Adjustments - - - - - - - - - - - (=) Net Income Avail to Common, GAAP 6,119.00 8,235.00 14,013.00 25,922.00 41,733.00 37,037.00 39,510.00 53,394.00 45,687.00 48,351.00 59,531.00

44

Table 20: Standardized cash flow statement operating and investing activities (Bloomberg L.P., 2019)

Apple, Inc. (AAPL US) - Standardized Cash Flow Statement

In Millions of USD except Per Share 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 12 Months Ending 09/27/2008 09/26/2009 09/25/2010 09/24/2011 09/29/2012 09/28/2013 09/27/2014 09/26/2015 09/24/2016 09/30/2017 09/29/2018 Cash from Operating Activities + Net Income 6,119.00 8,235.00 14,013.00 25,922.00 41,733.00 37,037.00 39,510.00 53,394.00 45,687.00 48,351.00 59,531.00 + Depreciation & Amortization 496.00 734.00 1,027.00 1,814.00 3,277.00 6,757.00 7,946.00 11,257.00 10,505.00 10,157.00 10,903.00 + Non-Cash Items 2,889.00 713.00 3,097.00 8,531.00 8,697.00 7,915.00 11,220.00 13,714.00 8,783.00 6,447.00 10,373.00

+ Stock-Based Compensation 516.00 710.00 879.00 1,168.00 1,740.00 2,253.00 2,863.00 3,586.00 4,210.00 4,840.00 5,340.00 + Deferred Income Taxes 398.00 1,040.00 1,440.00 2,868.00 4,405.00 1,141.00 2,347.00 1,382.00 4,938.00 5,966.00 (32,590.00) + Other Non-Cash Adj 1,975.00 (1,037.00) 778.00 4,495.00 2,552.00 4,521.00 6,010.00 8,746.00 (365.00) (4,359.00) 37,623.00

+ Chg in Non-Cash Work Cap 92.00 477.00 458.00 1,262.00 (2,851.00) 1,957.00 1,037.00 2,901.00 1,256.00 (730.00) (3,373.00) + (Inc) Dec in Accts Receiv (785.00) (353.00) (4,860.00) (1,791.00) (6,965.00) (1,949.00) (6,452.00) (3,124.00) 476.00 (6,347.00) (13,332.00) + (Inc) Dec in Inventories (163.00) 54.00 (596.00) 275.00 (15.00) (973.00) (76.00) (238.00) 217.00 (2,723.00) 828.00 + Inc (Dec) in Accts Payable 596.00 92.00 6,307.00 2,515.00 4,467.00 2,340.00 5,938.00 5,400.00 2,117.00 8,966.00 9,175.00 + Inc (Dec) in Other 444.00 684.00 (393.00) 263.00 (338.00) 2,539.00 1,627.00 863.00 (1,554.00) (626.00) (44.00)

+ Net Cash From Disc Ops - - - - - - - - - - - (=) Cash from Operating Activities 9,596.00 10,159.00 18,595.00 37,529.00 50,856.00 53,666.00 59,713.00 81,266.00 66,231.00 64,225.00 77,434.00

Cash from Investing Activities + Change in Fixed & Intang (1,091.00) (1,213.00) (2,121.00) (7,452.00) (9,402.00) (9,076.00) (9,813.00) (11,488.00) (12,734.00) (12,451.00) (13,313.00)

+ Disp in Fixed & Intang - - - - - - - - - - - + Disp of Fixed Prod Assets - - - - - - - - - - - + Disp of Intangible Assets - - - - - - - - - - - + Acq of Fixed & Intang (1,091.00) (1,213.00) (2,121.00) (7,452.00) (9,402.00) (9,076.00) (9,813.00) (11,488.00) (12,734.00) (12,451.00) (13,313.00) + Acq of Fixed Prod Assets - (1,144.00) (2,005.00) (4,260.00) (8,295.00) (8,165.00) (9,571.00) (11,247.00) (12,734.00) (12,451.00) (13,313.00) + Acq of Intangible Assets - (69.00) (116.00) (3,192.00) (1,107.00) (911.00) (242.00) (241.00) - - -

+ Net Change in LT Investment (38.00) - - - - - - - - - - + Dec in LT Investment - - - - - - - - - - - + Inc in LT Investment (38.00) - - - - - - - - - -

+ Net Cash From Acq & Div - - (638.00) (244.00) (350.00) (496.00) (3,765.00) (343.00) (297.00) (329.00) (721.00) + Cash from Divestitures - - - - - - - - - - - + Cash for Acq of Subs - - (638.00) (244.00) (350.00) (496.00) (3,765.00) (343.00) (297.00) (329.00) (721.00) + Cash for JVs - - - - - - - - - - -

+ Other Investing Activities (7,060.00) (16,221.00) (11,095.00) (32,723.00) (38,475.00) (24,202.00) (9,001.00) (44,443.00) (32,946.00) (33,666.00) 30,100.00 + Net Cash From Disc Ops - - - - - - - - - - - (=) Cash from Investing Activities (8,189.00) (17,434.00) (13,854.00) (40,419.00) (48,227.00) (33,774.00) (22,579.00) (56,274.00) (45,977.00) (46,446.00) 16,066.00

45

Table 21: Standardized cash flow statement financing activities (Bloomberg L.P., 2019)

Apple, Inc. (AAPL US) - Standardized Cash Flow Statement

In Millions of USD except Per Share 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 12 Months Ending 09/27/2008 09/26/2009 09/25/2010 09/24/2011 09/29/2012 09/28/2013 09/27/2014 09/26/2015 09/24/2016 09/30/2017 09/29/2018 Cash from Financing Activities + Dividends Paid - - - - (2,488.00) (10,564.00) (11,126.00) (11,561.00) (12,150.00) (12,769.00) (13,712.00) + Cash From (Repayment) Debt - - - - - 16,896.00 18,266.00 29,305.00 22,057.00 29,014.00 432.00

+ Cash From (Repay) ST Debt - - - - - - 6,306.00 2,191.00 (397.00) 3,852.00 (37.00) + Cash From LT Debt - - - - - 16,896.00 11,960.00 27,114.00 24,954.00 28,662.00 6,969.00 + Repayments of LT Debt - - - - - - - - (2,500.00) (3,500.00) (6,500.00)

+ Cash (Repurchase) of Equity 1,240.00 745.00 1,663.00 1,964.00 2,016.00 (21,629.00) (43,531.00) (33,961.00) (29,227.00) (32,345.00) (72,069.00) + Increase in Capital Stock 1,240.00 745.00 1,663.00 1,964.00 2,016.00 1,231.00 1,469.00 1,292.00 495.00 555.00 669.00 + Decrease in Capital Stock - - - - - (22,860.00) (45,000.00) (35,253.00) (29,722.00) (32,900.00) (72,738.00)

+ Other Financing Activities - (82.00) (406.00) (520.00) (1,226.00) (1,082.00) (1,158.00) (1,499.00) (1,570.00) (1,874.00) (2,527.00) + Net Cash From Disc Ops - - - - - - - - - - - (=) Cash from Financing Activities 1,116.00 663.00 1,257.00 1,444.00 (1,698.00) (16,379.00) (37,549.00) (17,716.00) (20,890.00) (17,974.00) (87,876.00)

Net Change in Cash + Cash from Operating Activities 9,596.00 10,159.00 18,595.00 37,529.00 50,856.00 53,666.00 59,713.00 81,266.00 66,231.00 64,225.00 77,434.00 + Cash from Investing Activities (8,189.00) (17,434.00) (13,854.00) (40,419.00) (48,227.00) (33,774.00) (22,579.00) (56,274.00) (45,977.00) (46,446.00) 16,066.00 + Cash from Financing Activities 1,116.00 663.00 1,257.00 1,444.00 (1,698.00) (16,379.00) (37,549.00) (17,716.00) (20,890.00) (17,974.00) (87,876.00)

(=) Net Changes in Cash 2,523.00 (6,612.00) 5,998.00 (1,446.00) 931.00 3,513.00 (415.00) 7,276.00 (636.00) (195.00) 5,624.00