Apple Inc. is one of the best-performing companies in the communication and technology sector globally. The company majorly manufactures computers and smartphones as their main products. Apple Inc. has a significant market share around the world, making it one of the highest profit-making companies globally. The company also boasts of a much-diversified investment portfolio which enables them to generate more financial income. Apple Inc. has also ensured that all their business premises are strategically located in corporate environments that enhance their productivity. The organizational structure and size of Apple Inc. require them to maintain appropriate book-keeping to enable them to monitor their financial health. This paper strives to identify Apple Inc’s weighted average cost of Capital (WACC).
Moody’s credit rating agency assigned Apple Inc an Aa1 credit rating on 1st February 2021, portraying them as one of the companies with the most stable credit rating and a huge profitability margin. One of the main reasons Apple Inc has a very high and stable credit rating is the high levels of productivity recorded due to investments in innovation (“Apple Inc. Credit Rating – Moody’s,” 2021). The organization also maintains an appropriate liquidity ratio that enhances efficiency in its operations and its strength in other investments in different sectors. The firm’s credit rating is AA1 which portrays an organization with an extremely strong base to meet its financial obligations.
Apple Inc credit rating = AA1
30 Year Bond for AA1 rating = 3.03%
Cost of Debt Capital (RD) = 3.03%
Apple Inc Beta = 1.2
Three-Month Treasury Bill = 0.03
Equity Risk Premium ( ERP) = 5.5%
Cost of Equity = Risk-free rate + Beta * (Equity Premium)
Cost of Equity = (0.03+1.2)(5.5%) = 1.23*5.5%
RE = 0.06765
Apple Inc Cost of Equity Capital = 65,339,000
Apple Inc Cost of Debt Capital = 258,549,000
Total values = Cost of Equity Capital + Cost of Debt Capital = 65,339,000 + 258,549,000
Apple Inc Total Asset Base = 323,888,000
Weighting Cost of Equity Capital = (65,339,000÷323,888,000)*100%
E/V= 20.17% OR 0.2017
Weighting Cost of Debt Capital = (258,549,000÷323,888,000)*100%
D/V = 79.82% OR 0.7982
Calculating the weighted average cost of capital for Apple Inc.
Corporate Tax = 35%
WACC = (E/V)* RE +(D/V)* RD *(1-.35) = 0.2017*0.06765+0.7982*0.0303*(1-.35) = 0.013645005+0.02418546*0.65 = 0.013645005+0.015720549 = 0.0293655545
WACC for Apple Inc =2.94%
If the Corporate Tax is at 25% = 0.2017*0.06765+0.7982*0.0303*(1-.25) = 3.17%
An increase in an organization’s debt capital value will result in a decrease in the organization’s weighted average cost of capital, which negatively affects the entity’s financial stability. A decrease in the weighted average cost of capital also exposes the company to negative financial risks since it has to service all its interests and debt commitment (Kartinah et al., 2021). In contrast, dividends are not always compulsory to be issued. It is safer for a company to invest resources only into ventures with break-even points greater than its weighted average cost of capital. The value of debt capital is always affected by the tax, whereas the preference shares and ordinary shares do not have any tax benefits since the dividends are paid to the shareholders after tax has been paid.
Organizations with greater equity capital costs are more costly to run and manage than entities with huge debt capital value. They may not enjoy the benefits of accessing long-term financial assistance from various financial institutions since they don’t have the strength and capacity to service long-term loans. However, high amounts of debt capital increase the organization’s financial risk by leading the organization into a low liquidity ratio.
Apple Inc. credit rating – Moody’s. (2021). www.moodys.com. Web.
Kartinah, D., Jhoansyah, D., & Z, F. M. (2021). Analyze return on equity and weighted average cost of capital linkages to firm value. Almana : Jurnal Manajemen Dan Bisnis, 5(1), 1–6. Web.