After graduating with a degree in finance, you land a job at Apple as a financial analyst. The first project to which you have been assigned is the valuation of a potential acquisition target. Apple is considering widening its competition with Amazon to include big-box retail sales. To that end, Apple is exploring the purchase of a mass merchandiser that is likely to be valued at around $115 billion.

You have been asked to retrieve Apples WACC as it is often used as the appropriate discount rate when valuing acquisition targets. Sitting at a Bloomberg terminal, you pull up Apple's current WACC. Before sending the WACC to your manager, you pause and ponder the following questions:

1. Is it appropriate to use Apples WACC to value this target firm? Why or why not?

2. Will using Apples WACC as the required return cause us to make a bad investment decision? Why or why not?

3. If we choose not to use Apples WACC, how can we come up with an appropriate required return for this investment?

4. What would be the most challenging aspects of running an analysis to come up with the appropriate required return?

Write a memo to the manager of your team, Emma May, that includes Apples WACC and addresses these questions.

Apple Inc Cost of Capital - Current Market Value Period MR 2022Q1 Capital Structure (Millions of USD) 3) Equity 4 Debt Cost (A-T) 5) Preferred Equity WACC Weight 95.9% 4.1% 0.0% Cost 9.6% 2.3% 0.0% WxC 9.2% 0.1% 0.0% 9.3% Market Cap 2,880,565.2 95.9% ST Debt 16,169.0 0.5% LT Debt 106,629.0 3.6% Pref. Eqty 0.0 0.0% Total 3,003,363.2 100.0% 6) History WACC EVA ROIC EVA Spread # Track Annotate a Zoom Economic Value Added (Millions of USD) 7) Net Operating Profit 8) Cash Operating Taxes NOPAT 116903.00 11402.75 105500.25 11.00- 10.50 WACC 9.3312 10.00- 9) Total Investment Capital Capital Charge 194730.00 18170.67 9.3312 9.00- 8.50 Economic Value Added 87329.59 8.00- 7.50 ROIC EVA Spread 54.18% 44.85% '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 Apple Inc Cost of Capital - Current Market Value Period MR 2022Q1 Capital Structure (Millions of USD) 3) Equity 4 Debt Cost (A-T) 5) Preferred Equity WACC Weight 95.9% 4.1% 0.0% Cost 9.6% 2.3% 0.0% WxC 9.2% 0.1% 0.0% 9.3% Market Cap 2,880,565.2 95.9% ST Debt 16,169.0 0.5% LT Debt 106,629.0 3.6% Pref. Eqty 0.0 0.0% Total 3,003,363.2 100.0% 6) History WACC EVA ROIC EVA Spread # Track Annotate a Zoom Economic Value Added (Millions of USD) 7) Net Operating Profit 8) Cash Operating Taxes NOPAT 116903.00 11402.75 105500.25 11.00- 10.50 WACC 9.3312 10.00- 9) Total Investment Capital Capital Charge 194730.00 18170.67 9.3312 9.00- 8.50 Economic Value Added 87329.59 8.00- 7.50 ROIC EVA Spread 54.18% 44.85% '12 '13 '14 '15 '16 '17 '18 '19 '20 '21