Apple Inc. Valuation
University of Arizona Global Campus
Kevin Sessions
BUS 401 Principles of Finance
August 24, 2022
Apple Inc. Valuation
Part 1
A potential investor who wants to invest in a company’s stock must evaluate different risk types. The different types of risk of consideration include idiosyncratic, industry-specific, and market risks. The idiosyncratic risk negatively affects an individual’s securities or a specific group of assets. The systematic affect the market or its segments. This risk is the opposite of the idiosyncratic risk, and it does not affect the individual securities or specific industry or stock; however, it affects the market in general. The risk is one of the hard-to-determine risks because it is very unpredictable as most investors fail in most cases to predict it correctly, resulting in risk investment (Hickman, Byrd, & McPherson, 2013). As the name suggests, the industry-specific risk affects the specific industry that the investor is interested in. the investor considers this risk hazardous since it applies to the target industry.
The rate of return is the minimum return expected from an investor. Beta is essential for project evaluation before investing; it’s used to evaluate and estimate the rate of return and to determine the beta asset. During the process, investors focus on whether the risk associated with the investment is diversifiable. The three types of risk discussed are diversifiable. Market risk and economic and systematic risks are non-diversifiable risks.
Part 2
According to Yahoo! Finance, 2021, Apple Inc. had a beta of 0.11. Beta is a term used in finance to measure how an individual asset moves depending on the stock market changes. The market Beta is used as a benchmark when assessing an asset beta; an asset with a beta of less than 1.0 is less erratic; however, those with 1.0 or more are considered more erratic.
The Capital pricing model determines a company’s required rate of return. We can calculate the Apple Inc. rate of return using this method. We will use a risk-free rate of return of 2%, a market risk premium of 5 %, and a beta of 1.01. Required Rate of Return (r)
Assumptions
Rate of return on LT Treasury Composite: RF 2.14%
Expected rate of return on market portfolio: E(RM) 11.71%
Systematic risk of common stock: βTGT 0.87
Apple Inc common stock3 required rate of return: rTGT 10.44%
RTGT = RF +βTGT [E(RM) – RF]
= 2.14% + 0.87 [11.71% – 2.14%)
= 10.44%
From the calculation we can see that Apple’s rate of return is 10.44 %- this is above the capitalization discount rate (10%) that is used in e constant growth rate.
Part 3
The constant growth formula is used to determine the stock price of an organization. we will use this formula to find Apple Inc. stock price. Price = (D (1 + g)/ (r-g).
The Apple’s stock price as at 24th August 2022 was selling 164.02 which + 1.27 % up as of the start of the day. The company reported the last stock that was priced at 152.85. from this information we can see that the company has minimal chances of experiencing financial distress in the coming years.
References
Hickman K. A., Byrd, J. W., & McPherson, M. (2013). Essentials to finance. Bridgepoint Education.
Apple Inc. (TGT). (n.d.). Yahoo Finance – Stock Market Live, Quotes, Business & Finance News. https://finance.yahoo.com/quote/TGT?p=TGT&.tsrc=fin-srch