Using Apple Inc, write a report of 800–1,000 words that demonstrates your understanding of the cost...

Question

Using Apple Inc, write a report of 800–1,000 words that demonstrates your understanding of the cost of capital and risk. Specifically, you are to include the following:
Give a description of the weighted average cost of capital.
Give a description of the capital asset pricing model.
Give a description of the security market line.
Give a description of the cost of debt.
Calculate the weighted average cost of capital for Apple Inc. Explain your answer.
Calculate the cost of debt for Apple Inc. Explain your answer.
How would you restructure the firm’s debt? Explain your answer.

Robert · Accepted Answer

Calculation of Weighted Average Cost of Capital (WACC) of Apple Inc.
The weighted average cost of capital (WACC) 
The WACC of any company shows its overall cost of capital that a company is presently bearing 
through the composition of debt, equity and other sources of capital for running of the business. 
To calculate the WACC, the cost of individual capital is weighted by its proportion according to 
its market value and then sums it.  
To find the WACC of Apple, two major capital’s component are needed - equity and debt.  
The WACC is found by using the formula -  
WACC = (E/E+D) rE + D/(E+D) rD (1-TC) 
Where,  E = Market value of equity 
  D = Market value of debt 
  rE = Cost of equity and 
  rD = Cost of debt 
  TC = Tax rate
Now, the market value of equity and debt can be found from the latest balance sheet of the 
company while the cost of equity and debt would be calculated through certain calculations. 
Cost of equity 
So, to know the cost of equity, we can use the CAPM model which is expressed as 
 ri= rf + βi * (RMkt-rf) 
Where,  ri = Cost of equity 
  βi = Beta of equity 
  rf = Risk free rate of return and  
  (RMkt-rf) = Risk premium
However, there are certain limitations of CAPM model like absence of transaction cost, simple 
market structure, and constant value of underlying variables for the whole period etc. But due to 
its simplicity it is frequently used to determine the cost of equity. At least it gives an overview of 
cost that may be further utilized for other calculations.
Security Market line (SML) 
SML is the graphical representation of the capital asset pricing model (CAPM). It displays the 
expected rate of return of an individual security as a function of systematic, non-diversifiable 
risk. Expected return is shown on Y-axis and beta is shown on X-axis. The intercept of Y-axis is 
represented by Risk free rate.

Using Apple Inc, write a report of 800–1,000 words that demonstrates your understanding of the cost of capital and risk. Specifically, you are to include the following: Give a description of the...

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