# Apple Inc. (NASDAQ:AAPL)

## Present Value of Free Cash Flow to the Firm (FCFF)

Intermediate level

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

### Intrinsic Stock Value (Valuation Summary)

Apple Inc., free cash flow to the firm (FCFF) forecast

US\$ in millions, except per share data

Year Value FCFFt or Terminal value (TVt) Calculation Present value at 14.78%
01 FCFF0 75,935
1 FCFF1 90,682 = 75,935 × (1 + 19.42%) 79,007
2 FCFF2 106,402 = 90,682 × (1 + 17.34%) 80,770
3 FCFF3 122,630 = 106,402 × (1 + 15.25%) 81,104
4 FCFF4 138,777 = 122,630 × (1 + 13.17%) 79,967
5 FCFF5 154,157 = 138,777 × (1 + 11.08%) 77,394
5 Terminal value (TV5) 4,636,208 = 154,157 × (1 + 11.08%) ÷ (14.78%11.08%) 2,327,590
Intrinsic value of Apple Inc.’s capital 2,725,833
Less: Commercial paper and term debt (fair value) 122,096
Intrinsic value of Apple Inc.’s common stock 2,603,737

Intrinsic value of Apple Inc.’s common stock (per share) \$153.14
Current share price \$127.14

Based on: 10-K (filing date: 2020-10-30).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Weighted Average Cost of Capital (WACC)

Apple Inc., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 2,161,609 0.95 15.42%
Commercial paper and term debt (fair value) 122,096 0.05 3.30% = 4.17% × (1 – 20.87%)

Based on: 10-K (filing date: 2020-10-30).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 17,001,802,000 × \$127.14
= \$2,161,609,106,280.00

Commercial paper and term debt (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

Required rate of return on debt. See details »

Required rate of return on debt is after tax.

Estimated (average) effective income tax rate
= (14.40% + 15.90% + 18.30% + 24.60% + 25.60% + 26.40%) ÷ 6
= 20.87%

WACC = 14.78%

### FCFF Growth Rate (g)

#### FCFF growth rate (g) implied by PRAT model

Apple Inc., PRAT model

Average Sep 26, 2020 Sep 28, 2019 Sep 29, 2018 Sep 30, 2017 Sep 24, 2016 Sep 26, 2015
Selected Financial Data (US\$ in millions)
Interest expense 2,873  3,576  3,240  2,323  1,456  733
Net income 57,411  55,256  59,531  48,351  45,687  53,394

Effective income tax rate (EITR)1 14.40% 15.90% 18.30% 24.60% 25.60% 26.40%

Interest expense, after tax2 2,459  3,007  2,647  1,752  1,083  539
Add: Dividends and dividend equivalents declared 14,087  14,129  13,735  12,803  12,188  11,627
Interest expense (after tax) and dividends 16,546  17,136  16,382  14,555  13,271  12,166

EBIT(1 – EITR)3 59,870  58,263  62,178  50,103  46,770  53,933

Commercial paper 4,996  5,980  11,964  11,977  8,105  8,499
Current portion of term debt 8,773  10,260  8,784  6,496  3,500  2,500
Non-current portion of term debt 98,667  91,807  93,735  97,207  75,427  53,463
Shareholders’ equity 65,339  90,488  107,147  134,047  128,249  119,355
Total capital 177,775  198,535  221,630  249,727  215,281  183,817
Financial Ratios
Retention rate (RR)4 0.72 0.71 0.74 0.71 0.72 0.77
Return on invested capital (ROIC)5 33.68% 29.35% 28.05% 20.06% 21.73% 29.34%
Averages
RR 0.72
ROIC 27.03%

FCFF growth rate (g)6 19.42%

Based on: 10-K (filing date: 2020-10-30), 10-K (filing date: 2019-10-31), 10-K (filing date: 2018-11-05), 10-K (filing date: 2017-11-03), 10-K (filing date: 2016-10-26), 10-K (filing date: 2015-10-28).

2020 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 2,873 × (1 – 14.40%)
= 2,459

3 EBIT(1 – EITR) = Net income + Interest expense, after tax
= 57,411 + 2,459
= 59,870

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [59,87016,546] ÷ 59,870
= 0.72

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 59,870 ÷ 177,775
= 33.68%

6 g = RR × ROIC
= 0.72 × 27.03%
= 19.42%

#### FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (2,283,705 × 14.78%75,935) ÷ (2,283,705 + 75,935)
= 11.08%

where:

Total capital, fair value0 = current fair value of Apple Inc.’s debt and equity (US\$ in millions)
FCFF0 = the last year Apple Inc.’s free cash flow to the firm (US\$ in millions)
WACC = weighted average cost of Apple Inc.’s capital

#### FCFF growth rate (g) forecast

Apple Inc., H-model

Year Value gt
1 g1 19.42%
2 g2 17.34%
3 g3 15.25%
4 g4 13.17%
5 and thereafter g5 11.08%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 19.42% + (11.08%19.42%) × (2 – 1) ÷ (5 – 1)
= 17.34%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 19.42% + (11.08%19.42%) × (3 – 1) ÷ (5 – 1)
= 15.25%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 19.42% + (11.08%19.42%) × (4 – 1) ÷ (5 – 1)
= 13.17%