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Capital Markets
US Economy & Apple Inc. shares
Final Report
Economic Growth
The US economy is progressively slowing not only in cyclical terms but from a long term pointof view. The present slow recovery is therefore not at aberration but a part of a long term trend.
Such a deep rooted slowing of the US economy clearly has major implications not only for the
United States itself but for the pattern of development of the world economy.
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In the last three and a half years, Obama said, the U.S. private sector has created 7. million new
jobs, which is at a pace of more than ! million jobs annually.In tandem with employment
progress, the United States also is whittling down its federal deficit at the fastest rate in "# years.
The president emphasi$ed he will %eep ma%ing the case for smart investments and fiscal
responsibility to %eep the U.S. economy in a growth pattern, create more jobs and %eep the U.S.
business sector competitive in the global economy
Smart ta& policy is a %ey ingredient of economic growth, and the ta& policy of the last three years
has had a mar%ed impact on economic activity. This influence has been particularly evident since
mid'!##( when the )ush ta& cuts were passed by.
Investment is one of main components of *+, and also one of most variable. -evertheless,
recent indicators suggest that the information technology revolution was real, and booming
orders for computer euipment and software are setting records once again. The average rate of
investment growth after the !##( ta& cut has been /0." percent. In real dollars, investment is
1770 billion higher per year than it was a decade ago. Investment is a sign of a booming
economy, and it is driving the productivity revolution that raises U.S. living standards.
+eficits themselves have not been proven to hurt the economy, but they do signal government
spending that will have to be paid for by future generations, often with higher ta&es. 2owerspending is the only solution to the deficit problem that doesn3t sacrifice strong economic
growth.
The alternative is a still'larger central government that crowds out investment, saps resources
from the private sector, and produces the anemic economic growth.
Over the last "# years, the U.S. *+ has grown at an average rate of about (.(4. 56or the U.S.
economy to maintain that pace between !##" and !#/" it would need to grow by about .4
over the ne&t years,8 according to )9O. U.S. real *+ would need to grow /.74 over the
ne&t five years. The U.S. economy continues to muddle through, barely moving faster than a
slug. :ith growth in the second uarter at meager /.(4
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2eaders at the summit, representing the !# most advanced and largest global economies, agreed
on specific steps to strengthen the global economy, address climate change, bolster the
international ta& system, e&pand trade, strengthen nuclear industry liability, improve wor%place
safety, combat corruption and promote global development, according to the :hite ;ouse.
In addition, the *!# leaders reached these agreements<
= To phase down the production and consumption of a potent category of greenhouse gases
through the 9ontreal rotocol.
= To wor% together to address international ta& evasion, to fi& ta& rules that allow multinational
companies to avoid paying ta& anywhere, and to support efforts by less developed countries to
strengthen their revenue collection systems.= To achieve a strong multilateral trade agreement in +ecember !#/(, with trade facilitation at its
core, and to e&tend the standstill on protectionist trade measures for an additional two years
through !#/".
5:e>re moving ahead with our development agenda, with a focus on issues li%e food security
and combating corruption,8 Obama said.
U.S. manufacturing sector is rebounding, and new regulations have strengthened the ban%ing
system while reducing the chance of another crisis. The United States is also reducing its
dependence on imported oil and is producing more clean energy.
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The trend for US>s economic growth for the past five years.
Inflation
In September of !#/(, the ?onsumer rice Inde& for all items eased for the third month in a row
to /.! percent before seasonal adjustment. @ll Urban ?onsumers ?I increased #.! percent from
@ugust, on a seasonally adjusted basis .
The energy inde& rose #.A percent in September and accounted for about half of the seasonally
adjusted all items increase. @ll the major energy component inde&es rose in September. The food
inde& was unchanged, with declines in the inde&es for fruits and vegetables and for nonalcoholic
beverages offsetting increases in other inde&es.
The inde& for all items less food and energy rose #./ percent in September, the same increase as
in @ugust. The shelter and medical care inde&es also advanced and accounted for most of this
increase. The inde&es for new vehicles and for airline fares rose as well, while the apparel and
recreation inde&es declined.
The all items inde& increased /.! percent over the last /! monthsB this was the smallest /!'month
increase since @pril. The inde& for all items less food and energy has risen /.7 percent over the
last year with the shelter and medical care inde&es both up !.0 percent. The food inde& has risen
/.0 percent, while the energy inde& has declined (./ percent.
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Investor e&pectations for U.S. inflation have declined to the lowest in more than three years even
as data point to economic recovery, C9organ ?hase D ?o., said, citing surveys.
Investors e&pect U.S. inflation to average /."A percent in the ne&t /! months, compared with
/.A percent in the previous survey in 9arch. Over the ne&t two'to'five years, the rate is seen at
!.0 percent, the lowest since the Culy !#/# survey, C9organ said. The report was based on
responses from (!# investors including asset'management companies, pension funds, ban%s
and hedge funds.
The five year inflation pattern is summari$ed in the diagram above. That shows inflation to be at
the highest rate in !## and still prevails to e&ist but at a steady rate.
http://www.bloomberg.com/quote/CPI:INDhttp://topics.bloomberg.com/hedge-funds/http://www.bloomberg.com/quote/CPI:INDhttp://topics.bloomberg.com/hedge-funds/
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Central Banks E!pecte" monetary policy#
$akistan
@nalysts had widely e&pected the State )an% of a%istan to raise its monetary policy rate ' a rate
at which ban%s borrow from it through its discount window ' at some point this year in order to
tighten a%istan3s monetary supply. It was offering an interest rate of //.74 before.
The State )an% of a%istan ES)F has changed the schedule of the monetary policy. @s per the
new schedule, subseuent monetary policy statements will be announced during the first half of
alternate months, i.e. in Canuary, 9arch, 9ay, Culy, September and -ovember.
The monetary policy statement was last announced in Cune !#/(.
The central ban% reduced the discount rate by #. percent to nine percent for the months of Cune
and Culy. reviously, the central ban% was widely e&pected to revise the current percent policy
rate upward at least by # basis points given the increasing inflationary pressures in the country.
In Culy, the ?onsumer rice Inde& inflation cloc%ed in A. percent which the analysts believed
would further escalate in the months ahead. The Garachi stoc%s mar%et reacted strongly to the
reports forecasting a hi%e in the cost of borrowing. ;owever, the recent approval by the I96 of
1"."0 billion of three'year H&tended 6und 6acility for dollar'hungry a%istan changed,
apparently, the scenario. The I96, previously, was believed to have been pressuring a%istan for bringing the monetary policy in accordance with inflation numbers. In its fresh H66 program,
however, the international lender has urged Islamabad to focus on attracting foreign investment
in the country. This has relieved pressure on the mar%et sentiments where a status uo is widely
being e&pected today in the S)3s monetary policy stance. :hether or not the State )an%
behaves as per e&pectations, however, is yet to be seen.
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Unite" States
U.S. monetary policy affects all %inds of economic and financial decisions people ma%e in this
countrywhether to get a loan to buy a new house or car or to start up a company, whether to
e&pand a business by investing in a new plant or euipment, and whether to put savings in a
ban%, in bonds, or in the stoc% mar%et, for e&le. 6urthermore, because the U.S. is the largest
economy in the world, its monetary policy also has significant economic and financial effects on
other countries.
)efore the financial crisis, the typical central ban% conducted monetary policy by controlling a
short'term nominal interest rate usually a rate charged in interban% or other wholesale money
mar%et transactions. In the U.S., as in many other countries, this control was accomplished by
manipulating the supply of the central ban%3s monetary liabilities. )efore the crisis, a relatively
stable, interest'sensitive demand for reserves by U.S. ban%s arose from the array of regulations
surrounding the use of those balances. 2egally reuired reserves were small, and with no interest
earned on reserves, ban%s sought to economi$e on e&cess reserves. @gainst this incentive to
minimi$e reserve holdings, ban%s3 demand was supported by the use of reserves in settlement of
interban% obligations and by the desire to avoid costly overdrafts.
@s the economy wea%ened in the fall of !##A, the 6ed drove the interban% interest rate to near$ero. @s a general matter, unconventional monetary policy is associated with the e&tended period
of time since then, during which the 6ed3s interest rate target has been essentially as low as it can
go in other words, at the J$ero lower bound.J The ability of ban%s and other members of the
public to hold currency constrains the ability of the central ban% to enforce a nominal interest
target much less than $ero. )ut in an e&ceptionally wea% economy, the appropriate real rate of
interest may be negative. @ central ban% that has credibility for low and stable inflation so that
inflation e&pectations are reasonably well anchored will have difficulty ma%ing the real
interest rate more than a little bit negative.
One possible strategy at the $ero lower bound is to see% a lower real interest rate by engineering
an increase in e&pected inflation, above the rate the central ban% would otherwise target. )y
departing from its inflation target for a time, a central ban% may be able to support economic
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growth by lowering the real interest rate, despite not being able to reduce the nominal interest
rate below $ero. ?entral ban%s operating at the $ero lower bound have generally avoided this
approach, and for good reason, in my view. In the United States, for e&le, the process of
achieving credibility for low inflation was difficult and costly, ta%ing the better part of two
decades. This e&perience suggests that engineering medium'term variations in inflation
e&pectations would be uite difficult to implement and would set precedents that pose longer'run
ris%s to the central ban%3s credibility..
The 6ed has deployed a number of approaches to communicating about its intentions and
e&pectations for the path of short'term rates in recent years. The 6O9? began by including
ualitative language in its policy statements characteri$ing the time period over which it
e&pected e&ceptionally low interest rates to be appropriate< @t first it was Jfor some timeJE+ecember !##A and Canuary !##F, and then Jan e&tended periodJ E9arch !## through Cune
!#//F. In @ugust !#//, the ?ommittee sharpened its guidance by specifying the time before
which an increase in the federal funds rate seemed unli%ely and then moving this date further
into the future several times. 6inally, in +ecember !#/!, the ?ommittee replaced this date'based
forward guidance with a threshold for the unemployment rate, saying that Jthe e&ceptionally low
range for the federal funds rate will be appropriate at least as long as the unemployment rate
remains above "'K percent, inflation between one and two years ahead is projected to be no
more than a half percentage point above the ?ommittee3s ! percent longer'run goal, and longer'
term inflation e&pectations continue to be well anchored.J This form of forward guidance
remains in place today.
These communication efforts have been generally aimed at easing financial conditions by
pushing bac% the dates at which mar%et participants believe short'term rates are li%ely to rise.
Such communications by the central ban%, however, inevitably face a conundrum. 6orward
guidance is effective when it alters the public3s perception of the central ban%3s pattern of
behavior in response to incoming data in essence, the central ban%3s Jreaction function.J )ut
there3s always the possibility that the public will interpret the forward guidance in terms of the
future evolution of the economic conditions to which the central ban% reacts. The public might
reason that, under its e&isting pattern of behavior, the central ban% e&pects low rates to be
warranted for a longer period because they e&pect the economy to be wea%er. In this case,
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forward guidance could have the parado&ical effect of reducing current economic activity, by
reducing e&pectations about the level of future economic activity.7 It may be difficult to craft
forward guidance in a way that definitively separates these two interpretations. The 6O9?3s use
of numerical thresholds is in part an attempt to clarify that forward guidance about short'term
interest rates is about the ?ommittee3s reaction function, not its economic outloo%.
Ideally, a central ban% can ma%e clear that its communications concern its future reactions to
incoming economic data. 6orward guidance regarding central ban% reaction patterns often ta%es
the form of criteria for particular decisions, as in the case of the 6O9?3s thresholds for raising
interest rates or the conditions under which the open'ended asset purchase program will li%ely be
wound down.
+esigning such conditional guidance involves trade'offs, however. ?redibility reuires
consistency, over time, between a central ban%3s statements and its actual subseuent actions. @
central ban%3s statements will have greater immediate effect on the public3s e&pectations the more
they are seen as limiting the central ban%3s future choices. Let there are li%ely to be
circumstances, e& post, in which the central ban% feels constrained by past statements. Lielding
to the temptation to implicitly renege by rewor%ing decision criteria or citing unforeseen
economic developments may have short'term appeal, but widely perceived discrepancies
between actual and foreshadowed behavior will inevitably erode the faith people place in future
central ban% statements. So central ban%s face an e& ante trade'off, as well, between the short'run
value of e&ercising discretion and the ability to communicate effectively and credibly in the
future
Stocks an" Bon"s
US stoc% mar%et consists of five stoc% e&changes. 9easured by value of its listed companies3
securities, the -ew Lor% Stoc% H&change is more than three times larger than any other stoc%
e&change in the world. @s of October !##A, the combined capitali$ation of all domestic -LSH
listed companies was US1/#./ trillion.-@S+@M is another @merican stoc% e&change and the
world3s (rd largest e&change after the -ew Lor% Stoc% H&change and Capan3s To%yo Stoc%
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H&change. ;owever -@S+@M3s trade value is larger than Capan3s TSH.-@S+@M is the largest
electronic screen'based euity securities trading mar%et in the U.S. :ith appro&imately (,A##
companies and corporations, it has more trading volume per hour than any other stoc% e&change.
The US stoc% mar%et followed the following trend in past five years<
@fter US stoc% mar%et crashed in !##A it started to go up from !##. Since then it is falling an
upward trend.Since mid'!##A, the amount of outstanding U.S. debt has more than doubled to an
unprecedented 1//." trillion as the government increased borrowing to finance deficits and
mitigate the fallout from the financial crisis. US treasuries started to gain popularity as
government started to borrow from people.
;owever, the recent statistics of !#/( tell that bonds are increasingly shifting from ris% relievers
to securities that add more ris% for investors,8 *avin, whose firm is one of the !/ primary dealers
of U.S. government securities that are obligated to bid at Treasury auctions, said on Oct. !/.5The bond mar%et isn>t as safe as it was.8
eople find better opporunities in stoc% as corporate profits for SD ## companies have almost
doubled since !##A, and earnings in each of the ne&t two years will increase by more than /#
percent, data compiled by )loomberg show. That>s more than twice as much as the 0.A percent
increase that analysts project for !#/(.
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Of the !00 companies in the inde& that have reported third'uarter results, 7" percent posted
higher'than'estimated earnings, the data show. :hile earnings have helped fuel a !( percent
advance in the SD ## to a record this year, its price'earnings ratio of /".7 is still less than the
average multiple of /.( for the past / years.
5)ecause of the growth outloo% there are opportunities that provide compensation plus a margin
of safety that Treasuries do not,8 Ceffrey Schoenfeld, the chief investment officer at )rown
)rothers ;arriman D ?o., which oversees 1(( billion, said on Oct. !(. 5There are better
opportunities than Treasuries right now if you do your homewor%.8
Schoenfeld said the -ew Lor%'based company sold of all its holdings of Treasuries and is
investing in financial company bonds and inflation'protected securities
%il an" ol" o'tlook#
*old prices are a good indicator of how healthy the U.S. economy is. :hen the price of gold is
high, that3s when the economy is not healthy. )ecause investors floc% to gold when they are
protecting their investments from either a crisis or inflation. :hen gold prices drop,that usually
means the economy is healthy. That3s because investors have left gold for other, more lucrative,
investments li%e stoc%s, bonds or real estate.
To understand the economy, it3s helpful to understand gold. In this article, you can trac% recent
trends in gold prices. Lou3ll also learn about how gold should be used by investors, the history of
gold, and more about the gold standard.
The price of gold continues to fall. It3s currently at 1/,0#!.# an ounce. If you loo% at historical
gold prices, you3ll see that it will probably continue this downward trend. )efore the !##Afinancial crisis, gold hovered around 10## an ounce.
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In case of oil, according to the International 9onetary 6und, a 1/#'a'barrel increase in the price
of oil reduces U.S. *+ growth by #. percentage points
:hile the rising price of gasoline at the pump is the most visible economic effect of higher oil
prices, the reality is that oil and its byproducts are a bigger part of the economy. ;ere, according
to -N , are some e&les of that cascading economic effect<
• @irlines are li%ely to add fuel surcharges to the price of tic%ets '' they3ve raised fares
four times since the start of !#//, according to the New York Times , boosting the lowest tic%et
price /#4 since last Canuary.
• +elivery companies such as 6ederal H&press E6+ F and US EUS F are li%ely to raise
rates.
• 6ood prices will reflect the higher costs farmers incur to run their tractors and other
euipment. Transport costs would also rise.
• lastic goods might increase in price, since plastic is derived from oil.
• ?rowding out '' since consumers3 real incomes are already down A./4 in the last
decade, those higher prices will limit what consumers can spend elsewhere.
OH?3s influence on the U.S. economy effects the determining production and prices. So if they
raise the price of a barrel of oil, that ma%es prices go up in the U.S. which is not good for the
U.S. economy because people have less to spend
http://www.moneynews.com/Headline/IMF-Global-Economy-Survive/2011/02/22/id/386982http://www.npr.org/templates/story/story.php?storyId=16211938http://www.npr.org/templates/story/story.php?storyId=16211938http://www.nytimes.com/2011/02/24/business/24fare.html?hphttp://www.nytimes.com/2011/02/24/business/24fare.html?hphttp://www.dailyfinance.com/quotes/fedex-corporation/fdx/nyshttp://www.dailyfinance.com/quotes/united-parcel-service-cl-b/ups/nyshttp://www.epi.org/publications/entry/a_lost_decade_poverty_and_income_trendshttp://www.moneynews.com/Headline/IMF-Global-Economy-Survive/2011/02/22/id/386982http://www.npr.org/templates/story/story.php?storyId=16211938http://www.nytimes.com/2011/02/24/business/24fare.html?hphttp://www.dailyfinance.com/quotes/fedex-corporation/fdx/nyshttp://www.dailyfinance.com/quotes/united-parcel-service-cl-b/ups/nyshttp://www.epi.org/publications/entry/a_lost_decade_poverty_and_income_trends
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Apple Inc.
The capital mar%et product that we chose is @pple Inc. shares
@pple, Inc. designs, manufactures and mar%ets personal computers and related personal
computing, and mobile communication devices. It is engaged in designing of 9ac laptops, along
with OS , i2ife, i:or% and professional software. @pple provides the digital music revolution
with its iods and iTunes online store. The company3s products and services include 9acintosh
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computers, ihone, iad, iod, @pple TP, serve, a portfolio of consumer and professional
software applications, peripherals and iOS operating systems, third'party digital content and
applications through the iTunes Store and a variety of accessory, service and support offerings. It
sells its products worldwide through its retail stores, online stores, and direct sales force and
third'party cellular networ% carriers, wholesalers, retailers, and value'added resellers to the
consumer, small and mid'si$ed business, education, enterprise, government and creative mar%ets.
In addition, the company also sells a variety of third'party 9ac, ihone, iad and iod
compatible products, including application software, printers, storage devices, spea%ers,
headphones and various other accessories through its online and retail stores. The company was
founded by Steven aul Cobs, Steve :o$nia% and Nonald *erald :ayne on @pril /, /7" and is
headuartered in ?upertino, ?@.
@@23 is the stoc% symbol under which @pple Inc. trades on the -@S+@M E-ational @ssociation
of Securities +ealers @utomated MuotationsFstoc% mar%et. @pple originally went public on
+ecember /!, /A#, with an initial public offering at US1!!.## per share. The stoc% has split !
for / three different times on Cune /, /A7, Cune !/, !### and 6ebruary !A, !##. @pple initially
paid dividends from Cune /, /A7 to +ecember /, /. On 9arch /, !#/!, @pple announced
that it would again start paying a dividend of 1!." per uarter Ebeginning in the uarter that
starts in Culy !#/!F along a 1/# billion share buybac% which would commence September (#,
!#/!, the start of its fiscal !#/( year.
In, order to forecast present value of @pple Inc., we are going to do it under three models with
our own assumptions.
Growth Rate:
First, we have to fnd out average growth rate or Apple Inc in the past 5-
years in order to start our orecast. We will adjust the company growth rate
http://en.wikipedia.org/wiki/Stock_symbolhttp://en.wikipedia.org/wiki/Apple_Inc.http://en.wikipedia.org/wiki/NASDAQhttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Initial_public_offeringhttp://en.wikipedia.org/wiki/Share_repurchasehttp://en.wikipedia.org/wiki/Stock_symbolhttp://en.wikipedia.org/wiki/Apple_Inc.http://en.wikipedia.org/wiki/NASDAQhttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Initial_public_offeringhttp://en.wikipedia.org/wiki/Share_repurchase
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with economy and the industry it operates in to predict the growth in uture
years.
Company Growth Rate:
For the company growth rate we have taen change in net income in thepast 5-years to calculate the average growth rate or the company. We have
calculated it on net income and not on dividend change !ecause as
mentioned earlier Apple stopped giving dividends in "##5, and then started
again in "#$" at % ".&5. We had to tae into account the past 5 years. Apple
is a company who grew in recent years !y maing huge revenues so we too
net income to calculate its growth.
'et Income
(millions)"##* +*#"## *"5 *"5-+*#+*# #./#5"#$# $+#$ $+#$-*"5*"5 #./#""#$$ "5"" "5""-
$+#$"5""
#.*5#
"#$" +$/ +$/-
"5"""5""
#.&$#
"#$ /#/ /#/-
+$/+$/
-#.$$
"./5+50$##
Average growthrate
55.#*1
In majority o the years Apple2s growth rate was a!ove e3cept or "#$,
where it aced negative growth, hence, the average growth came out to !e.
US Economy Growth Rate:
4o calculate the growth o the economy we have taen 6 789 growth in the
past 5-years.
8ue to the crisis in "##* 789 growth is very low so the average growth or
the economy turned out to !e $."+1.
789 7rowth
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"##* -#.1"## -".*1"#$# ".51"#$$ $.*1"#$" ".*1"#$ $.1Average 7rowth
:ate
#.*1
Industry Growth Rate:
Apple Inc is operating in technology industry; its major competitors are other
mo!ile phone companies, lie 6amsung and $."+1
Discount of cash ow techniques:
We will calculate WA?? to orecast the cash @ows discount ratescan !e used in the valuation o stocs.
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eighted !"erage Cost of Capita#:
!CC$ we%re&wp%rp&wd%rd '()*+
Return of equity 're+:
C!,-$ rrf&'rrf)rrm+%.
Rrf= 2.5% (Bloomberg)
Beta= 1.01 (Google Finance)
Assumptions
!t is assume" b# t$e euit# returns of t$e o&erall mar'et an" is "etermine"
b# t$e stoc's mar'ets return at "iscreet inter&als.
Return on mar/et:
As Apple2s shares are traded under 'A68AB we have calculated value o
return on maret !y taing 5-year average o returns on 'A68AB.
:C4:' D' EA:C4
(1)"##* -&.55"## "5.+"#$# $+.*""#$$ ".$#
"#$" $5.*"#$ ".$5Average return on
maret
.#&
C!,-$re$ 0123&'0123)41556(3+%(14(
$4147(8
Cost of de.t:
We have taen fnance cost o only one-year !ecause Apple too a loan in
"#$ !eore that it didn2t have any loan in the data o past fve years.
Finance costtotal de!t > $##$& > *.#$1
eight of de.t:
4otal de!t de!ttotal-de!t=eGuity
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$&$+#5#
>$".#/1
Weight o eGuityH
4otal eGuityeGuity=de!t
$"5+$+#5# > */.1
,referred Stoc/:
The ?ompany has five million shares of authori$ed preferred stoc%, none of which is issued or
outstanding. So the value of preferred stoc% will be #.
:@??Q E#.A7(R#.#0/(F E#./!#74R#.#A#/E/'!".!4FF
().)*+
,i-i"en" ,isco'nt Mo"el ,CM/#
Is the method used for valuation of stoc% through current dividends. Investors must value a
stream of dividends that may be paid foreverB since common stoc% has no maturity value.The
dividend Stream is uncertain< There is no specified number of dividends, if in fact any are paid at
all D dividends are e&pected to grow in most cases.
?urrent 8ividend is 9 8142.
ero)growth -ode#H
Do;/'re+
.#5#.#+$
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>/.*
It tells a f3ed dollar stream calculated through current dividend. nder this
dividend price the long term will !e /.* at ero growth.
Constant)Growth -ode#:
8o($=g)-g
.#5($=#.$"+) (#.#+$-#.$"+)
>-$+./
In the constant growth model the value calculated is -$+./1 , this model cannot
applied as it is indicating negative dividend stream. We assume in the constant
model that dividend will grow at a constant rate or ever so negative dividendstream orever cannot !e applica!le.
-u#tip#e)Growth -ode#:
8ividends 8ividend 7rowth 1"#$# #
#"#$$ #
#
"#$" ".&5#.$5
"#$ .#5
"#$+
-
-
-
-
-
-
?onstant growth o
$."+1
"#$#> #
"#$$> #
"#$"> ".&5
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"#$> ".&5 ($=#..$5)
>.#5
"#$+> .#5 ($=#.$"+)
>+.#$
9#> +.#$(#.#+$-#.$"+)
>-$+./
-$+./=.#5 >-$$./+
rs> +.$1
'9J (?ash-@ow mode on calculator)
> -$#.5&
4his is also coming negative so this cannot !e applied. 4he negative value in
the two streams !ecause ero dividends are paid in the initial years.
FREE C!S *> E?UI*@:
It is the measure o much cash can !e paid to the eGuity o the company
ater all e3penses, reinvestments and de!t repayment.
We have calculated F?FC or the ne3t fve years in order to get the cash@ows.
04(4
(Eillions)'C4 I'?DEC $+#$A88 AED:4IKA4ID' 8C9:I?IA4ID' $#"/LC66 ?MA'7C I' W.? $"$##LC66 ?MA'7C I' ?.C "$"##A88 8C
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A88 8C
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Constant)Growth -ode#:
9#> F?FC per share ( O 7)
/./(#.#+$-#.$"+)
> -$.#&
-u#tip#e)Growth -ode#:
9# > 9J o F?FC during the non-?onstant period = 9J o F?FC during the constant
7rowth 9eriod
F?FC 7rowth"#$# -#.$#
$#."#$$ -$.$
-#.5#"#$" -#.5&
-&*.""#$ /./
"#$+
-
-
-
$"$5.+5 7rowth at a constant rate
o $."+
04(4:
-#.$# ($=$#.)
>-$.$
04((:
-$.$($=(-#.5#))
-#.5&
04(0:
-#.5&($=(-&*."))
>/./
04(8:
/./($=$."+)
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>$"$5.+5
9H $"$5.+5(#.#+$-#.$"+)
> -++*.+#
9Jconstant growth> -++*.+#($=#.$"+)
> -$*.+#
9Jnon-constan growthH (-$.$($=#.#+$))=(-#.5&($=#.#+$)")=(/./($=#.#+$))
>$./
-u#tip#e)growth mode#:
,4$ )(A58174&8(1BA$
$ )(A2(16(
!na#ysis of FCFEE:
*he FCFE of the company is coming positi"e with ero growth mode# which
means that the with no growth it has positi"e cash ows that he can payto it equity ho#ders1 In the constant growth mode# the cashow is coming
negati"e )(8A1468 this is due to the reason that company has immense#y
increased its capita# ependiture .y in"esting in research and
de"e#opment so that they can come up with new inno"ations to compete
with Samsung1 In the mu#tip#e growth mode# of !pp#e the cash#ows are
coming negati"e again1 !nother reason for this can .e the fa## in growth of
net)income from 523 in 04(( to ((183 in 04(81
Free Cash F#ow *o Firm -ode#:
04(4
(EILLID'6)F?FC -$*"Add Interest0($-4) #Add 9rinciple :epayments #
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Less 'ew 8e!t Issue #Less 9reerred 8ividends #F?FF -$*"
"#$$
(EILLID'6)F?FC -$#+5/*Add Interest0($-4) #Add 9rinciple :epayments #Less 'ew 8e!t Issue #Less 9reerred 8ividends #F?FF -$#+5/*
04(0
(EILLID'6)F?FC 5"&5/Add Interest0($-4) #Add 9rinciple :epayments #Less 'ew 8e!t Issue #Less 9reerred 8ividends #F?FF -5"&5/
04(8
(EILLID'6)F?FC //Add Interest0($-4) $&0($-"&."1) $##.&*Add 9rinciple :epayments #Less 'ew 8e!t Issue ($&#)Less 9reerred 8ividends #F?FF "*/.&*
ero)Growth -ode#:
J# > F?FF WA??
>"*/.&*#.#5
>+#$
Constant Growth Case
J# > F?FF (WA?? O 7)
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>"*/.&*(#.#5-#.$"+)
> -$+*/5.*
-u#tip#e)Growth -ode#:
04(4 )(506471B0
04(( )(472B5)417
04(0 )2062B)(16(
04(8 8085B186
04(7 702421(B
Growing at
constant rate of
8(1073
04(4:
-$*"($=+./")
>-$#+5/*
04((:
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-$#+5/*($=(-#.+))
>-5"&5/
04(0:
-5"&5/($=(-$.&$))
>"*/.&
04(8:
"*/.&($=#.$"+)
>+"5#5.$/
9> +"5#5.$/(#.#+$-#.$"+)
>-$5&/*/./
9Jconctant growthH -$5&/*/./($=#.$"+)
>-&&#./"
9Jnon-constant growthH (-$#+5/*($=#.#+$))=(-5"&5/($=#.#+$)"=
("*/.&($=#.#+$))
> -$"##*.5&
Eultiple 7rowthH -&&#./"=(-$"##*.5&)
> $*."*
FCFF !!=@SIS:
FCFF is carried out to epress the net amount of cash that
is generated for the rm1 !gain in our ca#cu#ations on#y in
ero growth mode# we are getting a positi"e "a#ue which
means if the company grows at ero rate it wi## generate
positi"e cash ows for the future years1 Under constant
the "a#ue is coming negati"e the reason for this is again
high in"estment in capita# ependiture1 *he mu#tip#e
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growth is ca#cu#ated .y ta/ing the "a#ues of FCFF in the
past 2 years due to which our mu#tip#e growth is negati"e1
*he reason for this is that in the pre"ious years !pp#e did
not ha"e any #oan or #oan repayments due to which its
capita# ependiture outweighed that FCFF ca#cu#ations1
Stoc/ prices in past 2)years:
$eers & Competitors Market cap $0E ratio 1o"ayschane 2 yearchane 2 yeartren"
@@2@ppleInc 10"7.) /(.( /.!4 '.#4
;M;ewlett'ac%ard ?o '' -9 '#.A4 A7.!A4
))NL)lac%berry 1(.0) /.! '/".0/4 '!7.#!4
SS-26Samsung Hlectronics ?o 2td 1!/(.") '' #.##4 /".##4
http://money.cnn.com/quote/quote.html?symb=AAPLhttp://money.cnn.com/quote/quote.html?symb=HPQhttp://markets.money.cnn.com/research/quote/snapshot.asp?symb=BBRYhttp://markets.money.cnn.com/research/quote/snapshot.asp?symb=SSNLFhttp://money.cnn.com/quote/quote.html?symb=AAPLhttp://money.cnn.com/quote/quote.html?symb=HPQhttp://markets.money.cnn.com/research/quote/snapshot.asp?symb=BBRYhttp://markets.money.cnn.com/research/quote/snapshot.asp?symb=SSNLF
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It is believed that Samsung is giving a tough competition to @pple but in the stoc% mar%et
@pple>s shares continue to be the mar%et leader not only with its competitors but overall as well
it is largest US company according to its mar%et value. Shares of its one of the major competitor
blac%berry have fallen dramatically whereas, the only threat that @pple might face from is ;.
$ast $erformance#
@pple>s shares bottomed for a decade at 1".". On @pril /7, !##(, @pple>s shares began a
dramatic ascent as the company>s sales and earnings began to roc%et. The stoc% reached 1/.A(
on +ec. !A, !##7 '' then plummeted to 1// by late'6ebruary !##A after a disappointing forecast
from the company. The stoc% rebounded to nearly 1/# in 9ay !##A, then crashed again with the
mar%et meltdown later that year. @fter falling as low as 17A.!# on Can. !#, !##, the stoc% began
the climb that too% it above the 10## mar%.
@pple>s sales have tripled from 1.#A billion in its second fiscal uarter of !## to a record 1!A."
billion in its latest uarter, ended in Cune. The stoc% prices continued to rise in !#/#'!#/! as
apple made record brea%ing profit. @pple>s annual profits increased by !74 in the year !#/!. In
past years its stoc% value increased by more than 0##4.
Future Prospect:
The 07 analysts offering /!'month price forecasts for @pple Inc have a median target of #.##,
with a high estimate of 777.## and a low estimate of ("#.##. The median estimate represents a
0.0/4 increase from the last price of !".7.
@ recommendation from analysts was made whether to invest in @pple>s shares or nit. (7 of
them were strongly in favor to invest in @pple>s shares. @pple>s earnings per share are estimated
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to reach 1 /(.! whereasB the forecasted profit is 10.! billion in the following year. The high
profits are an attraction for investors to invest in @pple>s shares. @lso @pple has increased its
research and development e&penditure by (!4 and there are chances for new innovations which
can further increase their profits.
Concl'sion#
@ccording to our analysis the model that can applied to @pple is $ero growth
model the reason behind this is that it is the only model under which @pple is
getting positive values in future. Under other to models @pple e&pects negative
cash flows if it grows at a constant rate of (/.!04 from now. The reasons for this
are mentioned earlier which is high capital e&penditure as @pple increased its
research and development to almost (4, a major reason behind this is that @pple
facing increasing competition from Samsung. :hich has caused negative growth
for @pple>s net income which we e&pect will further fall in the future years. )ut
@pple is a well'established brand with a good mar%et repute so there are minimal
chances of it going in loss.
%-erall Analysis
@fter the recession of !##A the US economy is ma%ing a gradual recovery. Its economic growth
is increasing and at the same time it is facing a persistent rate of inflation. )ut the economy still
isn>t able from the debt deficit it has faced. The debt continues to increase and investors have
stopped investing in Treasury )onds which government uses to finance itself. :hat US
government might have to do to increase the demand for treasury bonds is to increase the interest
ratesB right now it is following the $ero lower bound policy. )ut the increased interest rates can
also lead to unanticipated inflation in the economy and it is also important for the economy to
recover from debt because there are chances for it to go in recession again.
@s people have lost their trust in government bonds there are chances that they might start
investing in shares as they are now loo%ing for more secured securities. @pple>s stoc% mar%et has
a bright future in this case as their shares are doing well in the stoc% mar%et and further
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investment can raise their shares even more. It is safer to invest in @pple>s shares as there are
very few chances for its demand to fall because @pple has now become a status symbol for
people and hence they have developed brand loyalty against it. )ut on the other hand there are
chances that people go for other alternative such as investing in gold because they cannot even
trust government securities now they might be reluctant to trust private company>s shares as
well.