1. Company Description:

Apple, Inc. was founded by Steven Paul Jobs, Steve Wozniak and Ronald Gerarld Wayne in 1976. The company is headquartered is in Cupertino, CA. Apple designs and manufactures personal computers, related software and mobile communication devices. It designs Mac laptops and software such as OS X, iLife and iWork. Apple was a pioneer in digital music revolution with its iPods and iTunes online store. Apple reinvented the mobile phone with the iPhone. Apple has recently introduced its iPad which is drastically changing mobile media and computing devices. The company's products and services include Macintosh computers, iPhone, iPad, iPod, Apple TV, iTunes Store, and many other software services. It sells its products worldwide through its retail stores, online stores, direct sales force, and third-party cellular network carriers. Notable U.S. cellular companies that currently offer the iPhone are at&t, Verizon, and Sprint. The company also sells a variety of third-party Mac, iPhone, iPad and iPod compatible products. Which include application software, printers, storage devices, speakers, headphones, etc. In the previous months Apple’s stock price has increased over $200 per share. Many analysts claim that this spike is due to the high productivity and retained earnings that Apple disclosed in last quarter’s financial statements, as well as the company’s recent declaration that they will be paying dividends in the future. 2. Intrinsic Value Analysis: A. Multiple Analysis i. We used Google, HP, IBM, and Microsoft as Apple’s comparable companies to perform the multiple analysis. ii. We found the competitors average P/E, P/S, and P/B to be 13.96, 2.87, and 5.09 respectively. We found the competitors average unlevered P/E, P/S, and P/B to be 8.99, 3.91, and 3.25 respectively (Table 1). With these averages we found Apple’s value from earnings, sales, and book value to be approximately $361.61, $310.67, and $389.97 billion respectively. We calculated the unlevered value from earnings, sales, and book value to be approximately $233.04, $423.25, and $249.00 billion respectively (Table 1). Taking the average of these valuations would place Apple’s levered and unlevered market cap at approximately $354.09 billion and $301.76 billion respectively with and estimated levered share price of $379.00 and unlevered share price of $323.65 (Table 1). iii. Method of Comparables is probably the best valuation model we have of Apple. However, the estimated market capitalization is far too low, but can be explained by their high growth rate. Without companies with similar growth the method of comparables fails to deliver an accurate estimation of value. B. Asset-Based Valuation i. We subtracted Apple’s total assets from its debt to receive an asset based valuation for the company of just under $116.4 billion or a stock price of $124.86 (Table 2). We came to the conclusion that there were three reasons for this undervaluation. First, Apple did not capitalize any software developments in 2010 or 2011 (Apple 10K). Also, Apple’s trademark, one of the most valuable trademarks in the world, is only on Apple’s books at $100 million (Apple 10-K). Finally, the asset-based valuation does not take into account Apple’s growth opportunities. C. Dividend Discount Model i. Apple plans to begin paying dividends in its final quarter of 2012. ii. The Dividend Discount Model is not an appropriate way to value Apple’s stock. Since Apple is yet to pay a dividend, in the last seventeen years, there is no way to determine an appropriate growth rate for the dividend. We came up with an arbitrary growth rate of 10% based on predictions of a double-digit dividend growth percentage (Releasing our dividend). iii. Using the Dividend Discount Model we calculated a stock price of $506.16 (Table 3). D. Discounted Cash Flow Model i. The Discounted Cash Flow Model (DCF) normally couldn’t be used for Apple, but since Factset was able to calculate a perpetuity, we were able to apply this model. ii. Using a WACC of 15%, a FCF growth rate of Apple of 43.5%, we calculated the NPV of Free Cash Flows through the year 2016 to equal $255.75 billion. Using a perpetuity calculated by Factset of $864.934 billion we reached a total valuation for Apple of just over $1.12 trillion (Table 4). iii. Our Valuation of Apple gave us a stock price of $1,201.97 (Table 4). E. RE Model i. Apple has a required return of 10.4% and an RE growth rate in 2014 of 12%, up from 7.6% the year before. Because the RE growth rate is already above 10.4% and still growing, you cannot calculate a perpetuity. Therefore, RE model cannot be applied. ii. We found variables needed to calculate the RE model in Factset (Table 5). iii. There is a lot of uncertainty about the future growth of Apple due to the death of founder and former CEO, Steve Jobs. Apple still has three products, iPhone, iPad, and Apple TV that were created by Jobs and are still evolving. After these products peak and the Federal Reserve relaxes interest rates in 2014, Apple will likely see its RE growth flatten. iv. We calculate a stock price of $200.84, but this is inaccurate because we were not able to calculate a perpetuity for Apple’s future RE (Table 5). F. AEG Model i. Abnormal Earnings Growth (AEG) Model cannot be used for Apple. Since Apple will start paying dividends this year and dividends are only projected two years into the future, an accurate AEG growth rate cannot be determined, and the AEG growth rate over the two years is over 20%, higher than Apple’s 10.4% required rate of return. ii. We found earnings and dividends estimates from Factset to complete the model (Table 6). iii. Similarly to the RE model, Apple can expect its AEG model to flatten once its growth slows. However, unlike RE, Apple’s AEG could continue to increase slightly if Apple increased its dividends which we believe will happen as Apple runs out of new projects. Therefore, we believe Apple’s AEG will flatten, but not quite as much as RE. iv. Using the AEG model we calculated a total valuation of $464.77 billion and a stock price of $498.48 (Table 6). This cannot be used because Apple’s AEG growth was higher than its required return. 3. Important Financial Ratios A. The DuPont Analysis is the product of multiplying a company’s Profit Margin, Asset Turnover, and Financial Leverage. Using the DuPont Analysis, we calculated the Return on Equity (ROE) for Apple to be 44.90%. Their ROE was second highest to IBM’s 68.13% among their competitors. However, IBM’s financial leverage is 4.94 compared to Apple’s 1.54. Using the industry average financial leverage of 2.54, Apple would have an industry best ROE of 74.17%. There are two reasons for Apple’s impressive ROE. First, Apple ranks highest amongst its competitors with an Asset Turnover of 1.13 with its top competitors averaging 0.87. Also, Apple exceeds the average profit margin of 25.80% exceeds the average by 5.07% and is only second to Microsoft’s 32.57%. With Apple’s leading asset turnover and second best profit margin, Apple stands to substantially increase their ROE through Financial Leverage (Table 7). 4. Credit Analysis
A. See table 8. B. See table 8. C. We don’t have any concerns about the company when we look at these numbers. All the outcomes that we came up with for Apple’s liquidity and solvency ratios reflect a healthy and successful company. The average Z-score for Apple in the past 7 years was just above 8, with a Z-score value of 9 in 2011 (Excel z-score). This is an extremely high number for a company’s Z-score, which is just another sign that Apple has been very successful in the recent past. Maintaining the high average for the last 7 years also reflects that Apple will continue to be a very successful company in the future. 5. Conclusion A. Our findings from section two yielded results at opposite ends of the spectrum. The two models we could use, Method of Comparables and DCF, gave us stock prices of $379.00 and $1,201.97 respectively. Apple has a very impressive ROE of 44.9% despite having the second lowest leverage amongst its competitors. What might be most impressive are Apple’s credit ratios. Particularly its defense interval of 4,162.11 days. This means that Apple can last over eleven years without having to tap its noncurrent assets. The cash ratio of .87 says that Apple can currently pay for 87% of its operations with only its cash. These strong ratios combined with the fact that Apple has no long-term debt leave no concerns about Apple’s future as a continuing entity. B. Apple’s stock price is currently $586.76. Since Apple is such an extraordinary company with a growth rate greater than its required return and no close competitors, none of our valuations yield an accurate price. Therefore, we took a weighted average of our two successful valuations, 65% $379.00 and 35% $1,201.97. This gives us a stock price of $678.74. We chose to weight it this way because of Jobs Death, Apple’s Dividend, and Apple has already reached the point where other $0.50 trillion dollar companies, Exxon and Microsoft began to fall. However, due to Apple’s unusual debt situation and impressive liquidity ratios, we do not rule out the possibility of substantial future growth. We have a “Buy” rating on Apple.

Works Cited "Apple 10-K Annual Report." apple.com. Apple, 26 Oct. 2011. Web. 18 Apr. 2012. <http://investor.apple.com/secfiling.cfm?filingID=1193125-11 -282113&CIK=320193>. "Apple Company Profile." Marketwatch. The Wall Street Journal, 18 Oct. 2011. Web. 17 Apr. 2012. <http://www.marketwatch.com/investing/stock/aapl/profile>.

FactSet. AAPL. Company Analysis. Estimates. All Estimates. Microsoft Excel. FactSet Add in. Quick Report. AAPL. Discounted Cash Flows.

Microsoft Excel. FactSet Add in. Quick Report. AAPL. New Report. FactSet Fundamentals. Altman’s Z Score. Morningstar. AAPL, GOOG, HPQ, IBM, MSFT. Key Ratios. Profitability

Morningstar. AAPL. Balance Sheet. Morningstar. AAPL. Income Statement. "Key Statistics." Finance.yahoo.com. N.p., 17 Apr. 2012. Web.17 Apr. 2012. <http://finance.yahoo.com/q/ks?s=AAPL+Key+Statistics>. "Releasing Our Dividend Report On Apple, Expect Double-Digit Annual Growth. "Seeking Alpha. N.p., 20 Mar. 2012. Web. 18 Apr. 2012. <http://seekingalpha.com/article/444201-releasing-our-dividend-report-on- apple-expect-double-digit-annual-growth>.

Appendix

Table 1

Table 2

Table 3

Table 4

Table 5

Table 6

Table 7

Table 8