Currently I do own shares of Apple Inc. I own it through an ETF (VFV) as well as some mutual funds. I am looking to add to my exposure to the company in the next little while. Even though this is not the only form of analysis that I do, it is one level that I like to analyze before I purchase a stock.
In the article below, I have calculated the WACC, Cost of Debt and Cost of Equity.
Recently I have put the calculations into a spreadsheet. If you would like to see how I calculated the WACC please click on the link. The linked page gives a detailed description on how I calculate a company’s WACC, Cost of Debt and Cost of Equity.
Below I have calculated Apple Inc’s WACC.
|1. Cost of debt (before tax) = Corporate Bond rate of company’s bond rating.|
|Cost of Debt||2.40%|
|Apple Inc’s current cost of debt as of December 4th is 2.4%|
|2. Tax Rate||26.67%|
|3. Cost of Debt (After Tax) = (Cost of Debt Before Tax) (1 – Tax Rate)|
|Cost of Debt after tax||1.76%|
|4. Cost of Equity = Risk Free Rate + Beta Equity (Average Market Return – Risk Free Rate)|
|The cost of equity is the return a firm theoretically pays to its equity investors (for example, shareholders)|
|to compensate for the risk they undertake by investing in their company.|
|Risk free Rate (30 year bond)||3.06%|
|Market Average Return||7.00%|
|Cost of Equity or R Equity||8.72%|
|5. WACC = R = (1 – Tax Rate) x R debt (D/D+E) + R equity (E/D+E)|
|Total Liabilities Debt||$193,437|
|Debt + equity||$797,887|
Based on Cost of Debt of 2.4% and a market return of 7%, I have calculated a Cost of Equity of ~8.72%.
Based on Visa’s Cost of Debt and Cost of Equity we can calculate Visa’s WACC. As of December 2016, Apple Inc. as a WACC of ~6.92%.
Understanding the WACC of a company is important because securities analysts employ WACC all the time when valuing and selecting investments. In discounted cash flow analysis, for instance, WACC is used as the discount rate applied to future cash flows for deriving a business’s net present value. WACC can be used as a hurdle rate against which to assess ROIC performance. It also plays a key role in economic value added (EVA) calculations.
Investors use WACC as a tool to decide whether to invest. The WACC represents the minimum rate of return at which a company produces value for its investors. Let’s say a company produces a return of 20% and has a WACC of 11%. That means that for every dollar the company invests into capital, the company is creating nine cents of value. By contrast, if the company’s return is less than WACC, the company is shedding value, which indicates that investors should put their money elsewhere.
In the next article I will calculate a DCF target for Apple Inc, based on the WACC calculation above.