Case Study Analysis

Calculating cost of capital for Apple co.

In the study we need to calculate cost of equity, debt and WACC for Apple.

Period used: 5 years

Return Interval = Monthly

Market Index: S&P 500 Index

Market risk premium?

Risk free rate?

Marginal tax rate for Apple?

You need adjusted close prices (adjusted price takes into account dividends and stock splits. Apple hasn't had split in last 5 years so that's ok.) for Apple going back from 6/1/2020 for 60 months.

It means adjusted close prices for : 6/1/2020, 5/1/2020, 4/1/2020 .... 7/1/2015.

1- Calculate levered Beta (using linear regression).

2- Calculate Jensen's alpha (calculate the annualized Jensen's beta). Has Apple stock performed better than expected in last five years?

3- Calculate after tax cost of debt for Apple. To do that look at Apple's 10-k filing with SEC for (9/28/219) and look up its total debt: D = short term debt + Commercial paper + long term debt. You need to look at the notes section of the report for detailed info on liabilities. Not all liabilities are considered debt. You also need interest expense for the year. You can also find it in 10-k report.

4- To calculate cost of debt we use the approximation: cost of debt = interest expense /total debt (D). Make sure to calculate after tax cost of debt.

5- Calculate leverage ratio for apple: D / E. We use book value of debt (same as above) and market value of equity as of 6/1/2020. (value of debt and equity are calculated few months apart. It's ok for our purpose)

6- Calculate WACC for Apple.

7- Calculate un-levered Beta

Present your calculation in an excel work sheet in an easy to follow, clear, clean and documented manner. Everyone is supposed to look at it and figure out what you did. Also report on what you did in 3-4 pages in a word document