The Henry Fund

Henry B. Tippie School of Management

Siddhanta Chandra [siddhanta-chandra@uiowa.edu]

Apple Incorporated (AAPL) April 18, 2017

Information Technology – Technology Hardware Stock Rating Buy
Investment Thesis Target Price $155-160
Henry Fund DCF $162.50
Apple is the world’s largest technology company with class leading sales in Henry Fund DDM $98.56
smartphones, tablets, and several other consumer electronics categories. We Relative Multiple $134.59
recommend a strong buy for Apple as the stock will continue an upwards Price Data
trajectory in 2017 and 2018 based on strong sales and stock buybacks. Our Current Price $141.05
model anticipates at least a 10% upside in the short term on this security. 52wk Range $89.47 – 1415.56
Drivers of Thesis Consensus 1yr Target $147.61
• The New iPhones Key Statistics
• iPhones form 2/3rd of Apple’s revenues. Market Cap (B) $729.06
• Sold 78.3M units 1Q17 – a record. 5% YoY growth. Shares Outstanding (B) 5.25
• New iPhones are expected to see a 7.5-8% growth and be chart- Institutional Ownership 60.20%
toppers. Revenue expected to be in the region of $149-152B Five Year Beta 1.31
• Services and New Products Dividend Yield 1.7%
• Recorded a 22.3% YoY growth in 1Q17. Est. 5yr Growth(EPS) 7%
• Expected to grow by 21.5%(2 yr avg) in 2017-18 Price/Earnings (TTM) 16.61
• Key drivers will be App Store, iTunes Store – largest music vendor, Price/Sales (TTM) 3.46
Apple Music – 20M subscribers and Apple Watch – the bestselling Price/Book (mrq) 5.50
smartwatch. Profitability
Risks to Thesis Operating Margin 27.15%
• Lack of Innovation Profit Margin 22.83%
Return on Assets (TTM) 14.52%
• Apple will be hurt if it doesn’t stay ahead of the game by innovating
Return on Equity (TTM) 35.00%
faster than other players in the industry.
• Faster growth will come from new product as existing product lines APPL Industry Sector
near maturity. 30
• Taxation on foreign funds 25 28.1 27.6
• Approximately 94% ($230.2B) of Apple’s cash is parked outside the 26.1
20
US.i
19.0
• Apple is expecting a tax reform which will allow it to bring the cash 15
16.6
18.0
back. If that reform doesn’t fall into place, Apple will need to raise 10
more debt (already near $80B) to fuel growth.
5
Earnings Estimates
0
Year 2014 2015 2016 2017E 2018E 2019E
P/E ROE
EPS 6.45 9.22 8.24 8.77 10.83 11.21 sources: Factset, YCharts, and Fidelity
growth 11% 30% -12% 6% 19% 3%
12 Month Performance Company Description
As the maker of the iPhone, the iPad, and the
APPL S&P 500
35% MacBook amongst others, Apple is one of the
30% most recognized brands in the world. It
25%
differentiates itself on the basis of design, ease of
20%
use, and premium build quality of its products.
15%
Apple also has built up an ecosystem of software
10%
5% tied into MacOS and OSX – both being operating
0% systems. Apple is the world’s most valuable
-5% company and is very cash rich with over $246B
-10% (almost $47 per share) in reserves, although most
M A M J J A S O N D J F of it is outside the US.

Important disclosures appear on the last page of this report.

 EXECUTIVE SUMMARY The company chiefly operates in the smartphone, tablet
and the PC segments and complements these segments
To say that Apple makes smartphones and other consumer with a full suite of software and service offerings which
electronic devices is like saying that its windy during a include the App Store, iTunes Store and Apple Music. It
hurricane. While it is technically correct, it does a huge also offers an extended product support program under
disservice to what Apple means to the technology world. the Apple Care name and owns Beats Electronics which
Apple has been a gamechanger more times than any other makes premium audio accessories.
company in the world, and it does so by being the best
overall package. Revenue Decomposition

While the main revenue driver for Apple has been the Apple’s revenue and profits are largely driven by its
iPhone, forming 63% of their total revenues, increased hardware offerings. iPhone occupies the prominent
competition and an increasingly saturating smartphone position with 63% of revenue share. For 2017, we expect
market has driven Apple to diversify into segments like iPhones to grow 4% YoY and forecast a 5-year revenue
wearables (Apple Watch), Machine Learning (Perception, CAGR of 3.4% for the product line. Services, Macs, and iPad
Turi and Tuplejump acquisitions), Energy (Apple Energy, contributed 11%, 11% and 10% to the top line respectively.
LLC – wholly owned subsidiary) and mobility ($1Bn
investment in Didi Chuxingii) and to increase focus on REVENUE DECOMPOSITION (2016)
accessories and services. Robust 1Q2017 results showed
strong numbers for iPhones and services and these two iPhone Services Mac iPad Other Products
segments are expected to be the drivers in 2017 and 2018.
Launch of the 10th Anniversary iPhone is generating lot a 5%
10%
of hype and is expected to be a strong seller, driving up
revenue. Apple’s capital return program continues to be
healthy with a moderate dividend yield of 1.7% and a 11%
substantial repurchase plan.

With strong fundamentals, a better than expected 1st 11% 63%

Quarter, a recovering world economy and diversification
efforts, we feel Apple represents great value and
recommend a BUY with a target price range of $155-160.

COMPANY DESCRIPTION
Source: Apple 10K
The maker of the iPhone, iPad and the Mac computers
amongst other product and service lines, Apple Inc is a iPhones
global technology company founded in 1976 and
incorporated in 1977. Founded as Apple Computer Inc., The first iPhone was launched in 2007 with the slogan:
the company changed its name to Apple Inc in 2007 to
better reflect its diversified portfolio of products and “This is only the beginning. Apple reinvents
future ambitions.
the phone.”
Headquartered in California, Apple is the world’s most
Launched to a positive reception and a whirlwind
valuable company with a market cap of over $720B. It is
marketing campaign, iPhone has since then changed the
also the world’s largest technology company by revenue
way the world looks at phones, making true its slogan of
and by assets and one of the most profitable companies in
reinventing the phone.
the world. The brand value of Apple was estimated to be
$107B in 2016, making it the world’s 2nd most valuable Before the advent of the iPhone, smartphones were boxy
brand after Google.iii looking, geek products. They featured resistive
touchscreens usable with styluses as the UI was not touch

Page 2
optimized. They were designed more for information S7 v vi) means that the iPhone is the most profitable
exchange than content creation or consumption. App smartphone and makes up about 80% of the global total
ecosystem was primitive and service offerings non- operating profits made off smartphone sales.vii A huge
existent. The image below shows how smartphones have reason behind it is that iPhone hold their price through
changed since the iPhone first arrived. their lifecycle. A Samsung Galaxy S7 32GB retailed for $570
for a large part of its lifecycle, before dropping to $480 on
Smartphone Designs: Then and Now the back of the impending launch of the S8 model. The
iPhone 7 32GB model is still retailing at $649, giving Apple
huge margins.

Apple typically follows a tick-tock launch cycle with a

major launch every two years and small refreshments in
the intervening years. The refreshes are known as ‘S’
models and started with the iPhone 3GS which was a
successor to the iPhone 3G. Since then there have been
Source: Josh Hefferich ‘S’ devices every year after a generation change. In 2014,
(https://twitter.com/Digeratii/status/165324320179109888) Apple split its iPhone product line into two with the
launch of the iPhone 6 and the iPhone 6 Plus. The plus
iPhone brought with it an UI designed for touch, did away model featured a bigger display, bigger battery, and
with most of the hardware buttons and made the better cameras. This allowed Apple to occupy two sub-
touchscreen the primary input for the user. It heralded an segments in the premium smartphone tier as the bigger
era of content consumption with music and video phone enabled Apple to charge more while making the
streaming on smartphones becoming commonplace. smaller phone available at a lower cost.
Today, apps form an integral part of a smartphone user’s
experience with most of the interactions done via apps. The current iteration of the iPhone is known as iPhone 7
Apple has since added features like a digital voice assistant and iPhone 7 Plus with iPhone SE being a lower cost
– Siri, better cameras, and fingerprint sensors. product available in developing countries. While the
iPhone 7 devices, in a surprising departure from Apple’s
Not only has the iPhone garnered strong reviews for most past, featured a design similar to the previous model,
of its iterations since then, it has also been the best-selling they added water and dust resistance, a ‘Force Touch’
smartphone since its inception, selling over a billion units.iv Home button powered by Apple’s Taptic Engine, and a
faster processor. The Plus model gained a dual camera
setup, with a telephoto lens added to the standard wide-
angle lens. This gave the Plus model the capability to
perform lossless 2x zoom and a ‘DSLR-like’ portrait mode
with enhanced depth of field (an effect which makes
subject stand out by blurring the background).

Source: Statista

The premium pricing, strong sales and relatively lower bill

of materials ($224 for iPhone 7 vs $255 for Samsung Galaxy

Page 3
While sales started off slow they picked up during the Services
holiday season and Apple reported sales of 78M units
with a revenue of $54B in 1Q2017.viii One big trend was Apple complements its hardware offerings with an
the popularity of the Plus model with it accounting for extensive suite of software and an ecosystem of apps and
over 40% of total iPhone 7 sales resulting in higher per services. Apple’s service revenues of $24B largely consist
unit revenue numbers. of revenues from the App Store which is the world’s largest
app ecosystem by sales and by downloads. With an
average per user per year revenue of $40ix, the app store
makes available over 2 million apps to the users of
iPhones, iPads, iPods, and the Apple Watch. With over 140
billion downloads, it is the most used app store by a
distance. Apple has a 70/30 revenue share policy which
means that a developer makes 70 percent of the revenues
while Apple gets the remaining 30 percent. The share
changes to 85/15 if a user stays subscribed to the
developer's app for a year. Google’s Play Store has a
similar sharing model. 2016 was a strong year for the
Source: The Atlas (https://www.theatlas.com/charts/Hy94PcRwx)
services segment, with it seeing a 22% YoY growth. We
expect the growth story to continue in 2017, indicators of
For 2017, we expect the strong numbers to continue and which are already been seen in the 1st quarter with an 18%
we expect Apple to sell $140B worth of iPhones, which is a YoY growth and revenues of $7B. On January 2017, Apple
4% YoY growth over 2016. We expect unit sales to be announced that 1st January 2017 was the busiest day ever
around 215 million units at an average price of $691-$694 in App Store history with $240M in sales in one day.
per unit. We expect a fall in sales in the last quarter
(Q42017) when the new iPhones are expected to launch.

iPhone Sales (in $Bn)

200.00

150.00

100.00

50.00

0.00
2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Source: own model
Source: Apple
FY2018 will be a strong year for the iPhone with Apple
The Apple App Store enjoys several key benefits. Apple’s
expected to launch, in September, a new redesign on
install base exceeds 1B and exhibits unparalleled customer
occasion of the 10th anniversary of the iPhone. It is also
loyalty. Developers generally see greater revenues for
rumored that Apple will further broaden its product line
their apps from the App Store compared to other
with a new iPhone X model in addition to the 7s and 7s Plus
competing ecosystems like Google Play, which means that
models. The iPhone X model is expected to be the most
the App Store is often the first to see a new app than other
premium offering and is expected to feature a complete
stores. The App Store has also been credited for a better
redesign with a curved OLED screen and more premium
curation policy.
build quality.
Apart from apps, Apple uses its iTunes platform to
distribute Movies, Music, Books, and other multimedia
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content. The Apple Music service launched in 2015 While the iPads command a majority share of the global
provides a subscription-based music streaming service tablet market, it has been seeing a downward trend in
which competes with rivals like Spotify. It currently has recent years.
around 22M subscribers, compared to 50M for Spotify.
Apple Music has three license types: This trend is expected to break in 2018 to see a modicum
of growth before falling back to a long-term secular
• Single User - $9.99/month decline. The tablet market globally has been shrinking as
• Family - $14.99/month (6 users) mobile phone screen sizes grow and PCs become lighter.
• Student - $4.99/month Another reason is the rate at which consumers replace
their current product with a new one which for tablets is
REVENUE DECOMPOSITION much lower than for a smartphone.
(2021)
7%
6%
iPhone

8% Services
Mac
18%
61% iPad
Other Products

Source: Own Model

Apple Music has its roots in the Beats Music service which
Apple acquired in 2014 as part of the Beats Electronics
acquisition. As of December 2016, Apple Music has 20M
paid subscribers. Apple’s target is to double their services Source: Statista
revenue by 2021 and our forecasted numbers bear that iPad sales fell by 11% YoY in 2016 and saw a 22% YoY
out. In the years to come, as the install base grows and as decline during the 1st quarter of 2017. We expect a 20%
Apple looks for other avenues for growth, expect Services YoY decline over the complete year with projected sales of
to make up 18% of Apple’s revenue in 2021 from the $17B.
current 11%.
Mac
iPad
The Macintosh or the Mac line of notebooks and
iPads are Apple’s line of tablet computers. Launched in computers form Apple’s Personal Computer offerings.
2010, the current lineup includes iPad 4, iPad Air, iPad Mini
4, and iPad Pro 9.7inch and 12.9inch models. iPads run on
the same operating system as the iPhones i.e. the iOS.

Current Lineup. Source: Apple

The PC segment is seeing a decline in sales for the last 5

years with 4Q2016 sales declining by 3.7%. Interestingly,
in spite of an overall drop in numbers, four of the top six
manufacturers actually saw an increase which points
towards a consolidation in the business. Apple saw a 10%
decline in 2016 but recovered in 1Q2017 after the launch
of the new MacBook models to post a 7% increase in sales.

Page 5
Increased competition and reduced distinction between iPods
tablets and PCs means that Apple will struggle to see
historic highs in this segment but Mac will remain a solid iPods are the company’s line of portable digital music and
offering for the years to come. media players and includes the iPod touch, iPod nano and
iPod shuffle.
Other Products iPod is the product which made Apple popular amongst
Apple’s recent push to enter new segments has resulted in the mainstream consumer but sales have declined over
products like the Apple Watch which along with iPods form the years as mobile phones become more adept at playing
the Other Product category music, eliminating the need for a separate device for music
playback. We expect iPods to be deprecated in a few years
Apple Watch with them forming an insignificant part of overall sales.

Apple Watch is Apple’s entry into the wearable market. Accessories

Launched in 2015, it currently in its 2nd generation with the
current lineup called Apple Watch Series 1 and Series 2. A burgeoning install base of iProducts means that
Apple aims to enhance the usability of the iPhone via the accessory sales make up a lucrative segment for Apple.
use of the Apple Watch while the marketing focuses on the This includes products like the AirPods, cases, adapter and
fashion aspect of the watch with it being labeled as a earphones.
fashion accessory. Apple is a market leader in
Apple TV
smartwatches and accounts for nearly 80% of the market
by revenue and 50% by units. Apple TV is a digital media player that connects and
streams data to a compatible TV.
The US wearable market is expected to grow to 55 million
users by 2020 while the global market is expected to reach Airport
$34B in salesx, making Apple’s market leader position an
excellent springboard to more profits. We predict that Airport is Apple’s line of wireless routers.
Apple will continue to be the market leader and will have
an estimated 30% of the market by units. Company Analysis
Geographic Decomposition

Revenue by Geography

7%
7%

41%
21%

24%
Americas Europe Greater China
Japan Rest of Asia Pacific

Source: Apple 10K

Apple generates its revenue from six geographies based on

the location of its customers. The Americas includes both
Source: Canalys North and South America. Great China includes China,

Page 6
Hong Kong, and Taiwan. The Rest of Asia Pacific includes The Q2 fiscal guidance is strong but slightly conservative
Asian countries and Australia. The Europe includes with revenue guidance between $51.5B to $53.5B against
European countries, as well as India, the Middle East and an expected guidance of $53.79B
Africa.
Manufacturing in India
RECENT DEVELOPMENTS
As growth stabilizes in mature economies like the US and
Apple sues Qualcomm Europe, Apple needs to look at growing economies like
India to fuel future growth. One key step in achieving this
In January 2017, US Federal Trade Commission charged is local manufacturing. Apple has dabbled with the idea of
Qualcomm with using anti-competitive tactics over manufacturing in India since some time now and in Feb
licensing. The Federal Trade Commission alleged that 2017, it was finally official that Apple will start
Qualcomm received high royalties for patented manufacturing in India in the state of Karnataka. The
technologies that are "essential to industry standards." manufacturing unit will not only help in lowering costs of
That creates in effect, "a tax" on manufacturers that used the iPhone, particularly the iPhone SE, but will also help
competing processors. Immediately after this Apple open Apple Stores in India. Apple has been
development, Apple filed a lawsuit against Qualcomm, hampered by a rule that prevented it from opening its own
suing it for $1B saying that Qualcomm was "charging retail stores in the country. Foreign retailers can only sell
royalties for technologies they have nothing to do with" products if 30% of the raw materials used to make them
are sourced locally.xiii
Apple also alleged that Qualcomm was “withholding
nearly $1B in payments from Apple as retaliation for
responding truthfully to law enforcement agencies
investigating them.”xi

While the amount sued for is negligible for a company with

revenues worth $215B, the larger implications for Apple is
the fact that they are no longer tied at the hip with
Qualcomm and no longer need to suffer the royalty
hegemony of the chip supplier. It will enable Apple to
diversify its supply chain. The entire episode seems to have
given Apple some pause with them trying to lessen their
reliance on suppliers and bringing a lot of component
design in-homexii.

Earnings call 1Q2017

Source: Statista
Apple reported their 1st Quarter earnings for the FY2017
on January 31st. It was a record quarter for them in many Didi opens lab
ways. They sold a record number of iPhones at a higher
average price than any quarter ever with 78.3M units Apple-backed Chinese ride-hailing giant Didi recently
shipped and $54B in sales. The Apple Watch had its best opened an artificial intelligence lab in Mountain View,
ever quarter and total revenues of $78.4B is a quarter Calif., where the firm will develop intelligent driving
record as well. systems and AI-based transportation security. Apple had
invested $1B in Didi in 2016 valuing it at $20B.xiv
They beat earnings estimates by 15 cents, earning $3.36
per share against a consensus estimate of $3.21. Revenue Buffet bets on Apple
estimates of $77.25B were also surpassed.
After Jan. 1 and before Apple reported earnings on Jan. 31,
Buffett's Berkshire Hathaway added almost 76 million
Apple shares to its holdings taking the total value of BH’s
Page 7
Apple holding to $18B and making Berkshire Hathaway product highlights in these categories with big names like
one of the biggest shareholders of Apple with 2.5% of Facebook and Google entering the space with products
shares outstanding. xv like the Oculus Rift and Google Glass.

This is interesting because Buffet has typically stayed away While Apple does not have an AR/VR product in its lineup,
from technology stocks and his investment has generated its rumored to be working on one. We do not expect a
massive positive sentiment for the Apple stock. launch in the next 6-8 months.

INDUSTRY TRENDS Machine Learning and Self Driving Cars

IoT and Smart Home Tech 2017 is set to be a breakthrough year in terms of
advancements in AI and its use in consumer and
Internet of Things(IoT) is the inter-networking of physical commercial applications. Already machine learning is
devices also referred to as ("connected devices" and being used to good effect in customer service, smartphone
"smart devices"), vehicles, buildings, and other items— assistants, cyber security, and medical services.
embedded with electronics, software, sensors, actuators,
and network connectivity that enable these objects to Another aspect of Machine Learning are self-driving cars
collect and exchange data. and 2016 saw big advancements in this category.

IoT has seen massive growth in recent years and is

projected to grow to a massive 75 billion devices by
2025xvi. Apple’s HomeKit (now Home app) aims to make
Apple a major player in this space. Apple does not

Source: Tractica
Source: IHS
Apple’s bets on Didi and acquisitions like Turi and
manufacture IoT products but enables other Tuplejump mean that Apple is well placed in this new
manufacturers to create products which can interact with arena.
iDevices.

AR and VR.
Augmented reality (AR) is a live direct or indirect view of a
physical, real-world environment whose elements are
augmented (or supplemented) by computer-generated
sensory input such as sound, video, graphics or GPS data.
By contrast, virtual reality replaces the real world with a
simulated one. Recent consumer technology conferences
have seen an overwhelming number of innovations and

Page 8
 MARKETS AND COMPETITION Samsung due to lower taxation rates and lower R&D
spend.
The technology hardware industry is highly competitive
with pricing pressures across the spectrum. Price pressure Apple and Samsung have long fought for the crown of the
is highest at the lower priced tier with many companies biggest smartphone vendor. In the quarter ending Dec
vying for the same piece of pie. At the higher end in terms
of both pricing and cutting-edge, the pressure eases
slightly but is still highly contested.

Apple, due to its sheer brand value and innovative

Products, is able to command a price premium that
translates to a higher gross and net margin. Further,
Apple’s strategy to design in the US and manufacture parts
in different parts of the world has enabled it to keep costs
to a minimal and improve operating margins.
2016, Apple edged out Samsung and sold 78.3M
Peer Comparisons smartphones compared to 77.5M by Samsung. Samsung
was hit hard by the Note 7 withdrawal on safety concerns.
Apple operates across different market segments and as
such competes with a lot of companies. Samsung is, by far,
Apple’s biggest competitor as it competes with it in the
Smartphone, Tablet and PC categories.

A look at the revenue and profit numbers for the

competing companies follows.

Company Name Price Market Revenue

Cap
Apple 138.68 727,590.0 217,481.0
HP Inc 17.36 29,397.1 48,658.0
Samsung 1,735.53 271,430.0 173,994.6
Electronics Over the entire year, Samsung still has the lead in terms of
Alphabet 857.84 583,747.0 89,733.0 units shipped but loses out on revenue due to its portfolio
of inexpensive smartphones which sell heavily to give it
Microsoft 64.73 500,203.0 85,106.0
the huge unit sales numbers. In contrast, Apple’s
Source: Factset
smartphone sales are made up almost entirely of the
Company Name Current Quick Cash higher margin latest generation iPhones. To give
Ratio Ratio Ratio perspective, iPhone’s nearest competitor, the Galaxy S7
Apple 1.23 1.20 0.72 sold 50M units in the entire year compared to 78.3M
iPhones sold in one quarter.
HP Inc 0.96 0.71 0.34
Samsung Electronics 2.64 2.31 1.61
Alphabet A 6.29 6.27 5.15
Microsoft 2.05 2.02 1.73
Source: Factset

Samsung and Apple compare well when it comes to Gross

Margins with 39% and 38% respectively but Apple has a
much better Net Margin of 21% compared to 11% for

Page 9
 ECONOMIC OUTLOOK Interest Rates
Consumer Sentiment Index After almost a decade of flat rates, the Fed finally raised
the rate to .5% in December 2015. The current rate stands
A stable and high Customer Sentiment Index reflects that at .75% after another 25bps hike in January 2017. With the
people feel good about the state of the economy and their Federal Reserve making it clear that it’s looking to take the
rate to 1-1.25% range, the cost of debt will increase for all
companies, as businesses find themselves in an
environment of reduced liquidity.

CATALYSTS FOR GROWTH

As iPhones form a major chunk of Apple’s revenue and
profits, the new iPhones launching in September are
expected to catalyze growth with a corresponding increase
in services segment.

A favorable tax repatriation scheme will enable Apple to

strengthen its non-core competencies by acquisitions or
capital expenditures. Such a scheme can act as a catalyst.
Source: Thomson Reuters

financial situation. They are more likely to spend on non- INVESTMENT POSITIVES
essential items giving a fillip to the consumer electronics
segment. • Brand Value. Apple can command a premium on
pricing due to its pre-eminent position in customer’s
US and Global GDP Growth Rate psyche.
• Industry leading net margins of 21% means that Apple
generates massive profits on its equally massive sales.

INVESTMENT NEGATIVES
• Failure of the iPhone. Apple and iPhone’s destinies are
so closely tied that a failure for the iPhone can spell
trouble for Apple and send its price spiraling down.
• Ireland Tax Ruling, if it goes against Apple will result in
reduced cash reserves and negative sentiment. The
European Economic Commission has ordered the Irish
government to collect $14.6B (about $2.7 per share) in
back taxes from Apple. Apple and the Irish
government have appealed the decision.

Source: The IMF

As the Global and the US economy return to growth after

a sluggish 2016, consumer goods including consumer
electronics are expected to see tailwinds.

Page 10
 Valuation While the current iPhones have been strong sellers and
Apple sold 78.3 million units in last quarter – a recordxvii;
We valued Apple’s stock in the $155-160 range using DCF anticipation for the new devices will cause slowdown in
and DDM models. We feel that DCF gives the most
iPhone 7/7 Plus sales which will be compensated by the
accurate valuation considering the stable cashflow of
new launch sales numbers.
Apple and is based on revenue decomposition of different
sales categories.
Another noteworthy trend is the gravitation of users
The relative P/E models values the stock at 139.34. As towards the more expensive Plus model resulting is
Apple’s peer group, we chose Alphabet Inc., Microsoft, better revenue numbers.
Cisco, Intel Corp, IBM, Hewlett Packard Inc., and Hewlett
Packard Enterprises. Considering Apple makes most its After a sluggish 2016, the global economy is projected to
money from the iPhone, its most direct peer company grow at 3% in 2017 creating tailwinds for Apple as
would have been Samsung but since it’s not listed on the consumer buying activity picks up.xviii
US markets, the above-mentioned group gives a good
approximation of the value of the stock. Explosion of growth in ‘stealth’ segments
We are issuing a strong BUY rating for Apple on the basis Services was a big growth driver for Apple in FY16 and
of its growing install base, enviable customer retention
grew at 22%. The growth story will continue on the back
rates, and high Free Cash Flow generation. Additionally,
of increased iPhone/iPad user base as major chunk of
Apple is likely to benefit from a lower tax rate on foreign
cash repatriation under the Trump administration. services revenue is the App Store which is tightly linked
to the ‘i’ devices. The iTunes store continues to be the
At the current price, we see an upside potential of 10-11% largest music vendor in the world and Apple Music hit the
on Apple. While Apple’s stock has seen a recent spurt of
20M subscriber mark recently. Such numbers bode well
growth, we believe it still has some ways to go. We believe
for the future and the services category is expected to
that the market has yet not priced in the expected growth
number for the upcoming iPhone and it’s just beginning to grow to $45B by 2021.
wake up to Apple’s massive growth in the Services and
New Products categories. Another success story are the new products like Apple
Watch, Apple TV, and Airport. Apple Watch sold 4.6M
Recent sentiment has been overwhelmingly positive, units in the last quarter for a 13% YoY growth and is now
driven by strong Q1 results and increased positions by the largest selling smartwatch in the market.xix The other
influencer buyers like Warren Buffet.
products category is poised to grow at 12.67% AAGR for
Key Drivers/Risks the next 3 years.

The new iPhones Why we call them the ‘stealth’ segments is because these
segments typically fly under the radar. Expect these to
Apple makes 2/3rd of its revenue from smartphone sales fuel new growth for Apple.
which primarily consists of two variants, namely the
iPhone and the iPhone Plus. The current generation is High Capital Returns
named iPhone 7 and iPhone 7 Plus while the upcoming
Apple’s stock is increasingly attractive to buyers due to
iteration is expected to be called iPhone 7s/7s Plus and
the company’s proclivity for returning capital to
iPhone X (expected Sep 2017) in honor of the iPhone’s
shareholders. Since mid-2012, Apple has returned $250B
10th anniversary. Both are expected to be high sellers and
in value to shareholders by dividend payouts and share
chart toppers in their class with a 7-8% growth in net sales
repurchases.
over the current iteration.

Page 11
Apple’s dividends are expected to continue growing at a Debt Levels
10% growth rate with a payout ratio between 26-30%
While Apple has a lot of cash on its balance sheets, most
The company expects to spend $42B in stock repurchase of it is parked outside the US. Hence Apple has needed to
raise debt in order to bolster domestic cash position and
over the coming years. v
to fund the share repurchase program. Apple’s debt is now
Penetration in Emerging Markets upwards of $80B.

While its interest income from investments helps cover

Except China, where it continues to show strong numbers,
the interest payments for its debt, Apple will be hopeful
Apple has overall struggled to get a foothold in emerging
for a repatriation tax waiver under the new
markets like India and Southeast Asia. Even in China, Apple
administration. If Apple is able to bring back the cash, it
remains vulnerable and was toppled from being the best
can not only fund share repurchases more aggressively but
seller to the no. 2 slot. Unit sales in China stood at 45M in
also use the cash to increase acquisition activity. Apple
2016, netting Apple $48B in sales – a 17% drop from 2015.
needs to stay wary of increasing debt too high.
Nonetheless, a renewed push to crack these markets by
the company is expected to show results in the coming Key Valuation Estimates and Assumptions
years. A new manufacturing tie-up in India with Wistron
Revenue and Growth
will see Apple making iPhones locally in India for the first
time. This will help Apple lower costs of its iPhones in a Apple’s revenue saw a 7.7% fall in 2016 from 2015 levels.
very price sensitive market with high growth potential. Total revenue stood at $215B, down from $233B in 2015.
Apple currently loses out to other vendors in India This was the first annual decline for Apple since 2001. The
primarily due to pricing with iPhone costs at launch being decline was closely connected to declining iPhone sales
40% more than in the US.xx and softness in the Chinese market. Apple broke off this
streak in 1Q17 by selling a record number of iPhones.
Innovation Slowdown
Apple recorded overall revenues of $78B in 1Q17 and is
Apple operates in the highly competitive technology
poised to end the year about 5% up over 2016 with $226Bn
sector which thrives on constant innovation with a regular
in total revenues with strong showing across all categories
production line of new products. Already we saw Apple
except iPad which are expected to decline by 20% in 2017
being pushed down to 5th in China in terms of overall units
but will return to growth in 2018 on the back of new
shipped, by newer rivals like Oppo and Huawei.xxi
models.
Apple also faced criticism over iPhone 7/7Plus, which
Services and Other Products will see 25% and 11% growth
many tech reviewers considered to be unimaginative with
respectively while Macs will see a respectable 8% growth.
no game changing features as is expected of a full cycle
iPhone. Many believed that the iPhone 7 is just a stop gap Effects of Beta
as Apple prepares itself for a massive overhaul with the
next gen of iPhone rumored to be named iPhone X. iPhone Beta is a measure of market volatility and based on data
7/7s, despite the criticism is selling in good numbers and provided by Yahoo Finance, the 5yr Beta for Apple is kept
saw a 5% YoY growth in sales in the 1Q17. at 1.31. We did a sensitivity analysis on our valuation
model by varying Beta and we can see that Apple’s stock
We believe that Apple is well prepared and is going to pull value is reasonably resilient to market volatility with even
out all stops with iPhone X. The Apple innovation DNA is a 15% increase in Beta resulting in an upside of almost 5%.
still strong, glimpses of which could be seen in feature like We find that Apple is less cyclical than other peer
Dual Camera Portrait and Zoom modes, AirPods, and the companies due to its strong brand name and high
Taptic engine. customer loyalty amongst the current install base.

Page 12
Net PPE growth 7) GSMARENA
http://www.gsmarena.com/apple_overwhelms_com
As a company, which does little manufacturing of its own, petitors_in_smartphone_profits_for_2016-news-
Apple’s net PPE spends are less than an OEM (original 23851.php
equipment manufacturer) but as Apple enters new 8) Apple
markets, its PPE spend will continue to grow with an http://images.apple.com/newsroom/pdfs/Q1FY17Da
estimated spend of $27B in 2017 and almost $30B in 2018. taSummary.pdf
9) Sensor Tower
Recent big tickets items include the Apple Park – the new
https://sensortower.com/blog/revenue-per-iphone-
HQ for Apple in the US, built at a cost of $5B and the new
2016
UK HQ at Battersea, expected to cost over a billion USD.
10) Forbes
https://www.forbes.com/sites/paullamkin/2016/02/
KEYS TO MONITOR
17/wearable-tech-market-to-be-worth-34-billion-by-
iPhone X reception: The rumored iPhone X represents a 2020/#2bb776343cb5
paradigm shift for Apple in terms of design as well as 11) CNBC
pricing for 2018 and beyond. It would be key to monitor http://www.cnbc.com/2017/01/20/apple-sues-
how the X and iPhone 7s/7s Plus are received. qualcomm-for-1-billion.html
12) Financial Times
Cash Repatriation: Apple’s cash reserves are legendary https://www.ft.com/content/14a192f8-170f-387d-
but most of it is parked outside the US. A repatriation deal 898a-7b6a1cb486fe
can be the difference raising debt or reducing it. 13) CNN
http://money.cnn.com/2017/02/03/technology/appl
Ireland Tax Ruling: Ireland has been kind to Apple in terms e-india-manufacturing-bangalore/
of taxation which means Apple’s effective tax rate is way 14) AppleInsider.com
lower than other companies. A ruling against Apple can http://appleinsider.com/articles/17/03/08/didi-
spell an end to this arrangement. opens-self-driving-car-lab-near-apple-in-california
15) CNBC
REFERENCES http://www.cnbc.com/2017/02/27/billionaire-
warren-buffett-more-than-doubled-his-holdings-in-
1) CNN Money
apple-in-2017.html
http://money.cnn.com/2017/02/01/investing/apple-
16) IHS
cash-overseas/
17) Apple 10-Q
2) Reuters
http://investor.apple.com/secfiling.cfm?filingID=162
http://www.reuters.com/article/us-apple-china-
8280-17-717&CIK=320193
idUSKCN0Y404W
18) IMF
3) Adage
https://www.imf.org/external/pubs/ft/weo/2017/up
http://adage.com/article/digital/apple-s-brand-
date/01/
tanks-google-recaptures-1-spot/307788/
19) IDC
4) Apple
http://www.idc.com/getdoc.jsp?containerId=prUS42
http://www.apple.com/newsroom/2016/07/apple-
342317
celebrates-one-billion-iphones.html
20) Business Today
5) IHS
http://www.businesstoday.in/technology/news/why
http://news.ihsmarkit.com/press-
-iphone-7-is-40-per-cent-more-expensive-in-india-
release/technology/iphone-7-materials-costs-higher-
than-us/story/237149.html
previous-versions-ihs-markit-teardown-revea
6) IHS
21) TechCrunch
http://news.ihsmarkit.com/press-
https://techcrunch.com/2017/02/05/oppo-topped-
release/technology/samsung-galaxy-s7-teardown-
chinas-smartphone-market-in-2016/
reveals-ho-hum-refresh-0

Page 13
 IMPORTANT DISCLAIMER licensed financial professionals. The investment opinion
contained in this report does not represent an offer or
Henry Fund reports are created by student enrolled in the solicitation to buy or sell any of the aforementioned
Applied Securities Management (Henry Fund) program at securities. Unless otherwise noted, facts and figures
the University of Iowa’s Tippie School of Management. included in this report are from publicly available sources.
These reports are intended to provide potential employers This report is not a complete compilation of data, and its
and other interested parties an example of the analytical accuracy is not guaranteed. From time to time, the
skills, investment knowledge, and communication abilities University of Iowa, its faculty, staff, students, or the Henry
of Henry Fund students. Henry Fund analysts are not Fund may hold a financial interest in the companies
registered investment advisors, brokers or officially mentioned in this report.

i CNN Money money.cnn.com/2017/02/01/investing/apple-cash-overseas/ xi http://www.cnbc.com/2017/01/20/apple-sues-qualcomm-for-1-billion.html

ii http://www.reuters.com/article/us-apple-china-idUSKCN0Y404W xii https://www.ft.com/content/14a192f8-170f-387d-898a-7b6a1cb486fe
iii http://adage.com/article/digital/apple-s-brand-tanks-google-recaptures-1-spot/307788/ xiii http://money.cnn.com/2017/02/03/technology/apple-india-manufacturing-bangalore/
iv http://www.apple.com/newsroom/2016/07/apple-celebrates-one-billion-iphones.html xiv http://appleinsider.com/articles/17/03/08/didi-opens-self-driving-car-lab-near-apple-in-california
v http://news.ihsmarkit.com/press-release/technology/iphone-7-materials-costs-higher-previous- xv http://www.cnbc.com/2017/02/27/billionaire-warren-buffett-more-than-doubled-his-holdings-in-
versions-ihs-markit-teardown-revea apple-in-2017.html
vihttp://news.ihsmarkit.com/press-release/technology/samsung-galaxy-s7-teardown-reveals-ho-hum- xvi IHS
refresh-0 xvii Apple 10-Q http://investor.apple.com/secfiling.cfm?filingID=1628280-17-717&CIK=320193
vii http://www.gsmarena.com/apple_overwhelms_competitors_in_smartphone_profits_for_2016-news- xviii https://www.imf.org/external/pubs/ft/weo/2017/update/01/
23851.php xix IDC http://www.idc.com/getdoc.jsp?containerId=prUS42342317
viiihttp://images.apple.com/newsroom/pdfs/Q1FY17DataSummary.pdf xxBusiness Today http://www.businesstoday.in/technology/news/why-iphone-7-is-40-per-cent-more-
ix https://sensortower.com/blog/revenue-per-iphone-2016 expensive-in-india-than-us/story/237149.html
x https://www.forbes.com/sites/paullamkin/2016/02/17/wearable-tech-market-to-be-worth-34-billion- xxi Techcrunch https://techcrunch.com/2017/02/05/oppo-topped-chinas-smartphone-market-in-2016/
by-2020/#2bb776343cb5

Page 14
Apple Inc.
Revenue Decomposition

Fiscal Years Ending Sep. 26 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Total Revenue 182.80 233.72 215.64 226.12 245.25 256.72 263.04 266.34
YoY %change 6.95% 27.86% -7.73% 4.86% 8.46% 4.68% 2.46% 1.25%

Net Sales by Product

iPhone 101.99 155.04 136.70 142.17 151.41 155.95 159.85 163.05
YoY %change 11.74% 52.01% -11.83% 4.00% 6.50% 3.00% 2.50% 2.00%
% of total revenue 55.80% 66.34% 63.39% 62.87% 61.74% 60.75% 60.77% 61.22%
Services 18.06 19.91 24.35 30.44 35.91 41.30 45.02 47.27
YoY %change 12.54% 10.22% 22.30% 25.00% 18.00% 15.00% 9.00% 5.00%
% of total revenue 9.88% 8.52% 11.29% 13.46% 14.64% 16.09% 17.11% 17.75%
Mac 24.08 25.47 22.83 24.66 25.89 25.37 24.10 22.42
YoY %change 12.08% 5.78% -10.36% 8.00% 5.00% -2.00% -5.00% -7.00%
% of total revenue 13.17% 10.90% 10.59% 10.90% 10.56% 9.88% 9.16% 8.42%
iPad 30.28 23.23 20.63 16.50 17.82 18.18 16.72 15.22
YoY %change -5.31% -23.30% -11.19% -20.00% 8.00% 2.00% -8.00% -9.00%
% of total revenue 16.57% 9.94% 9.57% 7.30% 7.27% 7.08% 6.36% 5.71%
Other Products -- 10.07 11.13 12.36 14.21 15.92 17.35 18.39
YoY %change 10.58% 11.00% 15.00% 12.00% 9.00% 6.00%
% of total revenue 4.31% 5.16% 5.46% 5.79% 6.20% 6.59% 6.90%
Historical Segments 8.38 -- --

Unit Sales by Product

iPhone 169,219 231,218 211,884
YoY %change 12.62% 36.64% -8.36%
iPad 67,977 54,856 45,590
YoY %change -4.30% -19.30% -16.89%
Mac 18,906 20,587 18,484
YoY %change 13.57% 8.17% -11.38%

Net Sales by Geography

Americas 80.09 93.87 86.62
Europe 44.29 50.33 49.95
Greater China 31.87 58.71 48.5
Japan 15.33 15.71 16.92
Rest of Asia Pacific 11.25 15.09 13.66
Apple Inc.
Sensitivity Analysis

DCF Target Price162.49

$

Beta Pre-Tax Cost of Debt

1.110 1.160 1.210 1.260 1.310 1.360 1.410 1.460 1.510 2.37% 2.62% 2.87% 3.12% 3.37% 3.62% 3.87% 4.12% 4.37%
2.15% 196.54 190.86 185.56 180.62 175.99 171.64 167.56 163.72 160.09 1.00% 164.13 163.85 163.58 163.31 163.04 162.77 162.50 162.24 161.97
2.35% 191.78 186.42 181.42 176.74 172.35 168.23 164.34 160.68 157.23 1.25% 163.99 163.72 163.44 163.17 162.90 162.63 162.37 162.10 161.83
2.55% 187.29 182.23 177.50 173.06 168.90 164.97 161.28 157.79 154.49 1.50% 163.85 163.58 163.31 163.03 162.76 162.50 162.23 161.96 161.69
2.75% 183.05 178.26 173.78 169.57 165.61 161.88 158.36 155.03 151.87 1.75% 163.71 163.44 163.17 162.90 162.63 162.36 162.09 161.82 161.55
Risk Free Normal
2.95% 179.04 174.51 170.26 166.26 162.49 158.93 155.57 152.39 149.37 2.00% 163.57 163.30 163.03 162.76 162.49 162.22 161.95 161.68 161.42
Rate Cash %
3.15% 175.24 170.95 166.91 163.10 159.51 156.12 152.91 149.86 146.98 2.25% 163.43 163.16 162.89 162.62 162.35 162.08 161.81 161.54 161.28
3.35% 171.64 167.56 163.72 160.09 156.67 153.43 150.36 147.45 144.68 2.50% 163.29 163.02 162.75 162.48 162.21 161.94 161.67 161.40 161.14
3.55% 168.23 164.34 160.68 157.23 153.96 150.86 147.92 145.13 142.48 2.75% 163.16 162.88 162.61 162.34 162.07 161.80 161.53 161.27 161.00
3.75% 164.97 161.28 157.79 154.49 151.37 148.40 145.59 142.91 140.37 3.00% 163.02 162.74 162.47 162.20 161.93 161.66 161.39 161.13 160.86

Tax Rate Net Intagibles/Revenue

22.00% 23.00% 24.00% 25.00% 26.00% 27.00% 28.00% 29.00% 30.00% 3.30% 3.50% 3.70% 3.90% 4.10% 4.30% 4.50% 4.70% 4.90%
4.00% 189.81 187.55 185.29 183.04 180.78 178.52 176.26 174.00 171.74 0.60% 158.50 158.26 158.01 157.77 157.53 157.28 157.04 156.80 156.55
4.25% 183.18 181.01 178.85 176.68 174.52 172.35 170.19 168.02 165.86 0.70% 159.70 159.46 159.21 158.96 158.72 158.47 158.23 157.98 157.73
4.50% 177.09 175.01 172.93 170.86 168.78 166.70 164.62 162.54 160.47 0.80% 160.94 160.69 160.44 160.19 159.94 159.69 159.44 159.20 158.95
4.75% 171.48 169.49 167.49 165.49 163.49 161.50 159.50 157.50 155.50 NOPLAT 0.90% 162.20 161.95 161.70 161.45 161.20 160.95 160.69 160.44 160.19
Market
5.00% 166.31 164.39 162.46 160.54 158.61 156.69 154.77 152.84 150.92 CV 1.00% 163.50 163.25 163.00 162.74 162.49 162.23 161.98 161.72 161.47
Risk Rate
5.25% 161.52 159.66 157.81 155.95 154.10 152.24 150.39 148.53 146.67 Growth 1.10% 164.84 164.58 164.33 164.07 163.81 163.55 163.30 163.04 162.78
5.50% 157.07 155.28 153.49 151.69 149.90 148.11 146.32 144.53 142.73 1.20% 166.21 165.95 165.69 165.43 165.17 164.91 164.65 164.39 164.13
5.75% 152.93 151.19 149.46 147.73 146.00 144.26 142.53 140.80 139.07 1.30% 167.62 167.36 167.10 166.83 166.57 166.31 166.05 165.78 165.52
6.00% 149.06 147.38 145.71 144.03 142.35 140.67 139.00 137.32 135.64 1.40% 169.07 168.81 168.54 168.28 168.01 167.74 167.48 167.21 166.95
Apple Inc.
Income Statement

Fiscal Years Ending Sep. 26 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Sales 183.24 231.28 214.23 226.12 245.25 256.72 263.04 266.34
COGS excluding D&A 104.61 131.00 121.00 131.15 134.88 141.20 144.67 146.49
Depreciation 6.86 10.01 9.03 10.80 10.85 11.77 12.32 12.63
Amortization of Intangibles 1.08 1.25 1.47 1.41 1.52 1.65 1.73 1.77
Gross Income 70.69 89.03 82.72 82.75 97.99 102.10 104.32 105.46
SG&A Expense 18.03 22.40 24.24 22.61 24.52 25.67 26.30 26.63
EBIT (Operating Income) 52.66 66.63 58.48 60.14 73.46 76.43 78.02 78.82
Nonoperating Income - Net 1.21 6.62 3.80 3.98 4.32 4.52 4.63 4.69
Interest Expense 0.38 0.73 1.46 1.46 1.58 1.71 1.88 2.05
Unusual Expense - Net 0.00 0.00 -0.55 0 0 0 0 0
Pretax Income 53.48 72.52 61.37 62.67 76.20 79.24 80.77 81.47
Income Taxes 13.97 19.12 15.69 16.29 19.81 20.60 21.00 21.18
Consolidated Net Income 39.51 53.39 45.69 46.37 56.39 58.64 59.77 60.29
Net Income available to Common 39.51 53.39 45.69 46.37 56.39 58.64 59.77 60.29

Per Share
EPS 6.45 9.22 8.24 8.77 10.75 11.24 11.49 11.62
EPS Growth 11% 30% -12% 6% 18% 4% 2% 1%
Total Shares Outstanding 5.87 5.58 5.34 5.29 5.24 5.22 5.20 5.19
Dividends per Share 1.81 1.98 2.18 2.40 2.64 2.90 3.19 3.51
Payout Ratio 28% 21% 26% 27% 25% 26% 28% 30%
Dividend Growth 11% 9% 10% 10% 10% 10% 10% 10%
Apple Inc.
Balance Sheet

Fiscal Years Ending Sep. 26 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Assets
Cash & Short-Term Investments 25.08 41.60 67.16 73.25 92.66 107.21 124.13 139.06
Short-Term Receivables 27.22 30.34 29.30 30.53 33.11 34.66 35.51 35.96
Inventories 2.11 2.35 2.13 2.26 2.45 2.57 2.63 2.66
Other Current Assets 14.12 15.09 8.28 11.31 12.26 12.84 13.15 13.32
Total Current Assets 68.53 89.38 106.87 117.35 140.48 157.27 175.43 191.00

Net Property, Plant & Equipment 20.62 22.47 27.01 27.13 29.43 30.81 31.57 31.96
Total Investments and Advances 130.16 164.07 170.43 188.74 204.93 230.14 256.07 282.65
Intangible Assets 8.76 9.01 8.62 9.27 10.06 10.53 10.78 10.92
Other Assets 3.76 5.56 8.76 6.78 7.36 7.70 7.89 7.99
Total Assets 231.84 290.48 321.69 349.28 392.25 436.44 481.74 524.51

Liabilities & Shareholders' Equity

ST Debt & Curr. Portion LT Debt 6.31 11.00 11.61 3.5 6.5 6.83 6.45 7.75
Accounts Payable 30.20 35.49 37.29 38.44 41.69 43.64 44.72 45.28
Income Tax Payable 1.21 0.00 0.00 0 0 0 0 0
Other Current Liabilities 25.74 34.12 30.11 31.66 34.33 35.94 36.83 37.29
Total Current Liabilities 63.45 80.61 79.01 73.60 82.53 86.41 87.99 90.32

Long-Term Debt 28.99 53.46 75.43 83.53 87.88 95.61 106.13 114.53
Unrecognized Tax Benefits 4.00 8.20 8.70 6.96 5.22 3.48 1.74 0
Deferred Tax Liabilities 20.26 24.06 26.02 20.82 15.61 10.41 5.20 0.00
Other Liabilities 3.60 4.79 4.29 4.52 4.90 5.13 5.26 5.33
Total Liabilities 120.29 171.12 193.44 189.43 196.14 201.04 206.32 210.17

Common Equity 23.31 27.42 31.25 29.15 22.85 18.65 15.50 12.35
Retained Earnings 87.15 92.28 96.36 130.06 172.62 216.12 259.28 301.36
Cumulative Translation Adjustment/Unrealized For.
-0.24
Exch. Gain -0.65 -0.58 -0.58 -0.58 -0.58 -0.58 -0.58
Unrealized Gain/Loss Marketable Securities -0.04 -0.46 1.17 1.17 1.17 1.17 1.17 1.17
Other Appropriated Reserves 1.36 0.77 0.04 0.04 0.04 0.04 0.04 0.04
Total Shareholders' Equity 111.55 119.36 128.25 159.85 196.11 235.40 275.42 314.35
Minority Interest
Total Equity 111.55 119.36 128.25 159.85 196.11 235.40 275.42 314.35
Total Liabilities & Shareholders' Equity 231.84 290.48 321.69 349.28 392.25 436.44 481.74 524.51
Apple Inc.
Cash Flow Statement

Fiscal Years Ending Sep. 26 2012 2013 2014 2015 2016

Operating Activities
Net Income / Starting Line 41.73 37.04 39.51 53.39 45.69
Depreciation, Depletion & Amortization 3.28 6.76 7.95 11.26 10.51
Deferred Taxes & Investment Tax Credit 4.41 1.14 2.35 1.38 4.94
Other Funds 1.74 2.25 2.86 3.59 4.21
Funds from Operations 51.16 47.19 52.67 69.62 65.34
Changes in Working Capital -0.30 6.48 7.05 11.65 0.48
Receivables -6.97 -1.95 -6.45 -3.12 1.04
Inventories -0.02 -0.97 -0.08 -0.24 0.22
Accounts Payable 4.47 2.34 5.94 5.40 1.79
Other Assets/Liabilities 2.21 7.06 7.64 9.61 -2.57
Net Operating Cash Flow 50.86 53.67 59.71 81.27 65.82

Investing Activities
Capital Expenditures -9.40 -9.08 -9.81 -11.49 -13.55
Capital Expenditures (Fixed Assets) -8.30 -8.17 -9.57 -11.25 -12.73
Capital Expenditures (Other Assets) -1.11 -0.91 -0.24 -0.24 -0.81
Net Assets from Acquisitions -0.35 -0.50 -3.77 -0.34 -0.30
Purchase/Sale of Investments -38.43 -24.04 -9.02 -44.42 -30.63
Purchase of Investments 151.23 148.49 217.13 166.40 142.43
Sale/Maturity of Investments 112.81 124.45 208.11 121.99 111.79
Other Funds -0.05 -0.16 0.02 -0.03 -1.50
Other Uses -0.05 -0.16 0.00 -0.03 -1.50
Other Sources 0.00 0.00 0.02 0.00 0.00
Net Investing Cash Flow -48.23 -33.77 -22.58 -56.27 -45.98
Financing Activities
Cash Dividends Paid -2.49 -10.56 -11.13 -11.56 -12.15
Change in Capital Stock 0.67 -22.33 -44.27 -34.71 -29.23
Repurchase of Common & Preferred Stk. 0.00 -22.86 -45.00 -35.25 -29.72
Sale of Common & Preferred Stock 0.67 0.53 0.73 0.54 0.50
Issuance/Reduction of Debt, Net 0.00 16.90 18.27 29.31 22.06
Change in Current Debt 0.00 0.00 6.31 2.19 -0.40
Change in Long-Term Debt 0.00 16.90 11.96 27.11 22.45
Issuance of Long-Term Debt 0.00 16.90 11.96 27.11 24.95
Reduction in Long-Term Debt 0.00 0.00 0.00 0.00 -2.50
Other Funds 0.13 -0.38 -0.42 -0.75 -1.16
Other Uses -1.23 -1.08 -1.16 -1.50 -1.57
Other Sources 1.35 0.70 0.74 0.75 0.41
Net Financing Cash Flow -1.70 -16.38 -37.55 -17.72 -20.48

Net Change in Cash 0.93 3.51 -0.42 7.28 -0.64

Fiscal Years Ending AAPL 2017E 2018E 2019E 2020E 2021E

Net Income 46.37 56.39 58.64 59.77 60.29

Depreciation 10.80 10.85 11.77 12.32 12.63
Amortization 1.41 1.52 1.65 1.73 1.77
Operations
Short-Term Receivables -1.23 -2.58 -1.55 -0.85 -0.44
Inventories -0.13 -0.19 -0.11 -0.06 -0.03
Other Current Assets -3.02 -0.96 -0.57 -0.32 -0.16
Other Assets 1.97 -0.57 -0.34 -0.19 -0.10
Accounts Payable 1.15 3.25 1.95 1.08 0.56
Income Tax Payable 0 0 0 0 0
Other Current Liabilities 1.55 2.68 1.61 0.89 0.46
Unrecognized Tax Benefits -1.74 -1.74 -1.74 -1.74 -1.74
Deferred Tax Liabilities -5.2038 -5.2038 -5.2038 -5.2038 -5.2038
Other Liabilities 0.24 0.38 0.23 0.13 0.07
Cash from Operation 52.18 63.83 66.32 67.54 68.09

Investing
Intangible Assets -2.06 -2.30 -2.12 -1.99 -1.90
Gross PPE -10.93 -13.15 -13.15 -13.08 -13.02
Total Investments and Advances -18.31 -16.19 -25.21 -25.93 -26.57
Cash from Investing -31.30 -31.64 -40.48 -41.00 -41.50

Financing
ST Debt & Curr. Portion LT Debt -8.105 3 0.33 -0.38 1.3
Long-Term Debt 8.11 4.35 7.73 10.52 8.40
Common Equity -2.1 -6.3 -4.2 -3.15 -3.15
Cumulative Translation Adjustment/Unrealized For. Exch. Gain 0 0 0 0 0
Unrealized Gain/Loss Marketable Securities 0 0 0 0 0
Other Appropriated Reserves 0 0 0 0 0
Dividends -12.67 -13.83 -15.14 -16.60 -18.21
Cash from Financing -14.77 -12.78 -11.28 -9.62 -11.66

Net Cash Change 6.10 19.40 14.55 16.92 14.93

Cash at the Beginning 67.155 73.25 92.66 107.21 124.13

Cash at the end 73.25 92.66 107.21 124.13 139.06

Cash at the B/S 73.25 92.66 107.21 124.13 139.06

Apple Inc.
Common Size Income Statement

Fiscal Years Ending Sep. 26 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
COGS excluding D&A 57.09% 56.64% 56.48% 58.00% 55.00% 55.00% 55.00% 55.00%
Depreciation 3.75% 4.33% 4.22% 4.78% 4.43% 4.59% 4.68% 4.74%
Amortization of Intangibles 0.59% 0.54% 0.69% 0.63% 0.62% 0.64% 0.66% 0.66%
Gross Income 38.58% 38.49% 38.61% 36.60% 39.95% 39.77% 39.66% 39.60%
SG&A Expense 9.84% 9.68% 11.31% 10.00% 10.00% 10.00% 10.00% 10.00%
EBIT (Operating Income) 28.74% 28.81% 27.30% 26.60% 29.95% 29.77% 29.66% 29.60%
Nonoperating Income - Net 0.66% 2.86% 1.77% 1.76% 1.76% 1.76% 1.76% 1.76%
Interest Expense 0.21% 0.32% 0.68% 0.64% 0.64% 0.67% 0.72% 0.77%
Unusual Expense - Net 0.00% 0.00% -0.26% 0.00% 0.00% 0.00% 0.00% 0.00%
Pretax Income 29.19% 31.35% 28.65% 27.71% 31.07% 30.87% 30.70% 30.59%
Income Taxes 7.63% 8.27% 7.32% 7.21% 8.08% 8.03% 7.98% 7.95%
Consolidated Net Income 21.56% 23.09% 21.33% 20.51% 22.99% 22.84% 22.72% 22.64%
Net Income available to Common 21.56% 23.09% 21.33% 20.51% 22.99% 22.84% 22.72% 22.64%
Apple Inc.
Common Size Balance Sheet

Fiscal Years Ending Sep. 26 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Assets
Cash & Short-Term Investments 13.69% 17.99% 31.35% 32.40% 37.78% 41.76% 47.19% 52.21%
Short-Term Receivables 14.85% 13.12% 13.68% 13.50% 13.50% 13.50% 13.50% 13.50%
Inventories 1.15% 1.02% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Other Current Assets 7.71% 6.52% 3.87% 5.00% 5.00% 5.00% 5.00% 5.00%
Total Current Assets 37.40% 38.64% 49.89% 51.90% 57.28% 61.26% 66.69% 71.71%

Net Property, Plant & Equipment 11.25% 9.72% 12.61% 12.00% 12.00% 12.00% 12.00% 12.00%
Total Investments and Advances 71.03% 70.94% 79.56% 83.47% 83.56% 89.65% 97.35% 106.12%
Intangible Assets 4.78% 3.90% 4.02% 4.10% 4.10% 4.10% 4.10% 4.10%
Deferred Tax Assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Other Assets 2.05% 2.40% 4.09% 3.00% 3.00% 3.00% 3.00% 3.00%
Total Assets 126.52% 125.59% 150.16% 154.47% 159.94% 170.01% 183.14% 196.93%

Liabilities & Shareholders' Equity

ST Debt & Curr. Portion LT Debt 3.44% 4.76% 5.42% 1.55% 2.65% 2.66% 2.45% 2.91%
Accounts Payable 16.48% 15.34% 17.41% 17.00% 17.00% 17.00% 17.00% 17.00%
Income Tax Payable 0.66% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Other Current Liabilities 14.04% 14.75% 14.05% 14.00% 14.00% 14.00% 14.00% 14.00%
Total Current Liabilities 34.62% 34.85% 36.88% 32.55% 33.65% 33.66% 33.45% 33.91%

Long-Term Debt 15.82% 23.12% 35.21% 36.94% 35.83% 37.24% 40.35% 43.00%
Unrecognized Tax Benefits 2.18% 3.55% 4.06% 3.08% 2.13% 1.36% 0.66% 0.00%
Deferred Tax Liabilities 11.06% 10.40% 12.15% 9.21% 6.37% 4.05% 1.98% 0.00%
Other Liabilities 1.96% 2.07% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%
Total Liabilities 65.65% 73.99% 90.30% 83.77% 79.98% 78.31% 78.44% 78.91%

Common Equity 12.72% 11.85% 14.59% 12.89% 9.32% 7.27% 5.89% 4.64%
Retained Earnings 47.56% 39.90% 44.98% 57.52% 70.39% 84.18% 98.57% 113.15%
Cumulative Translation Adjustment/Unrealized -0.13%
For. Exch. Gain
-0.28% -0.27% -0.26% -0.24% -0.23% -0.22% -0.22%
Unrealized Gain/Loss Marketable Securities -0.02% -0.20% 0.55% 0.52% 0.48% 0.46% 0.45% 0.44%
Other Appropriated Reserves 0.74% 0.33% 0.02% 0.02% 0.02% 0.01% 0.01% 0.01%
Total Shareholders' Equity 60.87% 51.61% 59.87% 70.69% 79.96% 91.70% 104.70% 118.02%
Total Equity 60.87% 51.61% 59.87% 70.69% 79.96% 91.70% 104.70% 118.02%
Total Liabilities & Shareholders' Equity 126.52% 125.59% 150.16% 154.47% 159.94% 170.01% 183.14% 196.93%
Apple Inc.
Key Management Ratios

Fiscal Years Ending Sep. 26 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Liquidity Ratios
Current Ratio (Current Assets/ Current Liabilities) 1.08 1.11 1.35 1.59 1.70 1.82 1.99 2.11
Quick Ratio (Cash + Other Liquid Assets) / current liabilities 0.82 0.89 1.22 1.41 1.52 1.64 1.81 1.94
Operating Cash Flow Ratio = Cash Flow From Operations/Current
Liabilities 0.94 1.01 0.83 0.71 0.77 0.77 0.77 0.75

Activity or Asset-Management Ratios

Asset Turnover Ratio (Sales/Total Assets) 79.04% 79.62% 66.59% 64.74% 62.52% 58.82% 54.60% 50.78%
Total Assets Turnover ex Cash 88.63% 92.93% 84.16% 81.92% 81.86% 77.97% 73.56% 69.10%

Financial Leverage Ratios

Debt Ratio = Total Liab/Total Assets 51.89% 58.91% 60.13% 54.23% 50.00% 46.06% 42.83% 40.07%
Equity Ratio (Total Equity/ Total Assets) 48.11% 41.09% 39.87% 45.77% 50.00% 53.94% 57.17% 59.93%

Profitability Ratios
Gross Margin Ratio= (Sales-COGS-SG&A)/Sales 33.07% 33.68% 32.20% 32.00% 35.00% 35.00% 35.00% 35.00%
Profit Margin Ratio = Net Income/Sales 21.56% 23.09% 21.33% 20.51% 22.99% 22.84% 22.72% 22.64%
ROA = Net Income/Avg Total Assets 18.01% 20.45% 14.93% 13.82% 15.21% 14.15% 13.02% 11.98%
ROE= Net Income/Shareholder Equity 35.42% 44.74% 35.62% 29.01% 28.75% 24.91% 21.70% 19.18%

Payout Policy Ratios

Total Payout Ratio (Div + Repurchase)/Net Income 140.79% 86.71% 90.52% 31.86% 35.70% 32.99% 33.05% 35.43%
Dividend Payout Ratio 28.07% 21.48% 26.47% 27.33% 24.53% 25.83% 27.78% 30.20%
Apple Inc.
Value Driver Estimation

Fiscal Years Ending Sep. 26 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
NOPLAT Calculation

Sales 183.24 231.28 214.23 226.12 245.25 256.72 263.04 266.34

-COGS excluding D&A 104.61 131.00 121.00 131.15 134.88 141.20 144.67 146.49
-Depreciation 6.86 10.01 9.03 10.80 10.85 11.77 12.32 12.63
-Amortization of Intangibles 1.08 1.25 1.47 1.41 1.52 1.65 1.73 1.77
-SG&A 18.03 22.40 24.24 22.61 24.52 25.67 26.30 26.63
+PV of Interest on Operating Leases 0.14 0.15 0.18 0.22 0.25 0.28 0.31 0.35
EBITA 52.79 66.78 58.66 60.36 73.71 76.71 78.33 79.17

Pre Tax Income 53.48 72.52 61.37 62.67 76.20 79.24 80.77 81.47
Total Income Tax Provision (inc. tax) 13.97 19.12 15.69 16.29 19.81 20.60 21.00 21.18
Tax Rate = Total Inc. Provision/Pre Tax 0.26 0.26 0.26 0.26 0.26 0.26 0.26 0.26
Plus Tax Shield on Interest Expense 0.10 0.19 0.37 0.38 0.41 0.45 0.49 0.53
Plus Tax on Lease Interest 0.04 0.04 0.05 0.06 0.06 0.07 0.08 0.09
Plus Tax Shield on Unusual Expenses 0.00 0.00 -0.14 0.00 0.00 0.00 0.00 0.00
Minus Tax on Non-Operating Income
(Plus in this formula) (Nonop Int.
Income+Other Inc) 0.32 1.75 0.97 1.04 1.12 1.18 1.20 1.22
Less Adjusted Taxes 13.79 17.61 15.13 15.69 19.16 19.94 20.36 20.58
Plus Change in Deferred Taxes 3.77 3.80 1.96 0.00 -5.20 -5.20 -5.20 -5.20
Equals NOPLAT 42.77 52.97 45.49 44.67 49.34 51.56 52.76 53.38
NOPLAT Growth % 0.11 0.24 -0.14 0.10 0.04 0.02 0.01
Normal Cash % of Sales 2% 2% 2% 2% 2% 2% 2% 2%

Normal Cash (2% * Sales) 3.66 4.63 4.28 4.52 4.90 5.13 5.26 5.33
Short-Term Receivables 27.22 30.34 29.30 30.53 33.11 34.66 35.51 35.96
Inventory 2.11 2.35 2.13 2.26 2.45 2.57 2.63 2.66
Other Current Assets 14.12 15.09 8.28 11.31 12.26 12.84 13.15 13.32
Operating Current Assets 47.12 52.40 44.00 48.62 52.73 55.19 56.55 57.26
Accounts Payable 30.20 35.49 37.29 38.44 41.69 43.64 44.72 45.28
Income Tax Payable 1.21 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Non Interest-Bearing Current
Liabilities(Accounts Payable + Income
Tax Payable + Deferred Tax Liablities) 51.66 59.55 63.31 59.26 57.30 54.05 49.92 45.28
Net Operating Working Capital -4.55 -7.15 -19.31 -10.64 -4.58 1.14 6.63 11.99
Plus Net PPE 20.62 22.47 27.01 27.13 29.43 30.81 31.57 31.96
PV of Operating Leases 4.31 5.37 6.53 7.32 8.20 9.18 10.28 11.51
Net Other Intangibles 8.76 9.01 8.62 9.27 10.06 10.53 10.78 10.92
Other Assets 3.76 5.56 8.76 6.78 7.36 7.70 7.89 7.99
Plus Net Other Operating Assets 16.83 19.94 23.91 23.37 25.61 27.41 28.96 30.42
Less other Liab. (BS line items) 25.74 34.12 30.11 31.66 34.33 35.94 36.83 37.29
Invested Capital 7.17 1.14 1.50 8.21 16.13 23.42 30.33 37.08

WACC 8.46% 8.46% 8.46% 8.46% 8.46% 8.46% 8.46% 8.46%

NOPLAT 42.77 52.97 45.49 44.67 49.34 51.56 52.76 53.38

Beg Invested Capital 7.57 7.17 1.14 1.50 8.21 16.13 23.42 30.33
Change in IC -0.40 -6.04 0.36 6.71 7.92 7.29 6.91 6.75
End Invested Capital 7.17 1.14 1.50 8.21 16.13 23.42 30.33 37.08
ROIC (NOPLAT/Beg IC) 564.97% 738.66% 4005.21% 2979.41% 600.98% 319.69% 225.30% 176.01%
FCF (NOPLAT - Change in IC) 43.17 59.01 45.12 37.96 41.42 44.27 45.84 46.63
EP (Beg IC * (ROIC-WACC)) 42.13 52.36 45.39 44.54 48.65 50.20 50.78 50.82

Marginal Tax Rate Calculation

Federal Statuatory rate 35% 35% 35%
State income taxes, net of federal tax
benefit 1% 1% 1%
Foreign rate differential -3% -4% -3%
Marginal Tax Rate 33% 32% 33%
Apple Inc.
Weighted Average Cost of Capital (WACC) Estimation
Weighted Average Cost of Capital (WACC) Estimation
Marginal Tax Rate 33%
Cost of equity Calculation
Risk Free Rate 2.95%
+
Beta 1.31
Market Risk Premium 4.80%
= Cost of Equity 9.24%

WACC Calculation
Shares outstanding 5.25
MV of share $141.20
=Total MV of Equity [E] $741.30

MV of debt [D] 94
Cost of Debt 3.37%

MV of equity $741.30
+
MV of debt 94
= MV of the firm [V] $834.87

Cost of Equity * 9.24%

(E/V) 0.888
+
Cost of Debt * 3.37%
(1-Marginal tax Rate) 67%
(D/V) 0.112
= WACC 8.46%
Apple Inc.
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:
CV Growth 1.00%
CV ROIC 176.01%
WACC 8.46%
Cost of Equity 9.24%

Fiscal Years Ending Sep. 26 2017E 2018E 2019E 2020E 2021E

DCF Model
Discount period 1 2 3 4 5
NOPLAT 44.67 49.34 51.56 52.76 53.38
Continuing Value 712
Free Cash Flow 38 41 44 46 47
Net FCF 38 41 44 758
PV of free cash flows 35 35 35 548
Value of Operations 653

Non Operating Assets

Excess Cash 63
ST Instruments 29
LT Instruments 170
Value of Non Operating Assets 263

Non Operating Liabilities

PV of Operating Leases 7
Total Debt 87
PV of employee stock options 0
Value of Non Operating Liabilities 94

Equity Value 822

Shares outstanding 5
Intrinsic Share Price $156.50
Current Share Price 141.20
Upside Potential 11%

EP Model
Periods to discount 1 2 3 4 5
Economic Profit 45 49 50 51 51
Continuing Value 682
Net EP 45 49 50 732
PV of Economic Profit 41 41 39 529
Initial Invested Capital 1
Value of Operations 653

Non Operating Assets

Excess Cash 63
ST Instruments 29
LT Instruments 170
Value of Non Operating Assets 263

Non Operating Liabilities

PV of Operating Leases 7
Total Debt 87
PV of employee stock options 0
Value of Non Operating Liabilities 94

Equity Value 822

Shares outstanding 5
Intrinsic Share Price $156.50
Current Share Price 141.20
Upside Potential 11%

Today 4/19/2017
Next FYE 9/26/2017
Last FYE 9/26/2016
Days in FY 365
Days to FYE 205
Elapsed Fraction 0.562
Intrinsic Value Today $162.49
Current Share Price 141.20
Upside Potential 13.10%
Apple Inc.
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Sep. 26 2017E 2018E 2019E 2020E 2021E

1 2 3 4 5
EPS $ 8.77 $ 10.75 $ 11.24 $ 11.49 $ 11.62

Key Assumptions
CV growth 1.00%
CV ROE 19.18%
Cost of Equity 9.24%

Future Cash Flows

P/E Multiple (CV Year) 11.51
EPS (CV Year) $ 11.62
Future Stock Price $ 133.76
Dividends Per Share 2.40 2.64 2.90 3.19 3.51
Future Cash Flows 2.40 2.64 2.90 3.19 $ 137.27

Discounted Cash Flows 2.20 2.21 2.23 2.24 88.25

Intrinsic Value $94.92

Current Share Price 141.20

Today 4/19/2017
Next FYE 9/26/2017
Last FYE 9/26/2016
Days in FY 365
Days to FYE 205
Elapsed Fraction 0.56
Intrinsic Value Today $98.56
Upside Potential -43.27%
Apple Inc.
Relative Valuation Models
EPS EPS
Ticker Company Price 2017E 2018E P/E 17 P/E 18
GOOGL Alphabet Inc. $853.99 $32.87 $37.86 26.0 22.6
MSFT Microsoft $65.39 $2.97 $3.28 22.0 19.9
CSCO Cisco $32.67 $2.18 $2.27 15.0 14.4
INTC Intel Corp $35.77 $2.79 $2.93 12.8 12.2
IBM IBM $170.05 $13.80 $14.25 12.3 11.9
HPQ Hewlett Packard Inc. $18.22 $1.60 $1.65 11.4 11.0
HPE Hewlett Packard Enterprise$18.13 $2.05 $2.15 8.8 8.4
Average 15.5 14.4

APPL Apple Inc. $141.20 $8.77 $10.75 16.1 13.1

Implied Value:
Relative P/E (EPS17) $ 135.83
Relative P/E (EPS18) $ 154.38
Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)

Operating Operating Operating Operating Operating

Fiscal Years Ending Sep. 26 Leases Fiscal Years Ending Sep. 26 Leases Fiscal Years Ending Leases Fiscal Years Ending 186.419966953594 Leases Fiscal Years Ending 164.343441181845 Leases
2017 0.929 2016 0.772 2015 0.662 2014 0.61 2013 0.516
2018 0.919 2017 0.774 2016 0.676 2015 0.613 2014 0.556
2019 0.915 2018 0.744 2017 0.645 2016 0.587 2015 0.542
2020 0.889 2019 0.715 2018 0.593 2017 0.551 2016 0.513
2021 0.836 2020 0.674 2019 0.534 2018 0.505 2017 0.486
Thereafter 3.139 Thereafter 2.592 Thereafter 1.877 Thereafter 1.855 Thereafter 1.801
Total Minimum Payments 7.627 Total Minimum Payments 6.271 Total Minimum Payments 4.987 Total Minimum Payments 4.721 Total Minimum Payments 4.414
Less: Interest 1 Less: Interest 1 Less: Interest 1 Less: Interest 1 Less: Interest 1
PV of Minimum Payments 6.53 PV of Minimum Payments 5.37 PV of Minimum Payments 4.31 PV of Minimum Payments 4.06 PV of Minimum Payments 4

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 3.37% Pre-Tax Cost of Debt 3.37% Pre-Tax Cost of Debt 3.37% Pre-Tax Cost of Debt 3.37% Pre-Tax Cost of Debt 3.37%
Number Years Implied by Year 6 Payment 3.8 Number Years Implied by Year 6 Payment 3.8 Number Years Implied by Year 6 Payment 3.5 Number Years Implied by Year 6 Payment 3.7 Number Years Implied by Year 6 Payment 3.7

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease
Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment
1 0.929 0.9 1 0.772 0.7 1 0.662 0.6 1 0.61 0.6 1 0.516 0.5
2 0.919 0.9 2 0.774 0.7 2 0.676 0.6 2 0.613 0.6 2 0.556 0.5
3 0.915 0.8 3 0.744 0.7 3 0.645 0.6 3 0.587 0.5 3 0.542 0.5
4 0.889 0.8 4 0.715 0.6 4 0.593 0.5 4 0.551 0.5 4 0.513 0.4
5 0.836 0.7 5 0.674 0.6 5 0.534 0.5 5 0.505 0.4 5 0.486 0.4
6 & beyond 0.836 2.5 6 & beyond 0.674 2.0 6 & beyond 0.534 1.5 6 & beyond 0.505 1.5 6 & beyond 0.486 1.4
PV of Minimum Payments 6.5 PV of Minimum Payments 5.4 PV of Minimum Payments 4.3 PV of Minimum Payments 4.1 PV of Minimum Payments 3.8
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 0

Average Time to Maturity (years): 0.00
Expected Annual Number of Options Exercised: 0

Current Average Strike Price: $ -

Cost of Equity: 9.00%
Current Stock Price: $141.20

2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Increase in Shares Outstanding: 0 0 0 0 0 0 0 0 0 0
Average Strike Price: $ - $ - $ - $ - $ - $ - $ - $ - $ - $ -
Increase in Common Stock Account: - - - - - - - - - -

Change in Treasury Stock 2.10 6.30 4.20 3.15 3.15 0 0 0 0 0

Expected Price of Repurchased Shares: $ 141.20 $ 153.91 $ 167.76 $ 182.86 $ 199.32 $ 217.25 $ 236.81 $ 258.12 $ 281.35 $ 306.67
Number of Shares Repurchased: 0.015 0.041 0.025 0.017 0.016 - - - - -

Shares Outstanding (beginning of the year) 5.300 5.29 5.24 5.22 5.20 5 5 5 5 5
Plus: Shares Issued Through ESOP 0 0 0 0 0 0 0 0 0 0
Less: Shares Repurchased in Treasury 0 0 0 0 0 - - - - -
Shares Outstanding (end of the year) 5.285 5.244 5.219 5.202 5.186 5 5 5 5 5
VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol AAPL

Current Stock Price $141.20
Risk Free Rate 2.95%
Current Dividend Yield 1.54%
Annualized St. Dev. of Stock Returns 25.48%

Average Average B-S Value

Range of Number Exercise Remaining Option of Options
Outstanding Options of Shares Price Life (yrs) Price Granted
Range 1 0 0.00 0.00 $ - $ -
Range 2
Range 3
Range 4
Range 5
Range 6
Range 7
Range 8
Range 9
Range 10
Range 11
Range 12
Range 13
Range 14
Total