Question

1. What is the weighted average cost of capital of the company?
2. How has the company's stock been performing in the last 5 years?
3. What is the annual cash dividend yield of the common stock?
4. How would you assess the overall risk structure of the company in terms
   of its operating risks and financial risk (debt-to-capitalization ratio)?
5. Would you invest in this company? Why or why not?
6. i choose apple inc company please provide quick answer

Answer 1

Answer 1)

The weighted average cost of capital refers when the weight of the respective capital is multiplied with its cost of capital a new rate of capital is obtained. The summation of such new rate of capital evolved from the different sources of capital is called weighted average cost of capital(WACC).

Weight is calculate like this - weight of a particular capital divided total capital. Suppose equity is 60% and debt is 40%. Weight of equity = 6 divided by 6+4 = .6. In the same way weight of debt = .4

In case of debt capital

When the weight is multiplied with the rate of cost of capital to obtain new rate of cost of capital such capital rate should be post tax rate i.e. original rate ˣ (1-tax rate)

WACC of Apple

Weight of equity = .8774; weight of debt = .1226

Cost of equity = 7.65%

Cost of debt = 2.814%

Tax rate = 21.45%

Therefore WACC = equity weight ˣ cost of equity + debt weight ˣ cost of debt (1-tax rate)

                          = .8774 ˣ .0765 + .1226 ˣ .02814(1-21.45%)

                          = 6.98%

Answer 2

On April 2015 the average stock price of apple was $112.44 and on April 2016 the average stock price has moved down to $100.01 On April 2017 the average stock value was $146.66. On April 2018 the average stock value was $186.98 and on April 2019 $178.97

Therefore, it is observed that the overall growth of the stock price is positive. In the year 2015 the average stock price was $112.44 and currently it is $178.97. Therefore a rise of 59.1%. Although the price was fallen down slightly from the average stock value of 2018. Otherwise, it is a steady increase of the price.

Answer 3)

Total stock holder’s equity = $119.36 billion

Apple’s debt = $90.51 billion

The weighted average cost of capital of this company is 6.98%

Dividend yield = Dividend per shareMarket value per share ˣ 100

Dividend per sharex100 Market value per share

                          2.95178.97 ˣ 100

2.95 x 178 97100 178.97

The current annual cash dividend yield is 1.65%

Answer 4

Operating risk

Operating risk also known as business risk arises when a firm faces the problem of cash flow which in long term may hamper the working capital condition of the firm that may lead to shut down the company in the long run. It means the day to day operations require free flow of money otherwise, the expenses for the daily operations cannot be met up.

The nature of such risks are of two types

• Systematic risk

Here the risk arises externally due to some macro level changes in the economy like inflation changes, GDP changes etc where a firm becomes helpless to control such risk.

• Unsystematic risk

This is kind of risk which is created internally and the firm is able to minimise such risk through diversification

Financial risk

In the capital structure the two types of capital sources are found. One is equity and the other is debt. In case of debt the firm has to pay a particular interest mandatorily and in case of equity, dividend is paid to the stock holders if the firm creates sufficient profit for its disposal. Therefore, interest payment is the obligation of the firm so when a firm emphasis on collecting more debt over equity the leverage of the firm also increases so it becomes risky firm for investment. When a firm largely depends on collecting capital from issuing shares and the percentage of debt capital is low the leverage of the firm is also low. Therefore, it is required to find out debt to equity ratio that enables an analyser to understand the financial risk of the firm.

In case of Apple’s equity capitalisation the outstanding sum of common stock par value is 22.9% of the total value of the equity and the rest is paid in capital excluding accumulated other comprehensive earning.

The total book value of equity is $823454.39 million

In case of debt calculation the current payables also to be taken into consideration because a company’s performance increases when it acts as a solvent player which is possible when the company pay off its obligation on regular basis. Out of total debt 32% covers the payables while short term loans are also the part of total debt amount which is 10%. The total noncurrent liabilities are 58%

The total book value of debt is $115081.5 million

The D/E ratio =115081.5823454.39

115081.5 823454.39

D/E ratio is 0.14

Answer5)

Since the leverage of the firm is low it means the firm is not a risky firm and it can be said that it is conservative in nature. Therefore, it is a good firm for investing money as the growth rate of the firm is steady.