Cost of Capital The stock of Apple Inc. sells for $224.29, and last years dividend was $2.72. A flotation cost of 3.51% would be required to issue new common stock. Assume Apple plans to issue $1,125 million worth of preferred stock that pays an annual preferred dividend of $5.15 per share. The new preferred stock could be sold at a price to net the company $220 per share. Security analysts are projecting that the common dividend will grow at a constant rate of 9.8% a year. The firm can issue additional long-term debt at an interest rate of 3.83%, and its marginal tax rate is 26%. The market risk premium is 6.79%, the risk-free rate is 2.86%, and Apples beta is 1.22. The cost of short-term debt for Apple is 4.3%.

Part 1: Component Costs

A) Calculate the after-tax cost of short-term debt (8 points)

B) Calculate the after-tax cost of long-term debt (8 points)

C) Calculate the cost of preferred stock (8 points)

D) Calculate the cost of internal equity using both the CAPM method and the dividend growth approach (8 Points)

Part 2: Capital Structure

Visit the following website: https://investor.apple.com/investor-relations/sec-filings/ Under the SEC Groupings select Quarterly and choose the 10-Q report from August 1, 2018 in PDF format. On page 5, use the 2018 balance sheet values to estimate and identify the capital structure:shortterm debt (Commercial paper), long-term debt (Long-term debt), and common equity (Shares outstanding*stock price). Assume that Apple plans to raise capital according to current book weights (short-term and long-term debt) and market weights (common equity and preferred stock) in the future.

Page 5.

E) Calculate the capital structure weights (8 points)

F) Calculate the weighted average cost of capital (8 points)

G) Calculate the cost of new common stock (external equity) (8 points)

H) Calculate the weighted average cost of capital for new common stock (8 Points)

I only need PART 2 (E,F,G,H)

Part 1: Component Costs
A) Cost of Short-Term Debt
T
rstd
After-tax cost of short-term debt
B) Cost of Long-Term Debt
T
rd
After-tax cost of long-term debt
C) Cost of Common Equity
CAPM Appraoch:
b
rRF
RPM
rs
Dividend Growth Approach:
D0
g
D1
P0
rs
D) Cost of Preferred Stock
Dps
Pps
rps
Part 2: Capital Structure
E) Capital Structure Weights
Amount of Short term debt (millions)
Amount of Long term debt (millions)
Amount of Common equity (millions)
Amount of Preferred stock (millions)
Wsd
Wd
Ws
Wps
F) Weighted Average Cost of Capital
After-tax cost of short-term debt
After-tax cost of long-term debt
rs (based on CAPM)
rps
WACC
G) Cost of New Common Stock
D0
g
D1
F
P0
re
H) Weighted Average Cost of Capital for New Stock
After-tax cost of short-term debt
After-tax cost of long-term debt
re
rps
WACC (assuming new stock)

Apple Inc. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In millions, except number of shares which are reflected in thousands and par value) June 30, 2018 September 30, 2017 ASSETS: Current assets: Cash and cash equivalents 31,971 S 38,999 14,104 5,936 12,263 12,488 115,761 20,289 53,892 17,874 4,855 17,799 13,936 128,645 Accounts receivable, net Vendor non-trade receivables Other current assets Total current assets Long-term marketable securities Property, plant and equipment, net Other non-current assets 172,773 38,117 22,546 194,714 33,783 18,177 375,319 Total assets 349,197 S LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable Accrued expenses Deferred revenue Commercial paper Current portion of long-term debt 49,049 25,744 7,548 11,977 6,496 100,814 38,489 S 25,184 7,403 11,974 5,498 88,548 Total current liabilities Deferred revenue, non-current Long-term debt Other non-current liabilities 2,878 97,128 45,694 234,248 2,836 97,207 40,415 241,272 Total liabilities Commitments and contingencies Shareholders' equity: Common stock and additional paid-in capital, $0.00001 par value: 12,600,000 shares authorized; 4,842,917 and 5,126,201 shares issued and outstanding, respectively Retained earnings Accumulated other comprehensive incomel(loss) 38,624 79,436 35,867 98,330 Total shareholders' equity Total liabilities and shareholders' equity (150) 134,047 375,319 114,949 349,197S See accompanying Notes to Condensed Consolidated Financial Statements Apple Inc. |Q3 2018 Form 10-Q13 Apple Inc. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In millions, except number of shares which are reflected in thousands and par value) June 30, 2018 September 30, 2017 ASSETS: Current assets: Cash and cash equivalents 31,971 S 38,999 14,104 5,936 12,263 12,488 115,761 20,289 53,892 17,874 4,855 17,799 13,936 128,645 Accounts receivable, net Vendor non-trade receivables Other current assets Total current assets Long-term marketable securities Property, plant and equipment, net Other non-current assets 172,773 38,117 22,546 194,714 33,783 18,177 375,319 Total assets 349,197 S LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable Accrued expenses Deferred revenue Commercial paper Current portion of long-term debt 49,049 25,744 7,548 11,977 6,496 100,814 38,489 S 25,184 7,403 11,974 5,498 88,548 Total current liabilities Deferred revenue, non-current Long-term debt Other non-current liabilities 2,878 97,128 45,694 234,248 2,836 97,207 40,415 241,272 Total liabilities Commitments and contingencies Shareholders' equity: Common stock and additional paid-in capital, $0.00001 par value: 12,600,000 shares authorized; 4,842,917 and 5,126,201 shares issued and outstanding, respectively Retained earnings Accumulated other comprehensive incomel(loss) 38,624 79,436 35,867 98,330 Total shareholders' equity Total liabilities and shareholders' equity (150) 134,047 375,319 114,949 349,197S See accompanying Notes to Condensed Consolidated Financial Statements Apple Inc. |Q3 2018 Form 10-Q13