Apple and Amazon

Part C, D and E

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 Apple and Amazon
Apple
Estimating the stock values:

Using CAPM:

Assumed:
Rf : 7%
Expected Rate of Return: 12.55%

Systematic risk: 1.26

R = Bf + B (E (Rm) –Rf)

R = 7% + 1.26 (12.55% - 7 %)

R = 14%
Apple and Amazon
 Apple and Amazon
Required Rate of Return of Amazon Using CAPM:
Assumed:

Risk free rate: 7%

Expected rate of return: 12.55%

Systematic risk: 1.50

 Apple and Amazon
Analysis:
Intrinsic value is the real value of stock at which the shares should actually be valued. Apple
share price is 176.57 while its market value is 141.95 which mean the shares are fairly valued,
perhaps slightly over valued. So there’s no need for Apple to buy back its shares.

Amazon intrinsic share value is 1569.68 while the market price is 653.07 which mean the shares
which mean that the company shares are extremely undervalued and are not being valued on the
price in which they actually should be. So, the company should buy back its shares.

Estimating Cost of Capital (WACC) (Apple):

Book value of debt and equity:

Book value of Debt = current portion of long term debt / Long term debt

= 2500m + 53,463m = 55,963m

Book Value of Equity = Assets – Liabilities

=290,479m -171,124 = 119355m

Weights of debt and Equity:

Weights of equity = E / (E + D) = 119,355 / (119,355 + 55963) = 0.681

Weights of Debt = D/ E + D = 55963 / (119355 + 55,963) = 0.319

Cost of equity and Debt:

Cost of equity:

Risk free rate of return + B * (Expected return of market – Risk free rate of return)

Cost of Equity = 7% + 1.26 * 5.55% = 11.993%

 Apple and Amazon
To calculate cost of equity, expected market return is subtracted from risk free rate. The answer
is multiplied by Beta and added into risk free rate.

Cost of Debt = 733m ÷ 55,963m = 1.31%

Apple’s interest expense is 733m which is divided by its book value of debt that is 55,963m. The
resulting answer is our cost of debt.

Cost of capital (COC):

COC= E / (E+ D) * cost of equity + D / E +D * cost of debt

COC = 0.682 * 13.993% + 0.319 * 1.31% = 9.91%

WACC for apple

WACC = E + (E+D) * cost of equity + D* cost of debt * (1 – tax rate)

= 0.681 * 13.99% + 0.391 * 1.31% * (1- 0.35) = 6.44%

WACC for Amazon:

Book value of Debt = current portion of long term debt / Long term debt

= 28m + 8235m = 8472m

Book Value of Equity = Assets – Liabilities

=65444m -52060 = 13384m

Weights of debt and Equity:

Weights of equity = E / (E + D) = 13,383 / (13,383 + 8473) = 0.612

Weights of Debt = D/ E + D = 8473 / (13,383 + 8473) = 0.388

 Apple and Amazon
Cost of Equity = Risk-Free Rate of Return / B * (Expected Returns of the Market – Risk-
Free Rate of Return)
Cost of Equity = 7% + 1.50 * 5.55% = 15.33%

By subtracting expected market return from risk free rate and multiplying the answer by Beta, we
get cost of equity.

Cost of Debt = 459m / 8473m = 0.0541%

Amazon’s interest expense is 459m which is divided by its book value of debt that is 8473m. The
resulting answer is our cost of debt.

Computation of Cost of Capital:

Cost of Capital = E/ (E+D) * Cost of Equity + D / (E+D) * Cost of Debt

Cost of Capital = 0.612 * 15.33% + 0.388 * 0.0541% = 9.40%

Computation of WACC for Amazon:

WACC = E / (E+D) * Cost of Equity + D / (E+D) * Cost of Debt * (1-Tax Rate)

=0.612 * 15.33% + 0.388 * 0.0541% * (1-0.35)

=9.40% * 0.65

=6.11%
 Apple and Amazon
Final Report:
Both Apple and Amazon are financially strong organizations that are performing well in the
market even though the liquidity ratio of Apple is decreasing which is not a good sign. Liquidity
ratio is the company’s ability to pay of its short term debts. A liquidity ratio of less than 1 which
is the in the case of Apple means the tech giant has difficulty in paying off its short term debts.
Amazon’s liquidity ratio is also decreasing which means the company will have difficulties in
paying off its short term debts.

Intrinsic value is the real value of stock at which the shares should actually be valued. Apple
share price is 176.57 while its market value is 141.95 which mean the shares are fairly valued,
perhaps slightly over valued. So there’s no need for Apple to buy back its shares.

Amazon intrinsic share value is 1569.68 while the market price is 653.07 which mean the shares
which mean that the company shares are extremely undervalued and are not being valued on the
price in which they actually should be. So, the company should buy back its shares.

The overall analysis is showing that both of the corporations are performing up to the mark and
are doing well in the market. But if we have to choose which company’s shares we should buy,
one should go for Apple rather than Amazon since Amazon hares are severely undervalued and
Apple shares are slightly overvalued than its actual share price so Apple should be the right
choice.
 Apple and Amazon

References:
Academy, C. (2018). How to calculate Cost Of Capital. http://ciansacademy.com/cost-of-
capital/.

Peavler, R. (2018). How to Calculate the Cost of Debt Capital.

https://www.thebalancesmb.com/how-to-calculate-the-cost-of-debt-capital-393134.

Preston, C. (2018). Apple vs. Amazon Stock: Which Is the Better Buy?
https://cabotwealth.com/daily/growth-stocks/apple-vs-amazon-stock-better-buy/.