The horizon value
To summarize everything, the unlevered Apple Inc. is worth $36. 88 billion in totality, wherein $5. 16 billion comes from the tax interest savings, and some $394 million comes from the non-operating assets (please see Table 1 of the Appendix).
These assets are just 1% of the total value of the unlevered firm. By 2008, this overall value of Apple Inc. would have reached $39. 43 billion worth of operations—up by about 8%–with a tax shield that is worth $5.6 billion. This would have reached a greater amount of $39. 83 billion in totality (from $36. 88 billion in current assets), considering non-operating assets that are worth $394 million (see Table 1). As of now, overall value of the unlevered should only reach $31. 32 billion, but because of the tax shield, some $5. 16 billion are added to the overall value of the firm.
This would, therefore, come to a total value of operations worth $36.48 billion (including NOA), which is less 8% than the projection by 2008, which is worth $39. 43 billion, and a total value that reaches $36. 88 billion in present projection. As for the leverage, WACC shows that, given a risk-free rate of 5. 25% that lands on $529 million, and then a market risk premium of 10% that lands on $998 million, the WACC of the company appears to be 15% of its market equity of $9. 98 billion; thus, WACC would be about $1.5 billion. If the company remains unlevered, the rate of return in equity would fall on 15% of the $9. 98 billion, which is about $1. 5 billion.
However, if it were levered, then it would fall at 17% rate or about $1. 7 billion all in all. Based on current projection, should the subject stocks be bought? Conclusion From the initial findings, it is very obvious that Apple Inc. ’s subject stocks worth $9. 98 billion could be and should be bought.
This is supported by five main reasons: first, because the company possesses specific strengths and opportunities that make the company a good candidate for investment; second, because it contains strong ratios (7 positive over 4 negative) that reflect a rising projection; third, because its balance sheet project soaring numbers and greater assets (although with greater liabilities as well); fourth, because rate of return would rise from 27% to about 32% if it were levered; fifth, because its pro-forma cash flows reflects rising projections, especially in terms of Total net operating capital, NOPAT, FCF, Interest tax savings, and FCFE; sixth and final, because its total horizon value after three years would land on a total of $39. 83 billion, which is an 8% leap from the current projection worth $36. 88 billion. Concerning this final statement, if Apple, Inc. would leap at an 8% interval within three years time, then by six years, it would have jumped by 16% to about $43 billion, given the same rate and projection, so that in about 10 years, equity would have exceeded to more than $50 billion, under the same rate and estimate.
From the market value of equity worth $9. 98 billion, it appeared that—instead of the horizon value on total equity worth $39. 83 billion—in terms of the total value of FCFE, numbers would only land on $24. 17 billion by 2008, including the NOA. The yearly projection in terms of the FCFE until 2008 is lower than the horizon value on total equity worth $39. 83 billion. This is because it covers only the equity and not the total value of operations (Brigham & Ehrhardt 900). However, if compared to the total value of the FCFE in present projection, we see that the amount only reaches $21. 45 billion, which is lower than its horizon value in FCFE that is worth $24. 17 billion.
The value in equity in terms of the FCFE would increase given a 17% cost of equity in its levered state. Apple Inc. is a takeover company. Its competitors like Hewlett-Packard, Intel Corporation, and even Microsoft Corporation were unable to match Apple’s P/E ratio of 37. 43 (Google Finance 2007). Apple’s balance sheet reflects greater assets and revenue, and increasing financial statements and projections—with the net income and operating income increasing in large magnitude. Despite the multinational corporation having to manage a more convoluted organization, it continues to get bigger and better… with larger projections and brighter future in the years to come.