Section 3: Dividend Analysis and Preliminary Valuation

In the Section 3: Dividend Analysis and Preliminary Valuation assignment, you will compute the of the company’s stock value based on historical dividend data for your company (APPLE INC) and a market-based equity rate of return. In this analysis, you will use the constant growth formula to compute two estimates of the stock price, a high-end value and a low-end value. Analysts frequently assess the stock value using a range of values, based on reasonable assumptions for a high-end and a low-end range. 

Once you have calculated two stock values, you will compare the company’s calculated values compared to the current market price of the stock. This comparison will help you determine if the stock is currently under-valued or over-valued, and will help you determine your recommendation of buy, hold, or sell. Analysts prepare value estimates based on historical data for the company as well as an understanding of expected future equity rates of return. It is important to understand that the constant growth formula provides an estimate of value, and analysts, like all humans, can be both right and wrong. The inputs used in the formula will greatly impact the value conclusion.

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In your paper, address the following five parts in a Word document:

Part 1: Dividend Analysis (two to three paragraphs): 

  • Create a table that illustrates the annual dividends per share paid by your selected company (APPLE INC)over the past 8 years. If the company has not paid dividends for 8 years, include as many years as available.

    Calculate the growth in annual dividends per share each year and include this annual growth rate in your table. 

    To find the dividends your company has paid in the past 8 years, review the BUS401 |Picking a Company that Pays Dividends (Links to an external site.) video from Week 1.

    Calculate the average dividend growth rate over the following periods: 

    the most recent 8 years, 
    the most recent 5 years, and
    the most recent 3 years.

    Summarize the trend in the dividend growth rates.

    Have the dividend growth rates increased or decreased? By how much? Has the increase or decrease been steady or varied from year to year?

    Determine two distinct estimates of the future dividend growth rate for this company: a high-end growth rate and a low-end growth rate. You are to choose these growth rates based on what is reasonable from the data you have on the company’s dividend growth in prior years, as presented in your table. The two future dividend growth rates can be any of following: 

    the most recent year growth rate; 
    the average growth rate over the 8-year period;
    the average growth rate over the most recent 5 years;
    the average growth rate of the most recent 3 years; or
    a growth rate you select that is reasonable, given the 8-year, 5-year, and 3-year averages, as well as the recent year growth rates.

    NOTE: Both dividend growth rates must be lower than the required rate of return used in the constant growth formula. See Part 2 below for the required rate of return to use in the constant growth formula.

    Justify the determined the high-end dividend growth rate and low-end dividend growth rates for your company. In your justification, provide a least two financial facts from your Week 1 and Week 2 assignments to support your determination.

Part 2: Preliminary Valuation: (two to three paragraphs)

  • Calculate the stock price for your selected company (APPLE INC) using the constant growth formula and the low-end dividend growth rate you determined in Part 1. Show all calculations for this estimated stock price using the low-end dividend growth rate.

    For the required rate of return (r), use the following assumptions:

    For a large capitalization company (greater than $10.0 billion in market capitalization) use 10.0%. 
    For a mid-cap company (between $2.0 billion and $10.0 billion in market capitalization) use 12.0%.
    For a small-cap company (less than $2.0 billion in market capitalization) use 15.0%.

    Show your calculations.

  • In a similar manner, calculate another estimate of the stock price for your selected company (APPLE INC) using the constant growth formula and the high-end dividend growth rate. 

    Use the same assumptions for the required rate of return (r) that you used for the low-end stock price, other than using the high-end dividend growth rate.
    Show your calculations.

  • Compare each of the two stock prices you just calculated to the current stock price per share of the company. 

    State whether each constant growth stock price (low-end and high-end) is above or below the current price.
    State whether each constant growth stock price (low-end and high-end) indicates if the stock price is currently under-valued or over-valued in the market. 

  • Determine your concluded stock value, based on the two calculations using the constant growth formula.
  • Justify your conclusion of value for your stock, using either the high-end stock price or the low-end stock price from the constant growth formula.Include least two financial facts from your Week 1 and Week 2 analyses.

The Section 3: Dividend Analysis and Preliminary Valuation paper

  • Must be three to four double-spaced pages in length including any tables or calculations (but not including title and references pages) and formatted according to APA Style (Links to an external site.) as outlined in the Writing Center’s APA Formatting for Microsoft Word (Links to an external site.) resource).
  • Must include a separate title page with the following:

    Title of paper in bold font

    Space should be between title and the rest of the information on the title page.

    Student’s name
    Name of institution (The University of Arizona Global Campus)
    Course name and number
    Instructor’s name
    Due date

  • Must utilize academic voice. See the Academic Voice (Links to an external site.) resource for additional guidance.
  • Must include a separate references page that is formatted according to APA Style as outlined in the Writing Center. See the APA: Formatting Your References List (Links to an external site.) resource in the Writing Center for specifications.
  • Must cite where the financial statement information comes from (i.e., Mergent)

    For help citing the information from Mergent, see the BUS401: Principles of Finance Research Guide (Links to an external site.).

Note: Since this is Section 3 of the Week 5 final project, there is no need for an introduction paragraph.

12

Apple Inc. Financial Statement Analysis

Kevin Sessions

The University of Arizona Global Campus

BUS 401 Principles of Finance

Phillip Sarakatsannis

August 1, 2022

Apple Inc. financial analysis

Part 1: Overview of the company

Apple Inc. is one of the leading tech firms not only in the United States but also globally. The company is known for manufacturing smart devices such as smartwatches, smartphones, smart glasses, and computers. It also manufactures software that runs on the mentioned devices (Reuters, 2022). The company currently takes the highest market share of 51% of mobile and computer devices.

Part 2: Income statements

The income statements record the income of the company every year.

The income statement records the net

sales

(revenues), operating income, and net sales. Apple’s revenues have increased over the last three years. It was $ 260, 174, $274, 515, and $ 365, 817 in 2019,

2020

, and

2021

respectively.

The operating expenses also increased in the last three years. The company recorded $34, 462, $36, 668, and $ 43, 887 in the years 2019, 2020, and 2021 respectively. With the increase in net sales, the net income also increased significantly over the past three years. The company managed to increase. In 2019 the company had $55,256; in 2020, the company had $ 57,411; in 2021, the company registered a net income of $ 94,680.

Part 3: Common size income statements

The common size income statement is used to determine how each line component in the business affects the company’s financial position. The company’s gross margin in the last three years has been increasing: it was 38 % in 2019 and 2020 and 42% at the end of the 2021 fiscal year. The operating income also increased in the last financial year (2021) compared to the preceding 2020, a drop compared to the 2019 operating margin (Arnold, Ellis, & Krishnan, 2018). The operating margin in the last three years was 30%, 24%, and 25% for 2021, 2020, and 2019 respectively.

Part 4: Balance sheets

The balance is an important company document that records the organization’s assets and

liabilities

. These are the items that make up the company’s capital. Apple’s total assets have been increasing last two years. The company had $ 251,002 worth of total assets in 2021, an increase from $ 323,880 in 2020 and a decrease from $ 338,516 in 2019. The current assets have, however, dropped in the last three years. The company had $ 162,819, $143,713, $134,836 in the year 2019, 2020, and 2021 respectively.

The total liabilities of the company also increased in the last three years.

The company had $ 248, 028, $ 258, 549, and $ 287, 912 in the year 2019, 2020, and 2021 respectively. The current liabilities also increased from 105,718 in 2019 to 125,481 in 2021; the current liabilities in 2020 were $ 105,392. The shareholder equity decreased from $ 904,800 million in 2019 to $ 63,090 million in 2021.

Part 5: Common size balance sheets

The common size balance can reveal each item over the critical item. The current assets as a percentage of the current assets have been dropping over the last three years. The current asset has dropped by 10 points from the 2019 current assets (Roychowdhury, Shroff, & Verdi, 2019). The current liabilities, on the other, had increased from 16.36 % in 2020 to 19.02 % in 2021.

Part 6: Cash flow

The cash flow of an organizations shows the movement of cash in and out of an organization in a fiscal year. The cash flow record cash flow associated with the operating activities, investing activities, and financing activities. From the information provide we can calculate apple’s cash flow in the last three years using the following formula.

Cash Flow = Cash from operating activities + (-) Cash from investing activities + (-) Cash from financing activities + Beginning cash balance.

2019

Cash flow = 69,391, 000 + 45, 896, 000 + (90,976,000) + 25, 913, 000 = 50,224,000

2020

Cash flow = 80, 674,000 + (4, 289, 000) + (86,820,000) + 50, 224,000 = 39,789,000

2021

Cash flow = 104, 038, 000 + (14, 545,000) + (93,353,000) + 39, 789,000 = 35, 929,000

The cash flow has been decline in the last three years shown in the calculation.

Part 7: Financial analysis conclusion

Through the analysis of the firm’s financial information, we can see that it is performing well in most of its areas of operations. However, there is some weakness that the company needs to look into. The tables below show the company’s financial strengths and weaknesses as far as financial performance is concerned.

Strengths

Weaknesses

Cash flow operating activities

Investing activities

Shareholders’ equity

Financing activities

Assets

liabilities
sales

The strengths have shown an increase in the amount of income to the organization, as shown in the financial statements—the weaknesses, on the other hand, led to the drop in Apple’s financial resources.

References

Arnold, A. G., Ellis, R. B., & Krishnan, V. S. (2018). Toward effective use of the statement of cash flows. Journal of Business and Behavioral Sciences, 30(2), 46-62.

Reuters. (2022). Apple Inc. Breaking International News & Views | Reuters. https://www.reuters.com/markets/companies/AAPL.O/

Roychowdhury, S., Shroff, N., & Verdi, R. S. (2019). The effects of financial reporting and disclosure on corporate investment: A review. Journal of Accounting and Economics, 68(2-3), 101246.

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