FINC 3420 – Intermediate Corporate Finance
Prof. Katya Emm
Homework Assignment 2
Firm Valuation – Apple Inc.
Read: ‘Corporate Finance,’ Berk and DeMarzo, Chapter 9; Review relevant class notes.
Prepare: Working individually, answer the questions below. Fill the shaded blank cells in the accompanying Excel template spreadsheet. Be sure to perform calculations by using formulas that refer to the collected data in the same file. Upload the Excel file with your work to Canvas.
Our goals: We will practice valuing an actual firm using the concepts and techniques introduced in the course
You work in a large brokerage firm and your assignment is to analyze the stock of Apple Inc. (NASDAQ: AAPL). Your boss recommends determining prices based on relative valuation (multiples), the dividend discount model and discounted free cash flow valuation method. You determine that Apple’s cost of equity is 9% and its weighted average cost of capital is 7.5%. You estimate that Apple’s dividends and free cash flows currently grow at 3% and forecast that they will continue to grow at 3% indefinitely.
To gather any additional information, go to Yahoo! Finance (finance.yahoo.com). Enter the symbol for Apple (APPL). From the main page for Apple, click “Statistics.” Note the following terms used on the website:
- ‘Trailing Annual Dividend Rate’ is dividend amount paid last year,
- ‘EPS (TTM)’ is trailing twelve months EPS,
- ‘levered free cash flows (TTM)’ is trailing twelve months FCFE
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FINC 3420 – Intermediate Corporate Finance
Prof. Katya Emm
1. Relative Valuation (30 points)
Estimate Apple’s share price using (a) trailing P/E and (b) EV/EBITDA multiples of Microsoft Corp, Apple’s main competitor. Obtain Microsoft’s trailing P/E and EV/EBITDA ratios from Yahoo! Finance (finance.yahoo.com).
- Dividend Discount Model (30 points)
Estimate Apple’s share price based on the dividend discount model.
3. Discounted Free Cash Flow Valuation Method (30 points)
Estimate Apple’s share price based on the discounted free cash flow valuation method using free cash flows to equity (FCFE).
- Recommendation (10 points)
What recommendation can you make as to whether your clients should buy or sell Apple stock based on your price estimates?
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