FINC 440 7980 Discounted Cash Flow PDF

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FINC 440 7980 AAPL Discounted Cash Flow...

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Running head: APPLE INC. – DISCOUNTED CASH FLOW VALUATION

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Introduction The discounted cash flow (DCF) valuation method is used to calculate the value of the company’s stock. It is another method used to determine if a stock is undervalued or overvalued. This method calculates the present value of the future cash flows of a company using a discount rate to estimate the intrinsic value of the company’s stock. DCF is generally used to calculate the stock’s value by estimating the future cash flows over the next 5 or 10 years. It would not make sense nor provide an accurate estimate over a time period greater than 10 years ("Discounted Cash," n.d.). To calculate the DCF valuation in the paper the ValuePro online calculator was used. ValuePro is a valuation tool which uses the DCF method to determine the value of a company’s common stock. ValuePro uses 4 steps to complete the DCF valuation: 1. Forecast Expected Cash Flow 2. Estimate the Discount Rate 3. Calculate the Value of the Corporation 4. Calculate Intrinsic Stock Value The first step uses the growth rate, net operating profit margin, tax rate, investment rate and working capital rate of the company to create a forecast of the expected cash flow. The second step requires the investor to estimate the discount rate which is also referred to as the weighted average cost of capital (WACC). The third step requires calculating the company’s corporate value. This is done by adding the cash flow from operations (expected cash

APPLE INC. – DISCOUNTED CASH FLOW VALUATION

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flows discounted by the discount rate), residual value, and the short-term assets. The final step requires the calculation of the value to common equity which is the total value of liabilities. This amount is then divided by the number of shares outstanding which results in the intrinsic value of the company’s stock ("The 4-step," n.d.). Analysts can then compare the intrinsic value to the current market value to determine if the stock is undervalued or overvalued. This report will discuss the findings and principle assumptions of both the default and adjusted DCF valuation for Apple Inc. (AAPL) using the ValuePro online calculator. The assumptions used for the adjusted DCF ValuePro valuation will be explained in detail. The relevant cash flows will be discussed. Finally, the intrinsic stock values calculated using the ValuePro valuation tool will be compared to the current market value of AAPL stock. Analysis The following analysis will provide the findings and assumptions used to calculate the default and adjusted discounted cash flow valuation using ValuePro, a summary of relevant cash flows, and a comparison of the market value and intrinsic value of AAPL stock. Findings and Principle Assumptions Discounted cash flow valuation: Default ValuePro. The table in Appendix A shows the default DCF valuation calculated by ValuePro for Apple Inc. The default ValuePro calculations are based on the data inputs in the ValuePro database. The default inputs will provide an estimated value but

APPLE INC. – DISCOUNTED CASH FLOW VALUATION

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will not be as accurate as the valuation using adjusted inputs based on Apple’s financials. The intrinsic stock value calculated using the default DCF ValuePro valuation for AAPL was $1,670.49 per share. This is $1,498.20 greater than the current market value of $172.29 as of November 25, 2018 ("Apple Inc.," n.d.). This shows how much the valuation can differ if company specific data is not used in the calculations. Discounted cash flow valuation: Adjusted ValuePro. The table in Appendix B shows the adjusted DCF valuation calculated by ValuePro for Apple Inc. The intrinsic stock value calculated using the adjusted DCF ValuePro valuation for AAPL was $271.39 per share. This is $99.10 higher than the current market value of $172.29 as of November 25, 2018 ("Apple Inc.," n.d.). The principle assumptions used in the adjusted ValuePro valuation will be discussed further in the next section. Principle assumptions used in the adjusted ValuePro valuation. The table in Appendix C lists all assumptions used for the adjusted ValuePro DCF valuation. The revenues reported for Apple Inc. for 2018 were $265,595,000 which is $96,491,000 higher that the value used in the default calculation ("Apple Inc.," n.d.). The growth rate decreased by 2.44% to 12.06% which was the rate reported by NASDAQ ("Apple Inc.," n.d.). The net operating profit margin decreased by 8.94% to 26.69% which was the value reported by Yahoo! Finance. The tax rate was calculated by dividing the taxes owed by the EBIT, which resulted in a tax rate for 2018 of 18.86%. This was a decrease of 6.3% from the rate used in the default valuation. The

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current stock price listed by Yahoo! Finance is $172.29 per share. For 2018 Apple Inc. had 4.75 billion shares outstanding ("Apple Inc.," n.d.). The depreciation rate was calculated at 2.02% higher that the rate used in the default valuation which was only 2.09%. The investment rate used in the adjusted ValuePro valuation was calculated to be -5.01%. The value of both short-term assets and liabilities increased for use with the adjusted ValuePro model. The short-term assets increased by $68,002,000 and short-term liabilities increased by $76,953,000. The values used in the adjusted ValuePro valuation were retrieved from the balance sheet on Yahoo! Finance ("Apple Inc.," n.d.). The beta of AAPL stock according to Yahoo! Finance was 1.21. The value of debt outstanding was calculated to be $102,519,000 using the values of short-term and long-term debt for 2018 ("Apple Inc.," n.d.). According to GuruFocus the WACC of Apple Inc. is 9.34 ("Apple Inc (NAS:AAPL)," n.d.). The adjusted values were used to calculate the DCF for Apple Inc. using ValuePro. Cash Flows The FCFF refers to the amount of money that is left over from paying taxes and operating expenses. This is an important topic for shareholders because this is the amount of available funds used to pay investors in the company ("Calculating Free," n.d.). The chart below shows the free cash flow to the firm (FCFF) calculated by ValuePro for the next 10 years.

APPLE INC. – DISCOUNTED CASH FLOW VALUATION

Market Value vs. Intrinsic Value The ValuePro DCF valuation tool provided calculations of the default and adjusted stock value for AAPL. The stock values used in this comparison can be found in the table below. The stock value of Apple Inc. calculated using the default ValuePro data inputs resulted in a stock price of $1,670.49 per share. This indicates that the stock is extremely undervalued. However, this calculation used the default financial inputs from the ValuePro database and likely will not provide an accurate estimation of the value of APPL stock. The growth rate and net operating profit margin are greater than the adjusted data inputs obtained from Apple’s financial data. The number of shares outstanding used as the default input, 940.1 million, is about much less than the 4.75 billion that Apple Inc. actually reported for 2018 which

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could have resulted in a higher intrinsic value. The stock value of Apple Inc. calculated using the adjusted ValuePro data inputs resulted in a stock price of $271.39 per share. This also indicates that market value of AAPL stock, which is $172.29, is undervalued. The adjusted ValuePro DCF valuation will give analysts a more accurate estimation of the company’s future value because the data inputs are specific to each company. Based on the results of the DCF valuations it is clear that the current market price of AAPL stock is undervalued. Valuation Method DCF Valuation: Default ValuePro DCF Valuation: Adjusted ValuePro Current Market Value

Stock Value $1,670.49 $271.39 $172.29

Conclusion The discounted cash flow (DCF) valuation tool is a comprehensive calculation used to value a company’s stock by assessing the company’s future cash flows while using a discount rate to account for the time value of money. The ValuePro DCF online calculator was used to calculate the default and adjusted DCF values for Apple Inc. Both calculations resulted in values that show the current market price of $127.29 to be undervalued. The analysis provided an explanation of the assumptions used for the adjusted DCF calculation as well as the free cash flows to the firm.

APPLE INC. – DISCOUNTED CASH FLOW VALUATION

References The 4-step DCF valuation technique. (n.d.). Retrieved from ValuePro website: http://www.valuepro.net/approach/dcftech/dcftech.shtml Apple Inc. (AAPL) financials. (n.d.). Retrieved November 25, 2018, from Yahoo! Finance website: https://finance.yahoo.com/quote/AAPL/balance-sheet?p=AAPL Apple Inc. (AAPL) statistics. (n.d.). Retrieved November 25, 2018, from Yahoo! Finance website: https://finance.yahoo.com/quote/AAPL/keystatistics?p=AAPL Apple Inc. analyst P/E ratio growth rates. (n.d.). Retrieved November 25, 2018, from NASDAQ website: https://www.nasdaq.com/symbol/aapl/pegrowth-rates Apple Inc (NAS:AAPL) WACC %. (n.d.). Retrieved November 25, 2018, from GuruFocus website: https://www.gurufocus.com/term/wacc/AAPL/WACC/Apple%2Binc Calculating free cash flow. (n.d.). Retrieved from ValuePro website: http://www.valuepro.net/approach/freecash/freecash.shtml Discounted cash flow (DCF) analysis. (n.d.). Retrieved from Investing Answers website: https://investinganswers.com/dictionary/discountedcash-flow-dcf-analysis

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APPLE INC. – DISCOUNTED CASH FLOW VALUATION

Appendix A Apple Inc. Discounted Cash Flow: Default ValuePro Valuation

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APPLE INC. – DISCOUNTED CASH FLOW VALUATION

Appendix B Apple Inc. Discounted Cash Flow: Adjusted ValuePro Valuation

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Appendix C Assumptions for ValuePro.net Valuation: Apple Inc. (AAPL)

Excess Return Period (Years) (10 years is appropriate) Revenues ($ mil) (From Income Statement) Growth Rate (%) (Estimated Annual Growth Rate in Earnings in Future) Net Operating Profit Margin (%) (EBIT from Income Statement) Tax Rate (%) (From Income Statement: Taxes / Earnings Before Taxes) Stock Price ($) (Current Price per Share) Shares of Stock Outstanding (mil.) (Be careful with decimal) 10 Yr. Treasury Bond Yield (%) Bond Spread to Treasury (%) (1.5 is appropriate) Preferred

ValuePro.n et Assumption s

Your Assumption s

10

10

169,104

265,595

According to Yahoo! Finance the revenues for 2018 were $265,595,000.

14.5

12.06

The growth rate according to NASDAQ for Apple was 12.06% ("Apple Inc.," n.d.).

35.63

26.69

According to Yahoo! Finance the net operating profit margin for 2018 was 26.69%.

25.16

18.86

Explain the Reasoning for Your Assumptions

No adjustment made.

Using the income statement from Yahoo! Finance the calculation of the tax rate for 2018 is as follows: $13,372,000/$70,898,000 = 0.1886

156.25

172.29

The current stock price according to Yahoo! Finance is $172.29.

940.1

4,750

According to Yahoo! Finance there were 4.75 billion shares outstanding for 2018.

5

5

No adjustment made.

1.5

1.5

No adjustment made.

7.5

0

Apple does not have preferred stock.

APPLE INC. – DISCOUNTED CASH FLOW VALUATION Stock Yield (%) Depreciation Rate (%) (Percentage of Revenue; Calculate) Investment Rate (%) (Percentage of Revenue for Capital Expenditures Calculate) Working Capital (%) (Percentage of Revenue – WC is Current Assets; Calculate) Short Term Assets ($ mil.) (Current Assets from Balance Sheet) Short-Term Liabilities ($ mil.) (Current Liabilities from Balance Sheet) Equity Risk Premium % (Should be between 5% and 6%) Company Beta for Stock (Number) (Look up Beta) Value (Book) of Debt Outstanding ($ mil.) (L-T + S-T Debt from Balance Sheet) Value Preferred Stock Outstanding ($

2.09

4.11

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Using the statement of cash flows from Yahoo! Finance the calculation of the depreciation rate is as follows: $10,903,000/$265,595,000=0.0411

5.3

-5.01

Using the statement of cash flows from Yahoo! Finance the calculation of the investment rate is as follows: -$13,313,000/$265,595,000=-0.0501

-6.04

-6.04

63,337

131,339

According to Yahoo! Finance the shortterm assets for 2018 were $131,339,000.

39,913

116,866

According to Yahoo! Finance the shortterm liabilities for 2018 were $116,866.

3

5.5

1.05

1.21

0

102,519

According to Yahoo! Finance the beta is 1.21. Using the balance sheet from Yahoo! Finance the calculation of debt outstanding is as follows: Short-term debt $8,784+ long-term debt $93,735 = $102,519,000

0

0

No preferred stock outstanding.

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mil) Company According to GuruFocus the WACC for WACC (%) 8.15 9.34 Apple for 2018 is 9.34 ("Apple Inc (Look up or (NAS:AAPL)," n.d.). Calculate) Data retrieved from Yahoo! Finance for “Your Assumptions” unless otherwise stated ("Apple Inc.," n.d.).

APPLE INC. – DISCOUNTED CASH FLOW VALUATION

Appendix D

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