Compute Apples WACC from the attached files.In this assignment, the goal is for you to compute Apples weighted average cost of capital(WACC) and to appreciate the issues involved

Tasks:1. In general, when computing beta does it make sense to use the most data possible? Forexample, as General Electric Company (GE) has been a public company for more than 100years, does it make sense to use 100 years of data when computing GEs beta?2. Compute Apples beta and Apples required rate of return on equity (RE).3. Compute Apples required rate of return on debt (RD). Comment on whether the value youcomputed makes sense by comparing it to the risk-free rate you used in the CAPM.4. Compute the weights of debt and equity in Apples capital structure (i.e., wD and wE).5. Compute Apples WACC.6. If Apple were considering investing in a new project, say iMoon that flies people to themoon and back, would it make sense for Apple to use the WACC you computed to evaluatethat project (i.e., does it make sense for Apple to use the WACC you computed to discountthe projected cash flows from the iMoon project)?

Month S&P 500 Adjusted Close Oct-2011 1253.30 Nov-2011 1246.96 Dec-2011 1257.60 Jan-2012 1312.41 Feb-2012 1365.68 Mar-2012 1408.47 Apr-2012 1397.91 May-2012 1310.33 Jun-2012 1362.16 Jul-2012 1379.32 Aug-2012 1406.58 Sep-2012 1440.67 Oct-2012 1412.16 Nov-2012 1416.18 Dec-2012 1426.19 Jan-2013 1498.11 Feb-2013 1514.68 Mar-2013 1569.19 Apr-2013 1597.57 May-2013 1630.74 Jun-2013 1606.28 Jul-2013 1685.73 Aug-2013 1632.97 Sep-2013 1681.55 Oct-2013 1756.54 Nov-2013 1805.81 Dec-2013 1848.36 Jan-2014 1782.59 Feb-2014 1859.45 Mar-2014 1872.34 Apr-2014 1883.95 May-2014 1923.57 Jun-2014 1960.23 Jul-2014 1930.67 Aug-2014 2003.37 Sep-2014 1972.29 Oct-2014 2018.05 Nov-2014 2067.56 Dec-2014 2058.90 Jan-2015 1994.99 Feb-2015 2104.50 Mar-2015 2067.89 Apr-2015 2085.51 May-2015 2107.39 Apple Adjusted Closing Price 52.44 49.52 52.47 59.14 70.28 77.68 75.66 74.85 75.66 79.13 86.56 86.80 77.46 76.50 69.56 59.54 58.03 58.20 58.21 59.52 52.48 59.89 64.91 63.51 69.63 74.51 75.17 67.08 70.93 72.35 79.54 85.80 88.18 90.71 97.74 96.07 102.98 113.90 105.71 112.20 123.51 119.64 120.33 125.78 Jun-2015 Jul-2015 Aug-2015 Sep-2015 Oct-2015 Nov-2015 Dec-2015 Jan-2016 Feb-2016 Mar-2016 Apr-2016 May-2016 Jun-2016 Jul-2016 Aug-2016 Sep-2016 Oct-2016 2063.11 2103.84 1972.18 1920.03 2079.36 2080.41 2043.94 1940.24 1932.23 2059.74 2065.30 2096.95 2098.86 2173.60 2170.95 2168.27 2126.15 121.10 117.11 109.36 106.98 115.90 115.23 102.52 94.81 94.69 106.73 91.80 98.39 94.19 102.67 105.10 111.99 112.47 Assignment Two: Computing Apple's WACC In this assignment, the goal is for you to compute Apple's weighted average cost of capital (WACC) and to appreciate the issues involved. We will compute the WACC using information contained in Apple's most recent annual report. Apple's most recent 10-K filing (i.e., annual report) is available here: https://www.sec.gov/Archives/edgar/data/320193/000162828016020309/a201610-k9242016.htm Note that as Apple's fiscal year ends in September, we are using Apple's annual report for the fiscal year that ends in September 2016 (and not Apple's most recent quarterly report issued February 1st, 2017). Also note that Apple released its annual report to the market towards the end of October 2016. Information needed for Apple's equity weight (wE) and equity required rate of return (RE) To ensure we all use the same information, use the following data: Share Price: $113 (roughly the closing price towards the end of October 2016) Shares Outstanding: 5,500,281,000 (from the annual report) Risk-Free Rate: 2% (this is approximately the 10-year risk-free rate and is appropriate if we assume that the WACC will be used to evaluate projects that have a 10-year lifespan) Market Risk Premium: 6% (this is an estimate, recently the risk premium has been fluctuating between 5% and 6%) I have created an Excel spreadsheet that contains Apple's monthly adjusted closing price for the past five years along with the S&P 500's monthly adjusted closing value (see course website). 1 Use this information to compute Apple's beta and then use the Capital Asset Pricing Model (CAPM) to compute Apple's required rate of return on equity (RE). The following video may help you estimate beta if you are not sure how to do so: https://www.youtube.com/watch?v=8-MaljhswA4. Note that while we are using five years of monthly data, there is no right or wrong in using two versus three versus five years of data, daily versus weekly versus monthly returns, etc.. There are empirical issues with whatever range and/or frequency you choose. Also, there are issues regarding the choice of \"market\" used to compute market returns (I have used the S&P 500 stock index). It is important to understand that whatever value for beta you obtain, it will be an estimate and a noisy one at that. Thus, it is important to understand that your final answer is better understood more in terms of a range rather than a single value, making sensitivity analysis, as always, crucially important (note that I am not asking you to do the sensitivity analysis or compute a range but just for you to be aware of the issues involved). 1 The closing prices have been adjusted to account for dividends and stock splits. 1|Page Information needed for Apple's weight of debt (wD) and required rate of return on debt (RD) Marginal Corporate Tax Rate: 35% As we do not have information pertaining to the market value of Apple's debt or Apple's target capital structure, we will use the information in the annual report (i.e., the book values) to compute the weight for debt. Note 6 of the annual report provides detailed information about Apple's debt obligations. We will focus on Apple's long-term debt, the $78.384 billion reported below and taken from the table provided in Note 6 (Note 6 begins on page 58 and ends on page 60 of the annual report). Thus we will use $78.384 billion as our estimate for the value of debt. Apple's Long-Term Debt Structure To compute the required rate of return on debt, I want you to compute the weighted average effective interest rate of all the maturities listed in the table. When the effective interest rate is a range, be conservative and use the upper value. For example, the second entry in the table states that Apple has $12,500 million (i.e., $12.5 billion) in debt with maturities between 2018-2043. The effective interest rate on this debt ranges from 1.08%-3.91%. So 2|Page use the 3.91% in your computation of the weighted average effective interest rate of all the maturities. The first two entries and the last entry in your weighted average computation for the required rate of return on debt will look like the following: = 2,000 12,500 2,000 1.10% + 3.91% + + 3.86% 78,384 78,384 78,384 It is important to note that we could be arrested by the WACC police for doing it this way. We should be using the market value of Apple's debt to back out the required return on debt whenever possible. If a firm's debt is not publicly traded or the market prices are not reliable (because the bonds rarely trade, for example), then an alternative approach is to use the current required return on bonds for firms with the same credit rating as Apple. We have not done either so once you compute your value for RD, see if it makes sense (e.g., compare it to the risk-free rate we used in the CAPM above). Tasks: 1. In general, when computing beta does it make sense to use the most data possible? For example, as General Electric Company (GE) has been a public company for more than 100 years, does it make sense to use 100 years of data when computing GE's beta? 2. Compute Apple's beta and Apple's required rate of return on equity (RE). 3. Compute Apple's required rate of return on debt (RD). Comment on whether the value you computed makes sense by comparing it to the risk-free rate you used in the CAPM. 4. Compute the weights of debt and equity in Apple's capital structure (i.e., wD and wE). 5. Compute Apple's WACC. 6. If Apple were considering investing in a new project, say iMoon that flies people to the moon and back, would it make sense for Apple to use the WACC you computed to evaluate that project (i.e., does it make sense for Apple to use the WACC you computed to discount the projected cash flows from the iMoon project)? 3|Page