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 point
of 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.

In the last three and a half years, Obama said, the U.S. private sector has created 7.5 million new
jobs, which is at a pace of more than 2 million jobs annually.In tandem with employment
progress, the United States also is whittling down its federal deficit at the fastest rate in 60 years.
The president emphasized he will keep making the case for smart investments and fiscal
responsibility to keep the U.S. economy in a growth pattern, create more jobs and keep the U.S.
business sector competitive in the global economy
Smart tax policy is a key ingredient of economic growth, and the tax policy of the last three years
has had a marked impact on economic activity. This influence has been particularly evident since
mid-2003 when the Bush tax cuts were passed by.
Investment is one of main components of GDP, and also one of most variable. Nevertheless,
recent indicators suggest that the information technology revolution was real, and booming
orders for computer equipment and software are setting records once again. The average rate of
investment growth after the 2003 tax cut has been 14.6 percent. In real dollars, investment is
$774 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.
Deficits 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 taxes. Lower
spending is the only solution to the deficit problem that doesn't 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 60 years, the U.S. GDP has grown at an average rate of about 3.3%. For the U.S.
economy to maintain that pace between 2006 and 2016 it would need to grow by about 5.9%
over the next 5 years, according to BMO. U.S. real GDP would need to grow 1.7% over the
next five years. The U.S. economy continues to muddle through, barely moving faster than a
slug. With growth in the second quarter at meager 1.3%

Leaders at the summit, representing the 20 most advanced and largest global economies, agreed
on specific steps to strengthen the global economy, address climate change, bolster the
international tax system, expand trade, strengthen nuclear industry liability, improve workplace
safety, combat corruption and promote global development, according to the White House.
In addition, the G20 leaders reached these agreements:
To phase down the production and consumption of a potent category of greenhouse gases
through the Montreal Protocol.
To work together to address international tax evasion, to fix tax rules that allow multinational
companies to avoid paying tax anywhere, and to support efforts by less developed countries to
strengthen their revenue collection systems.
To achieve a strong multilateral trade agreement in December 2013, with trade facilitation at its
core, and to extend the standstill on protectionist trade measures for an additional two years
through 2016.
Were moving ahead with our development agenda, with a focus on issues like food security
and combating corruption, Obama said.
U.S. manufacturing sector is rebounding, and new regulations have strengthened the banking
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.

The trend for USs economic growth for the past five years.

Inflation
In September of 2013, the Consumer Price Index for all items eased for the third month in a row
to 1.2 percent before seasonal adjustment. All Urban Consumers CPI increased 0.2 percent from
August, on a seasonally adjusted basis .
The energy index rose 0.8 percent in September and accounted for about half of the seasonally
adjusted all items increase. All the major energy component indexes rose in September. The food
index was unchanged, with declines in the indexes for fruits and vegetables and for nonalcoholic
beverages offsetting increases in other indexes.
The index for all items less food and energy rose 0.1 percent in September, the same increase as
in August. The shelter and medical care indexes also advanced and accounted for most of this
increase. The indexes for new vehicles and for airline fares rose as well, while the apparel and
recreation indexes declined.
The all items index increased 1.2 percent over the last 12 months; this was the smallest 12-month
increase since April. The index for all items less food and energy has risen 1.7 percent over the
last year with the shelter and medical care indexes both up 2.4 percent. The food index has risen
1.4 percent, while the energy index has declined 3.1 percent.

Investor expectations for U.S. inflation have declined to the lowest in more than three years even
as data point to economic recovery, JPMorgan Chase & Co., said, citing surveys.
Investors expect U.S. inflation to average 1.68 percent in the next 12 months, compared with
1.85 percent in the previous survey in March. Over the next two-to-five years, the rate is seen at
2.4 percent, the lowest since the July 2010 survey, JPMorgan said. The report was based on
responses from 320 investors including asset-management companies, pension funds, banks
and hedge funds.

The five year inflation pattern is summarized in the diagram above. That shows inflation to be at
the highest rate in 2009 and still prevails to exist but at a steady rate.

Central Banks Expected monetary policy:

Pakistan

Analysts had widely expected the State Bank of Pakistan to raise its monetary policy rate - a rate
at which banks borrow from it through its discount window - at some point this year in order to
tighten Pakistan's monetary supply. It was offering an interest rate of 11.7% before.
The State Bank of Pakistan (SBP) has changed the schedule of the monetary policy. As per the
new schedule, subsequent monetary policy statements will be announced during the first half of
alternate months, i.e. in January, March, May, July, September and November.
The monetary policy statement was last announced in June 2013.
The central bank reduced the discount rate by 0.5 percent to nine percent for the months of June
and July. Previously, the central bank was widely expected to revise the current 9 percent policy
rate upward at least by 50 basis points given the increasing inflationary pressures in the country.
In July, the Consumer Price Index inflation clocked in 8.5 percent which the analysts believed
would further escalate in the months ahead. The Karachi stocks market reacted strongly to the
reports forecasting a hike in the cost of borrowing. However, the recent approval by the IMF of
$6.64 billion of three-year Extended Fund Facility for dollar-hungry Pakistan changed,
apparently, the scenario. The IMF, previously, was believed to have been pressuring Pakistan for
bringing the monetary policy in accordance with inflation numbers. In its fresh EFF program,
however, the international lender has urged Islamabad to focus on attracting foreign investment
in the country. This has relieved pressure on the market sentiments where a status quo is widely
being expected today in the SBP's monetary policy stance. Whether or not the State Bank
behaves as per expectations, however, is yet to be seen.

United States
U.S. monetary policy affects all kinds of economic and financial decisions people make in this
countrywhether to get a loan to buy a new house or car or to start up a company, whether to
expand a business by investing in a new plant or equipment, and whether to put savings in a
bank, in bonds, or in the stock market, for example. Furthermore, because the U.S. is the largest
economy in the world, its monetary policy also has significant economic and financial effects on
other countries.
Before the financial crisis, the typical central bank conducted monetary policy by controlling a
short-term nominal interest rate usually a rate charged in interbank or other wholesale money
market transactions. In the U.S., as in many other countries, this control was accomplished by
manipulating the supply of the central bank's monetary liabilities. Before the crisis, a relatively
stable, interest-sensitive demand for reserves by U.S. banks arose from the array of regulations
surrounding the use of those balances. Legally required reserves were small, and with no interest
earned on reserves, banks sought to economize on excess reserves. Against this incentive to
minimize reserve holdings, banks' demand was supported by the use of reserves in settlement of
interbank obligations and by the desire to avoid costly overdrafts.
As the economy weakened in the fall of 2008, the Fed drove the interbank interest rate to near
zero. As a general matter, unconventional monetary policy is associated with the extended period
of time since then, during which the Fed's interest rate target has been essentially as low as it can
go in other words, at the "zero lower bound." The ability of banks and other members of the
public to hold currency constrains the ability of the central bank to enforce a nominal interest
target much less than zero. But in an exceptionally weak economy, the appropriate real rate of
interest may be negative. A central bank that has credibility for low and stable inflation so that
inflation expectations are reasonably well anchored will have difficulty making the real
interest rate more than a little bit negative.
One possible strategy at the zero lower bound is to seek a lower real interest rate by engineering
an increase in expected inflation, above the rate the central bank would otherwise target. By
departing from its inflation target for a time, a central bank may be able to support economic

growth by lowering the real interest rate, despite not being able to reduce the nominal interest
rate below zero. Central banks operating at the zero lower bound have generally avoided this
approach, and for good reason, in my view. In the United States, for example, the process of
achieving credibility for low inflation was difficult and costly, taking the better part of two
decades. This experience suggests that engineering medium-term variations in inflation
expectations would be quite difficult to implement and would set precedents that pose longer-run
risks to the central bank's credibility..
The Fed has deployed a number of approaches to communicating about its intentions and
expectations for the path of short-term rates in recent years. The FOMC began by including
qualitative language in its policy statements characterizing the time period over which it
expected exceptionally low interest rates to be appropriate: At first it was "for some time"
(December 2008 and January 2009), and then "an extended period" (March 2009 through June
2011). In August 2011, the Committee sharpened its guidance by specifying the time before
which an increase in the federal funds rate seemed unlikely and then moving this date further
into the future several times. Finally, in December 2012, the Committee replaced this date-based
forward guidance with a threshold for the unemployment rate, saying that "the exceptionally low
range for the federal funds rate will be appropriate at least as long as the unemployment rate
remains above 6- percent, inflation between one and two years ahead is projected to be no
more than a half percentage point above the Committee's 2 percent longer-run goal, and longerterm inflation expectations continue to be well anchored." This form of forward guidance
remains in place today.
These communication efforts have been generally aimed at easing financial conditions by
pushing back the dates at which market participants believe short-term rates are likely to rise.
Such communications by the central bank, however, inevitably face a conundrum. Forward
guidance is effective when it alters the public's perception of the central bank's pattern of
behavior in response to incoming data in essence, the central bank's "reaction function." But
there's 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 bank reacts. The public might
reason that, under its existing pattern of behavior, the central bank expects low rates to be
warranted for a longer period because they expect the economy to be weaker. In this case,

forward guidance could have the paradoxical effect of reducing current economic activity, by
reducing expectations 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 FOMC's use
of numerical thresholds is in part an attempt to clarify that forward guidance about short-term
interest rates is about the Committee's reaction function, not its economic outlook.
Ideally, a central bank can make clear that its communications concern its future reactions to
incoming economic data. Forward guidance regarding central bank reaction patterns often takes
the form of criteria for particular decisions, as in the case of the FOMC's thresholds for raising
interest rates or the conditions under which the open-ended asset purchase program will likely be
wound down.
Designing such conditional guidance involves trade-offs, however. Credibility requires
consistency, over time, between a central bank's statements and its actual subsequent actions. A
central bank's statements will have greater immediate effect on the public's expectations the more
they are seen as limiting the central bank's future choices. Yet there are likely to be
circumstances, ex post, in which the central bank feels constrained by past statements. Yielding
to the temptation to implicitly renege by reworking 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 bank statements. So central banks face an ex ante trade-off, as well, between the short-run
value of exercising discretion and the ability to communicate effectively and credibly in the
future

Stocks and Bonds

US stock market consists of five stock exchanges. Measured by value of its listed companies'
securities, the New York Stock Exchange is more than three times larger than any other stock
exchange in the world. As of October 2008, the combined capitalization of all domestic NYSE
listed companies was US$10.1 trillion.NASDAQ is another American stock exchange and the
world's 3rd largest exchange after the New York Stock Exchange and Japan's Tokyo Stock

Exchange. However NASDAQ's trade value is larger than Japan's TSE.NASDAQ is the largest
electronic screen-based equity securities trading market in the U.S. With approximately 3,800
companies and corporations, it has more trading volume per hour than any other stock exchange.
The US stock market followed the following trend in past five years:

After US stock market crashed in 2008 it started to go up from 2009. Since then it is falling an
upward trend.Since mid-2008, the amount of outstanding U.S. debt has more than doubled to an
unprecedented $11.6 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.
However, the recent statistics of 2013 tell that bonds are increasingly shifting from risk relievers
to securities that add more risk for investors, Gavin, whose firm is one of the 21 primary dealers
of U.S. government securities that are obligated to bid at Treasury auctions, said on Oct. 21.
The bond market isnt as safe as it was.
People find better opporunities in stock as corporate profits for S&P 500 companies have almost
doubled since 2008, and earnings in each of the next two years will increase by more than 10
percent, data compiled by Bloomberg show. Thats more than twice as much as the 4.8 percent
increase that analysts project for 2013.

Of the 244 companies in the index that have reported third-quarter results, 76 percent posted
higher-than-estimated earnings, the data show. While earnings have helped fuel a 23 percent
advance in the S&P 500 to a record this year, its price-earnings ratio of 16.7 is still less than the
average multiple of 19.3 for the past 15 years.
Because of the growth outlook there are opportunities that provide compensation plus a margin
of safety that Treasuries do not, Jeffrey Schoenfeld, the chief investment officer at Brown
Brothers Harriman & Co., which oversees $33 billion, said on Oct. 23. There are better
opportunities than Treasuries right now if you do your homework.
Schoenfeld said the New York-based company sold of all its holdings of Treasuries and is
investing in financial company bonds and inflation-protected securities

Oil and gold outlook:

Gold prices are a good indicator of how healthy the U.S. economy is. When the price of gold is
high, that's when the economy is not healthy. Because investors flock to gold when they are
protecting their investments from either a crisis or inflation. When gold prices drop,that usually
means the economy is healthy. That's because investors have left gold for other, more lucrative,
investments like stocks, bonds or real estate.
To understand the economy, it's helpful to understand gold. In this article, you can track recent
trends in gold prices. You'll 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. It's currently at $1,402.50 an ounce. If you look at historical
gold prices, you'll see that it will probably continue this downward trend. Before the 2008
financial crisis, gold hovered around $400 an ounce.

In case of oil, according to the International Monetary Fund, a $10-a-barrel increase in the price
of oil reduces U.S. GDP growth by 0.5 percentage points

While 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. Here, according
to NPR, are some examples of that cascading economic effect:

Airlines are likely to add fuel surcharges to the price of tickets -- they've raised fares
four times since the start of 2011, according to the New York Times, boosting the lowest ticket
price 10% since last January.

Delivery companies such as Federal Express (FDX ) and UPS (UPS) are likely to raise
rates.

Food prices will reflect the higher costs farmers incur to run their tractors and other
equipment. Transport costs would also rise.

Plastic goods might increase in price, since plastic is derived from oil.

Crowding out -- since consumers' real incomes are already down 8.1% in the last
decade, those higher prices will limit what consumers can spend elsewhere.
OPEC's influence on the U.S. economy effects the determining production and prices. So if they
raise the price of a barrel of oil, that makes prices go up in the U.S. which is not good for the
U.S. economy because people have less to spend

Apple Inc.
The capital market product that we chose is Apple Inc. shares
Apple, Inc. designs, manufactures and markets personal computers and related personal
computing, and mobile communication devices. It is engaged in designing of Mac laptops, along
with OS X, iLife, iWork and professional software. Apple provides the digital music revolution
with its iPods and iTunes online store. The company's products and services include Macintosh

computers, iPhone, iPad, iPod, Apple TV, Xserve, 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 network carriers, wholesalers, retailers, and value-added resellers to the
consumer, small and mid-sized business, education, enterprise, government and creative markets.
In addition, the company also sells a variety of third-party Mac, iPhone, iPad and iPod
compatible products, including application software, printers, storage devices, speakers,
headphones and various other accessories through its online and retail stores. The company was
founded by Steven Paul Jobs, Steve Wozniak and Ronald Gerald Wayne on April 1, 1976 and is
headquartered in Cupertino, CA.
AAPL' is the stock symbol under which Apple Inc. trades on theNASDAQ (National Association
of Securities Dealers Automated Quotations)stock market. Apple originally went public on
December 12, 1980, with an initial public offering at US$22.00 per share. The stock has split 2
for 1 three different times on June 15, 1987, June 21, 2000 and February 28, 2005. Apple initially
paid dividends from June 15, 1987 to December 15, 1995. On March 19, 2012, Apple announced
that it would again start paying a dividend of $2.65 per quarter (beginning in the quarter that
starts in July 2012) along a $10 billion share buyback which would commence September 30,
2012, the start of its fiscal 2013 year.
In, order to forecast present value of Apple Inc., we are going to do it under three models with
our own assumptions.

Growth Rate:
First, we have to find out average growth rate for Apple Inc in the past 5years in order to start our forecast. We will adjust the company growth rate

with economy and the industry it operates in to predict the growth in future
years.
Company Growth Rate:
For the company growth rate we have taken change in net income in the
past 5-years to calculate the average growth rate for the company. We have
calculated it on net income and not on dividend change because as
mentioned earlier Apple stopped giving dividends in 2005, and then started
again in 2012 at $ 2.65. We had to take into account the past 5 years. Apple
is a company who grew in recent years by making huge revenues so we took
net income to calculate its growth.

2008
2009
2010
2011

Net
(millions)
4830
8235
14013
25922

2012

41733

2013

37037

Average
rate

Income

8235-4830/4830
14013-8235/8235
2592214013/25922
4173325922/25922
3703741733/41733

0.705
0.702
0.850
0.610
-0.113
2.754/5*100
55.08%

growth

In majority of the years Apples growth rate was above 60% except for 2013,
where it faced negative growth, hence, the average growth came out to be.
US Economy Growth Rate:
To calculate the growth of the economy we have taken US GDP growth in the
past 5-years.
Due to the crisis in 2008 GDP growth is very low so the average growth for
the economy turned out to be 1.24%.

GDP Growth

2008
2009
2010
2011
2012
2013
Average Growth
Rate

-0.3%
-2.8%
2.5%
1.8%
2.8%
1.9%
0.983%

Industry Growth Rate:

Apple Inc is operating in technology industry; its major competitors are other
mobile phone companies, like Samsung and Blackberry. So we to took out
the average of the industry growth by taking the 5-year net income growth
of these two competitors and then taking their average.
Blackberry
Apple
Samsung

Growth in 5-years
18.74%
39.58%
55.08%
37.4%

The industry average growth turned out to be 37.4%. The note to be taken here is
that Samsung is becoming major threat for Apple Inc.

Forecasted constant growth for the future:

Apples forecasted constant growth rate after 2013.
55.08%+1.24%+37.4%/3
= 31.24%

Discount of cash flow techniques:

We will calculate WACC to forecast the cash flows & discount rates
can be used in the valuation of stocks.

Weighted Average Cost of Capital:

WACC= we*re+wp*rp+wd*rd (1-T)

Return of equity (re):

CAPM= rrf+(rrf-rrm)*b
Rrf= 2.5% (Bloomberg)
Beta= 1.01 (Google Finance)
Assumptions:
It is assumed by the equity returns of the overall market and is determined
by the stocks markets return at discreet intervals.
Return on market:
As Apples shares are traded under NASDAQ we have calculated value of
return on market by taking 5-year average of returns on NASDAQ.

2008
2009
2010
2011
2012
2013
Average return on
market

RETURN ON MARKET
(%)
-36.55
25.94
14.82
2.10
15.89
32.15
9.06

CAPM=re= 2.5%+(2.5%-0.8861%)*1.01
=0.0413
Cost of debt:
We have taken finance cost of only one-year because Apple took a loan in
2013 before that it didnt have any loan in the data of past five years.
Finance cost/total debt = 136000/16960 = 8.01%
Weight of debt:
Total debt debt/total-debt+equity

16960/140509
=12.07%
Weight of equity:
Total equity/equity+debt
123549/140509 = 87.93%
Preferred Stock:
The Company has five million shares of authorized preferred stock, none of which is issued or
outstanding. So the value of preferred stock will be 0.
WACC= (0.8793*0.0413) + (0.1207%*0.0801(1-26.2%))
=0.095
Dividend Discount Model (DCM):
Is the method used for valuation of stock through current dividends. Investors must value a
stream of dividends that may be paid forever; since common stock has no maturity value.The
dividend Stream is uncertain: There is no specified number of dividends, if in fact any are paid at
all & dividends are expected to grow in most cases.

Current Dividend is $ 3.05.

Zero-growth Model:
Do/k(re)
3.05/0.0413

=73.8

It tells a fixed dollar stream calculated through current dividend. Under this
dividend price the long term will be 73.8 at zero growth.

Constant-Growth Model:
Do(1+g)/k-g
3.05(1+0.3124) / (0.0413-0.3124)
=-14.7
In the constant growth model the value calculated is -14.7% , 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 for ever so negative dividend
stream forever cannot be applicable.

Multiple-Growth Model:

2010

Dividends
0

2011

Dividend Growth %
0
0

2012

2.65

2013

3.05

0.15

2014
2010= 0
2011= 0
2012= 2.65

Constant growth of
31.24%

2013= 2.65 (1+0..15)

=3.05
2014= 3.05 (1+0.3124)
=4.01
P0= 4.01/(0.0413-0.3124)
=-14.79
-14.79+3.05 =-11.74
rs= 4.31%
NPV (Cash-flow mode on calculator)
= -10.596

This is also coming negative so this cannot be applied. The negative value in
the two streams because zero dividends are paid in the initial years.
FREE CASH-FLOW TO EQUITY:
It is the measure of much cash can be paid to the equity of the company
after all expenses, reinvestments and debt repayment.
We have calculated FCFE for the next five years in order to get the cashflows.
2010
NET INCOME
ADD AMORTIZATION & DEPRICIATION
LESS CHANGE IN W.C
LESS CHANGE IN C.E
ADD DEBT ISSUE
ADD DEBT REPAYMENT
FCFE
FCFE per share

(Millions)
14013
1027
12100
21200
0
0
-18260
-0.10

2011
NET INCOME
ADD AMORTIZATION & DEPRICIATION
LESS CHANGE IN W.C
LESS CHANGE IN C.E

(Millions)
25922
1600
(57600)
(74500)

ADD DEBT ISSUE

ADD DEBT REPAYMENT
FCFE
FCFE per share

0
0
-104578
-1.13

2012
NET INCOME
ADD AMORTIZATION & DEPRICIATION
LESS CHANGE IN W.C
LESS CHANGE IN C.E
ADD DEBT ISSUE
ADD DEBT REPAYMENT
FCFE
FCFE per share

(Millions)
41733
2600
(2990)
(94000)
0
0
52657
-0.56

2013
NET INCOME
ADD AMORTIZATION & DEPRICIATION
LESS CHANGE IN W.C
LESS CHANGE IN C.E
ADD DEBT ISSUE
ADD DEBT REPAYMENT
FCFE

FCFE per share:

=FCFE/no. of shares outstanding
=33977, 000, 000/899738,000
=37.7

Zero Growth Model:

P0=FCFE per share/k
=37.7/0.0413
=912.833

(MILLIONS)
37037
5800
(10517)
(15303)
16960
0
33977

Constant-Growth Model:
P0= FCFE per share / (K G)
37.7/(0.0413-0.3124)
= -139.063

Multiple-Growth Model:
P0 = PV of FCFE during the non-Constant period + PV of FCFE during the constant
Growth Period
2010

FCFE
-0.10

Growth
10.3

2011

-1.13

2012

-0.56

2013

37.7

2014
-

1215.45

-0.50
-68.32

2010:
-0.10 (1+10.3)
=-1.13
2011:
-1.13(1+(-0.50))
-0.56
2012:
-0.56(1+(-68.32))
=37.7
2013:
37.7(1+31.24)

Growth at a constant rate

of 31.24

=1215.45
P3: 1215.45/(0.0413-0.3124)
= -4483.40

PVconstant growth= -4483.40/(1+0.3124)3

= -1983.40
PVnon-constanf growth: (-1.13/(1+0.0413))+(-0.56/(1+0.0413)2)+(37.7/(1+0.0413)3)

=31.79
Multiple-growth model:

P0= -1983.40+31.79=
= -1951.61
Analysis of FCFEE:
The FCFE of the company is coming positive with zero growth model which
means that the with no growth it has positive cash flows that he can pay
to it equity holders. In the constant growth model the cashflow is coming
negative -139.063 , this is due to the reason that company has immensely
increased its capital expenditure by investing in research and
development so that they can come up with new innovations to compete
with Samsung. In the multiple growth model of Apple the cashlows are
coming negative again. Another reason for this can be the fall in growth of
net-income from 85% in 2011 to 11.3% in 2013.

Free Cash Flow To Firm Model:

2010
FCFE
Add Interest*(1-T)
Add Principle Repayments

(MILLIONS)
-18260
0
0

Less New Debt Issue

Less Preferred Dividends
FCFF

0
0
-18260

2011
FCFE
Add Interest*(1-T)
Add Principle Repayments
Less New Debt Issue
Less Preferred Dividends
FCFF

(MILLIONS)
-104578
0
0
0
0
-104578

2012
FCFE
Add Interest*(1-T)
Add Principle Repayments
Less New Debt Issue
Less Preferred Dividends
FCFF

(MILLIONS)
52657
0
0
0
0
-52657

2013
FCFE
Add Interest*(1-T) 136*(1-26.2%)
Add Principle Repayments
Less New Debt Issue
Less Preferred Dividends
FCFF

Zero-Growth Model:
V0

= FCFF / WACC

=32387.368/0.095
=340919

Constant Growth Case

V0

= FCFF / (WACC G)

(MILLIONS)
33977
100.368
0
(1690)
0
32387.368

=32387.368/(0.095-0.3124)
= -148975.9338

Multiple-Growth Model:

2010

-18260
4.72

2011

-104578
-0.4

2012

-52657
-1.61

2013

32387.36

2014

42505.17
Growing at
constant rate of
31.24%

2010:
-18260(1+4.72)
=-104578

2011:

-104578(1+(-0.4))
=-52657

2012:
-52657(1+(-1.61))
=32387.36

2013:
32387.36(1+0.3124)
=42505.17
P3= 42505.17/(0.0413-0.3124)
=-156787.79
PVconctant growth: -156787.79/(1+0.3124)3

=-69630.72
PVnon-constant growth: (-104578/(1+0.0413))+(-52657/(1+0.0413)2+

(32387.36/(1+0.0413)3)
= -120308.56
Multiple Growth: -69630.72+(-120308.56)
= 18999.28

FCFF ANALYSIS:
FCFF is carried out to express the net amount of cash that
is generated for the firm. Again in our calculations only in
zero growth model we are getting a positive value which
means if the company grows at zero rate it will generate
positive cash flows for the future years. Under constant
the value is coming negative the reason for this is again
high investment in capital expenditure. The multiple

growth is calculated by taking the values of FCFF in the

past 5 years due to which our multiple growth is negative.
The reason for this is that in the previous years Apple did
not have any loan or loan repayments due to which its
capital expenditure outweighed that FCFF calculations.

Stock prices in past 5-years:

Market cap P/E ratio

Todays 1 year
change change

AAPLAppleInc

$467.9B

13.3

+1.29% -9.90%

HPQHewlett-Packard Co

--

NM

-0.58% +87.28%

BBRYBlackberry

$3.4B

1.2

-16.41% -27.02%

--

0.00%

Peers & Competitors

SSNLFSamsung Electronics Co Ltd $213.6B

+16.00%

1 year
trend

It is believed that Samsung is giving a tough competition to Apple but in the stock market
Apples shares continue to be the market leader not only with its competitors but overall as well
it is largest US company according to its market value. Shares of its one of the major competitor
blackberry have fallen dramatically whereas, the only threat that Apple might face from is HP.
Past Performance:
Apples shares bottomed for a decade at $6.56. On April 17, 2003, Apples shares began a
dramatic ascent as the companys sales and earnings began to rocket. The stock reached $199.83
on Dec. 28, 2007 -- then plummeted to $119 by late-February 2008 after a disappointing forecast
from the company. The stock rebounded to nearly $190 in May 2008, then crashed again with the
market meltdown later that year. After falling as low as $78.20 on Jan. 20, 2009, the stock began
the climb that took it above the $400 mark.
Apples sales have tripled from $9.08 billion in its second fiscal quarter of 2009 to a record $28.6
billion in its latest quarter, ended in June. The stock prices continued to rise in 2010-2012 as
apple made record breaking profit. Apples annual profits increased by 27% in the year 2012. In
past 5 years its stock value increased by more than 400%.
Future Prospect:

The 47 analysts offering 12-month price forecasts for Apple Inc have a median target of 550.00,
with a high estimate of 777.00 and a low estimate of 360.00. The median estimate represents a
+4.41% increase from the last price of 526.75.

A recommendation from 55 analysts was made whether to invest in Apples shares or nit. 37 of
them were strongly in favor to invest in Apples shares. Apples earnings per share are estimated

to reach $ 13.92 whereas; the forecasted profit is $54.2 billion in the following year. The high
profits are an attraction for investors to invest in Apples shares. Also Apple has increased its
research and development expenditure by 32% and there are chances for new innovations which
can further increase their profits.

Conclusion:
According to our analysis the model that can applied to Apple is zero growth
model the reason behind this is that it is the only model under which Apple is
getting positive values in future. Under other to models Apple expects negative
cash flows if it grows at a constant rate of 31.24% from now. The reasons for this
are mentioned earlier which is high capital expenditure as Apple increased its
research and development to almost 35%, a major reason behind this is that Apple
facing increasing competition from Samsung. Which has caused negative growth
for Apples net income which we expect will further fall in the future years. But
Apple is a well-established brand with a good market repute so there aqre minimal
chances of it going in loss.
Overall Analysis
After the recession of 2008 the US economy is making a gradual recovery. Its economic growth
is increasing and at the same time it is facing a persistent rate of inflation. But the economy still
isnt able from the debt deficit it has faced. The debt continues to increase and investors have
stopped investing in Treasury Bonds which government uses to finance itself. What US
government might have to do to increase the demand for treasury bonds is to increase the interest
rates; right now it is following the zero lower bound policy. But 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.
As people have lost their trust in government bonds there are chances that they might start
investing in shares as they are now looking for more secured securities. Apples stock market has
a bright future in this case as their shares are doing well in the stock market and further

investment can raise their shares even more. It is safer to invest in Apples shares as there are
very few chances for its demand to fall because Apple has now become a status symbol for
people and hence they have developed brand loyalty against it. But 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 companys shares as
well.