Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Management

Gaurav Ghantkar[Gauravarvind-sinaighantkar@uiowa.edu]

Apple Inc. (APPL) September 19, 2016

Consumer Goods – Electronic Equipment Stock Rating Buy

Investment Thesis Target Price $164-$172 We recommend a BUY for Apple Inc. The company has produced some of the best products in the market. Recent product launches will ensure a strong cash flow and growth of the company. The company, built on strong fundamentals, has been able to churn out products that are differentiated from those of competitors, and thus, have been able to command a price premium. Drivers of Thesis

Launch of iPhone 7: Apple is highly dependent on its smartphone revenues. We have assumed a unit shipment CAGR of 3.78% Y-O-Y in the smartphone category, which translates to a sales CAGR of 2.05% Y-O-Y.

Services and Other Products: Driven by the price premium that Apple commands and launch of new Apple Watch, we expect this segment to show a 3.73% Y-O-Y sales CAGR.

Price Premium: Due to the innovative products, strategic brand significance, and the ability to differentiate itself from competitors, the company has been able and will continue to command a price premium for its products.

Competitor Issues: The recent recall by Samsung of its smartphones, due to battery issues, has presented Apple with a perfect opportunity to increase its market share.

Risks to Thesis

Diversification: The success of the company is tied up to a single product line as nearly 2/3rd of the top line is driven by the sale of the iPhone. Less diversification is a source of enormous risk.

Commoditization: The tablet and personal computing markets are running the risk of commoditization, as competitors are quick to respond to any technological changes. Thus, Apple may be forced to lower margins in future in order to compete on price.

Henry Fund DCF $168.69 Henry Fund DDM $111.65 Relative Multiple $171.78 Price Data Current Price $114.92 52wk Range $89.47 – 123.82 Consensus 1yr Target $123.66 Key Statistics Market Cap (B) $619.20 Shares Outstanding (M) 5388.00 Institutional Ownership 58.9% Five Year Beta 1.38 Dividend Yield 1.98% Est. 5yr Growth 3.00% Price/Earnings (TTM) 13.40 Price/Earnings (FY1) 13.90 Price/Sales (TTM) 2.9 Price/Book (mrq) 4.9 Profitability Operating Margin 28.81% Profit Margin 23.09% Return on Assets (TTM) 20.45% Return on Equity (TTM) 46.25%

Source: FactSet

Earnings Estimates Year 2013 2014 2015 2016E 2017E 2018E

EPS $5.71 $6.49 $9.28 $8.86 $9.64 $10.34

growth -10.3% 13.5% 43 % -4.5% 8.73% 7.29%

12 Month Performance Company Description

Apple Inc. designs, manufactures and markets consumer electronic goods that include media devices, PC’s and music players. Additionally it provides software and services that complement its products. Some of the iconic products that the company has launched include iPhone, iPad, iPod, and Mac, while the services include iOS, OS X and Apple Pay. Further, the company sells digital content and applications through iTunes store, App Store and Apple Music. The company is headquartered in California and was established in 1976.

13.4

46.3

8.219.4 18.5

14.1

25.5

15.7 9.20

20

40

60

P/E ROE EV/EBITDA

APPL Industry Sector

-20%

-15%

-10%

-5%

0%

5%

10%

15%

S O N D J F M A M J J A

APPL S&P 500

Source: Yahoo Finance

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EXECUTIVE SUMMARY

Founded in 1976, Apple Inc. is a leader in consumer electronics and is known for producing innovative, premium products.

The business model of Apple is driven chiefly through the sale of its smartphones-iPhone, which accounts for 66% of its revenues. A tepid end market demand for smartphones and tablets in recent quarters has prompted the company to diversify into the watch, self-driven cars, cloud services and online-payment systems. In a bid to spur growth, the company has recently launched the iPhone 7, which is expected to draw in strong sales in coming quarters, and the Apple Watch series 2 that will draw in relatively modest revenues.

The company has also showed zest for making small but strategic acquisitions over the years, most notable among them being the acquisition of Turi (200 million), Emotient, and Gliimpse. Through the acquisitions it seeks to its build its capabilities in machine learning, artificial intelligence and augmented reality. The absence of major acquisitions ensure that most of the growth is organic, without loss of shareholder value.

Apple Inc. has a health dividend yield of 2.12%, thus adding to shareholder value, a low P/E of 13.4 for a mature technology company makes us believe that the stock is undervalued, and strong cash balances (cash, cash- equivalents and securities) totaling to $205B. We, thus believe that the company has strong fundamentals, as supported by our valuation models, and hence we recommend a BUY.

COMPANY DESCRIPTION

Apple Inc. is an American multinational company headquartered in Cupertino, California and established in 1977. The company designs, manufactures and markets a variety of media devices, personal computers, portable music players and also sells software, services, third party applications and digital content. (1)

The products include iPhone, iPad, Mac, iPod, Apple Watch, Apple TV and software such as iOS, OS X and watch OS. Further, it sells digital content through iTunes store, App Store, Mac App Store, iBooks Store and Apple Music. (1)

Revenue Decomposition

The primary source of the company’s revenue is through its niche hardware products. As seen in the chart below, 66% of its revenue comes from the iPhone. In the wake of the launch of iPhone 7, we expect a unit shipment CAGR of 3.8% for the years 2017-2020, translating to 2.05% revenue CAGR, in line with the global rate of smartphone sales. The first three quarters of FY 2016 has seen a drop in sales of iPhone by 12%. The other 3 segments Mac, iPad, and Services and Other Products contribute 11%, 10% and 13% to the top line.

Source: FactSet

iPhone

The primary revenue generator for Apple is its flagship smartphone product namely the iPhone, which generates 66% of the company’s revenue. The FY 15 saw a whopping $155 Billion in Sales of the product, translating to a Y-O-Y increase of 52% over FY14. The primary driver behind this burgeoning increase was the introduction of the iPhone 6 and 6s plus in September 2014 and September 15 respectively, resulting in a good FY15 and Q1FY16 for Apple, however, the next 2 quarters of FY16 saw a drop of 12% in sale of revenue as the company was unable to continue the burgeoning demand of the previous fiscal. We expect the demand for iPhone to pick up owing to the launch of iPhone 7 in September 2016. The unit shipment CAGR of 3.8% Y-O-Y, translating to a revenue CAGR of 2.05% Y-O-Y for the segment, for the forecasted years 2017-2020 accounts for this launch. The launch of iPhone 7 did not see any new disruptive technological change, and

66%11%

10%

13%

Revenue Decomposition-Product

iPhone

Mac

iPad

Other

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hence, we do not expected iPhone 7 sales to see the same high growth trajectory that was witnessed by the iPhone 6.

Source: Statista

We see a seasonality in the sales of the iPhone. The first quarter has historically been the strongest due to the high demand due to the festive season, with the growth slowing in the remaining quarters.

Source: Piper Jaffray Research

The company is witnessing shorter queues for the sale of its iPhone 7 at retail stores. However, this is no indicator for the demand of its products, as the company seeks to move the sale of its products online.

iPad

The iPad series of tablets include the iPad Air and iPad Mini. The iPad draws in around 10% of the revenue. The year 2014-2016 has shown a decline in revenues in this segment. We expect this trend to continue into 2017 and then the growth to pick-up in 2018.

The first three quarters of FY16 saw a drop of 14% in the sales of iPad. We expect the trend to continue in the fourth quarter. FY 15 saw a drop in iPad revenue of 23%, primarily driven by the longer re-purchase cycles of the product and also due to cannibalization by the other Apple products. The higher drop in sales as compared to a drop in unit sales of 19% was caused by a decrease in average unit price from 445 in FY 14 to 423 in FY15.

Source: Statista

Mac

The Mac is Apple’s product line in the Personal Computing space based on its OS X operating system. The Company’s desktop computers include iMac, iMac with Retina Display Mac Pro and Mac mini. The Company’s portable computers include MacBook, MacBook Air, MacBook Pro and MacBook Pro with Retina display. (1)

The Mac line of products accounts for 11% of the revenue. We have assumed a 0.75% Y-O-Y CAGR for unit shipments. Due to the significant price competition this segment is on the verge of being commoditized. This translates to a flat revenue CAGR for the years 2017-2020.

The first three quarters of FY16 saw a drop of 8% in Mac sales, while the unit sales were down by 9% over the same time period in FY15. FY15 saw an increase of 6% over FY14, driven primarily by sales of MacBook Air, MacBook Pro and Mac Pro.

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Source: Statista

Services and Other Products

The Services and Other products accounts for 13% of the revenue. We have assumed a 3.73% Y-O-Y CAGR for this segment, due to the recent launch of Apple watch, which will drive demand.

Operating System Software

iOS

iOS is the company’s multi-touch operating system. (1)

OSX

The company’s MAC operating system based on Unix. (1)

watchOS

Released in 2015, watchOS is the Company’s OS for the Apple Watch. (1)

tvOS

Released in 2015, watchOS is the Company’s OS for the Apple TV. (1)

Application Software

This line of products include software such as iLife, iWork, Final Cut Pro etc. (1)

Services

Internet Services

This line of service include the iTunes Store, App Store, Mac App Store, iBooks Store, and Apple TV App store. (1)

iCloud

The company’s foray into cloud services is the iCloud, which provides a platform for the storage of digital content across the Apple devices. (1)

AppleCare

This includes a range of support options for the company’s customers such as phone support, hardware repair and web-based support. (1)

Apple Pay

This service, available in US and UK, is the company’s foray into mobile payments. (1)

Other Products

Accessories

This includes a variety of Apple branded accessories. (1)

Apple TV

This enables the streaming of high definition digital content by connecting to the consumers’ TVs. (1)

Apple Watch

This product includes a personal electronic device based on watchOS. (1)

In a bid to retain competitive advantage and keep the numbers discreet, Apple Inc., under the directions of its CEO, has chosen to keep the sales figures of the watch discreet in the 10k.

iPOD

iPod is the company’s line of portable digital music and media players and includes the iPod touch, iPod nano and iPod shuffle. (1)

Geographic Decomposition

Apple generates its revenue from six geographies based on location of its customers. The Americas includes both North and South America. Great China includes China, Hong Kong and Taiwan. The Rest of Asia Pacific includes

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Asian countries and Australia. The Europe includes European countries, as well as India, the Middle East and Africa. (1)

The domestic market accounts for 35% of the top line, while the International market accounts for 65% with China contributing 24% to the top line.

Source: Apple 10K 2015

Company Analysis

iPhone component pricing

Apple follows a very unique sourcing pattern, which is a reason behind its high profits. The company makes very little of its own components. The components are outsourced from different places around the world that allows it to have higher margins. The displays are sourced from Japan, Touch ID sensor is manufactured in Taiwan, and accelerometer from Germany. Globally, there are around 200 suppliers for parts and products. The key designing of the product is done in US.

RECENT DEVELOPMENTS

iPhone 7 Launch

Apple Inc. chose September 7, 2016 as the date of launch of the new iPhone 7. Pre-orders start on September 9 and shipping will start on the 16th. The launch is especially significant, considering the slump in sales of its previous version- the iPhone 6 in recent quarters. Roughly 66-68% of the company’s revenue comes from the sale of its iPhone.

The iPhone 7 features an improved camera, a faster processor, stereo speakers, and the presence of new wireless headphones known as Air pods. Further the product is water and dust resistant.

The company chose not to disclose first week sales figures of the product. However, the first sales numbers are driven by supply rather than demand for the product. The product was received with mixed reactions. The presence of “Airpods”, is a key competitive advantage for the company as no other company in the market have headphones that matches similar capabilities. The phone’s state-of-art camera is further likely to be well received by amateur, and hobby photographers. We believe that the demand for the product will be strong in the coming years and thus we assume a unit shipment CAGR of 3.8% for the years 2017-2020.

M&A

Turi:

In August 2015, Apple acquired Turi Inc., an artificial intelligence startup for $200 million. (27) Through this acquisition, Apple seeks to build its capabilities in Machine Learning- an area that is also being targeted by other technology companies such as Facebook and Google. This technology is likely to feed into Apple’s Siri, the speech-recognition engine on Apple’s iPhones. We believe this acquisition is likely to improvise the existing speech recognition in future releases of iPhone. However, we do not see this acquisition translating to top line growth for the iPhone 7 product line.

Emotient:

In January 2016, for an undisclosed amount, Apple acquired Emotient, a company that uses Artificial Intelligence to read emotions. (33) There has not been a stated reasoning for the acquisition. However, we can expect this technology to fit into newer models of iPhone, and can also feature in Siri. In a recent interview, Apple CEO, Tim Cook, spoke about augmented reality going huge. We believe Apple will be launching an augmented reality product in the foreseeable future, and Emotient acquisition is certainly a step in the direction. We, however have not accounted for this acquisition in the model.

40%

22%

25%

7%6%

GEOGRAPHIC DECOMPOSITION

Americas Europe

Greater China Japan

Rest of Asia Pacific

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Gliimpse:

For an undisclosed sum, Apple acquired Gliimpse, a healthcare data startup in August 2016. (34) Apple seeks to expand on its portfolio of apps and incorporate this new technology into its healthcare apps that may be used to track or treat diseases. It hopes to bolster its presence in the Healthcare industry.

The acquisition is, however, very minor to find a place in the model.

Berkshire Hathaway

The Warren Buffet led Berkshire Hathaway has increased its stake in Apple Inc. 55% from 9.8 million shares to 15.2 million shares as of June 2016. (39) The development is especially significant given that Berkshire historically has refrained from making investments in technology companies. A rationale behind this investment strategy can be investment in a historically successful company that has huge cash, cash equivalent and marketable securities of around $205 Billion, low TTM P/E ratio of 13.4, a good dividend yield of 2.04%, and a share re-purchase of 140 billion.

Taxes Ireland

In August 2016, in what is transpiring to be as much of a political issue as a legal issue, the European Commission accused Ireland of granting unfair and illegal tax breaks to Apple and ordered it to collect $14.5 Billion plus interest in taxes from the company. The narrative behind the accusation is that Apple pays an effective tax rate of 1% far below the statutory rate of 12.5% that is paid by other companies. The tax treatment permitted Apple Inc., which recorded all sales in Ireland, to avoid taxation on almost all products in the entire EU. (52) Further, Apple’s profits were all channelized to a headquarters that exists only on paper. This gives Apple, an unfair advantage, over the small players, as per the Commission.

Apple is set to appeal the order, and argue that the tax breaks were the reason for the company to park money in EU. Further, it claims that retroactive tax assessments are unfair. Apple Inc. has said that they would put the money in an escrow account pending appeals. (53) Thus, we have not accounted for this development in the model, as we believe Apple has the cash balances to offset any losses from unpaid taxes.

Our sensitivity analysis, indicates that the worst case scenario, would result in Apple Inc. stock falling by a price of $2.6/share, if they were to pay the entire fine. However, we believe, given the political and legal nature of the case, that the company will have to pay a partial fee, which we anticipate to be between 40%-60% of the total fine, resulting in a $1.3/share loss for Apple shareholders.

INDUSTRY TRENDS

Augmented Reality

Augmented Reality allows a user to see the real world with the addition of computer generated images. We are seeing industry trends for a move towards augmented/virtual reality. Google has come up with Google Glass, while Facebook launched the Oculus. Apple, however, does not have its own hardware product in this space as of the now. It is prudent to expect a launch in the foreseeable future.

In a recent interview, Apple CEO, Tim Cook express interest in Augmented Reality stating that it has “a higher commercial interest than virtual reality”. Further, the acquisition of Metaio in May 15 and Flyby Media in January 16 in the augmented reality space signs Apple’s keenness to build their capabilities in the domain.

Machine Learning/Artificial Intelligence

Machine Learning refers to study of pattern recognition and computational learning theory in artificial intelligence. We are seeing clear trends by technology companies to make their products more intelligent.

Apple has taken great strides to ensure artificial intelligence in its products. The product Siri in its smartphones is a speech recognition personal assistant and knowledge navigator. Apple has stated its commitment to extending the functionality of Siri to its Laptops, watches and TV’s. Further, the company has acquired machine learning company such as Turi in August 16, Perceptio in September 15 and face Recognition Company such as Emotient in January 16. Apple usually does not disclose the reason behind the acquisitions in order to ensure confidentiality. A rationale behind these acquisitions could be technology for Siri or as part of Apple’s self-driven cars as explained below.

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Self-Driven Electric Cars

Technology companies are investing heavily into driverless or self-driven cars. While, this technology is in the nascent stages and is not commercialized except for a few players, this certainly seems to be future of technology.

Apple is still in its very early stages in this pursuit with its Project Titan, an electric car project currently under research and development. It is not quite certain whether the first versions will be fully autonomous vehicles, however, based on engineering resources hiring patterns it is quite rationale to expect Apple’s self-driven car in the foreseeable future. Given Apple’s lack of history in the vehicle industry, this product is not expected to be a core driver for the company in the near future. As a caveat, there have also been rumors about Apple scrapping this project.

MARKETS AND COMPETITION

Apple Inc. competes in markets that are characterized by frequent product introductions, rapid technological innovations and high risk of obsolescence. Aggressive competition in such different lines of business has the potential to put a downward pressure on product pricing, thus lowering margins.

Smartphone Market

The smartphone market is characterized by a couple of major players and numerous smaller companies. The big names in this market are Samsung, Apple, Sony, LG, HTC and Huawei. The products in this market have short lifecycles, rapids innovation and newer versions are released every 1-2 years.

As can be seen in below chart, Samsung is the market leader with a 22.4% market share. The products of Samsung features the Android OS. Apple, with iOS, comes in at second with 11.8% market share.

The news of Samsung Note batteries being faulty and prone to being blown up has resulted in massive amount of its products being recalled. Along with a well-timed release of its new iPhone 7, this has presented Apple with a most opportune time to increase the market share. We thus expect Apple to increase its market share in the smartphone segment and revenue to grow by 4.82% in 2017. This will be partially offset by a number of other

players such as LG, Google, HTC, who will eat into the Samsung Note market share. We expect Samsung to make amends for Note product line by 2018, and thus we do not forecast a burgeoning growth in 2018 for Apple Inc.

Apple, due to its innovative products is able to command a price premium and thus leads the market with its operating margin that stood at 38% compared to 17% for Samsung for Q2 16.

As can be seen in below chart Q216 saw a decline in sales of Apple smartphones, as compared to Q215. This was in line with an industry wide decline in unit shipments of smartphone. Further, the absence of new launches and ability of other players to compete on price, corroded the sales of Apple, which had seen the sales burgeoning and hitting a ceiling in 2015.

Vendor 2Q16 Market Share

2Q15 Market Share

Samsung 22.40% 21.30%

Apple 11.80% 13.90%

Huawei 9.40% 8.60%

OPPO 6.60% 2.80%

vivo 4.80% 2.70%

Others 45.10% 50.70%

Total 100.00% 100.00%

Source: IDC

We are seeing trends by other players cutting costs in a bid to improve their margins. We believe this will put a downward pressure on the profit margins of Apple, which are likely to shrink in the years 2017-2020. We have forecasted the Sales/unit to show a 1% Y-O-Y decrease in our model. We expect the average Sales/Unit to fall from 663 in 2017 to 643 in 2020. 2017 will see the Sales/Unit to increase to 663 from 656 in previous year due to the launch of premium iPhone 7.

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Source: Statista

The world-wide smartphone market has grown by a meager 0.3% in Q216 over Q215 as per IDC. 2Q16 saw a decline in unit shipment volumes of Apple Inc. due to no new product launches. Rumors of Apple 7 launch in Q2 could also result in consumers waiting for the launch, than buying the previous version, thus contributing to the decline.

Vendor 2Q16 Shipment

Volumes

2Q15 Shipment

Volumes

Year-Over-Year

Change

Samsung 77 73 5.50%

Apple 40.4 47.5 -15.00%

Huawei 32.1 29.6 8.40%

OPPO 22.6 9.6 136.60%

vivo 16.4 9.1 80.20%

Others 154.8 173.6 -10.80%

Total 343.3 342.4 0.30%

Source: IDC

Apple, however, due to its innovative products is able to command a price premium and thus leads the market with its operating margin that stood at 38% compared to 17% for Samsung for Q2 16. Apple, thus dominates with 92% of the global profits as compared to Samsung at a distant second with 14% of global smartphone profits. Most of the other players in the industry are operating at a loss.

Source: Canaccord Genuity

We are seeing trends by other players cutting costs in a bid to improve their margins. We believe this will put a downward pressure on the sales of Apple, which are likely to see a slight decline in Sales/Unit in the years 2017-2020. We have forecasted the Sales/unit to show a 1% Y-O-Y decrease in our model, as Apple will be forced to lower prices to compete.

Tablet Market

The tablet market includes similar competitors as that of the smartphone market. The products have slightly longer lifecycles due to lesser usage as compared to the smartphones. Apple leads the global market share for tablets with a 25.8% market share for Q216. Samsung stands at second with 15.6% market share. The recent recall by Samsung of its products that have been plagued by battery defects, has presented Apple with a further opportunity to increase its market share.

Vendor 2Q16 Market Share

2Q15 Market Share

1. Apple 25.80% 24.90%

2. Samsung 15.60% 18.20%

3. Lenovo 6.60% 5.60%

4. Huawei 5.60% 2.90%

5. Amazon.com

4.00% 0.30%

Others 42.40% 48.20%

Total 100.00% 100.00%

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Source: IDC

The rapid increase in market share by Amazon from 0.3% in Q215 to 4% in Q216 is especially significant, as this trend will continue to put pricing pressure on the bigger players, which will be forced to lower their margins

Vendor 2Q16 Unit Shipments

2Q15 Unit Shipments

Year-Over-Year Growth

1. Apple 10 11 -9.20%

2. Samsung 6 8 -24.50%

3. Lenovo 2.5 2.5 3.10%

4. Huawei 2.2 1.3 71.00%

5. Amazon.com

1.6 0.1 1208.90%

Others 16.4 21.3 -22.90%

Total 38.7 44.1 -12.30%

Source: IDC

However, the tablet market is on a decline since 2014 with Apple’s iPad sales falling by 5.3 and 23.3% in 2014 and 2015 respectively. With no new product launch in this segment, the trend has continued with the first three quarters of 2016 that has seen a 13% decline. However, Apple Inc. market share of the smaller overall total sales in 2016 has improved over its peers as compared to in 2015, as consumers are preferring the premium iPad, although we are witnessing a lower overall tablet sales. We expect the average Sales price per unit to fall from 434 in 2016 to 417 in 2020, as Apple will be forced to compete on price as peer products are likely to show similar features and upgrades, and thus the tablet market may partially be moving towards commoditization.

Source: Statista

We forecast the tablet market to remain stagnant in 2017 and to rebound in 2018. Consumers are less likely to purchase tablets in the year 2020, which is likely to see a decline in sales due to longer product life-cycles.

PC Market

The PC market is highly mature and has long product life cycles. The products compete aggressively with slim profit margins. The PC market is almost on the verge of being commoditized with individual players such as Apple, being able to command a price premium owing to their unique products and a niche ecosystem. The market leaders include Lenovo, whose market share stands at 13.2% followed by HP Inc. at 12.28%. Apple stands at a distant 5th with a 4.56% market share.

Source: Statista

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The average PC lifespan has been on an increasing trend from 3.97 years in 2012 to 4.6 years in 2016. 2017 is going to see a slight drop in the average age of PC to 4.45. Longer PC lifespan corresponds to lower sales by consumers.

Source: Statista

Peer Comparisons

Apple competes in different lines of business. We use peers of Apple that compete in the smartphone, tablet or the personal computing segments. Below is a consolidated list of the major competitors only. Samsung is by far the biggest competitor as it competes aggressively in the tablet as well as smartphone business.

Market Cap Revenue P/E

Samsung 215B 178B 10.1

Microsoft 446B 92B 18.3

HP Inc. 24B 52B 7.5

Lenovo 7.4B 44B 97.2

Apple 619B 233.7B 12

Source: FactSet

We use profitability metrics to compare the companies. 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 US and manufacture parts in different parts of the world has enabled it to keep costs to a minimal and improve operating margins. Thus, Apple has the best ROE and ROA metrics among its peers.

ROE ROA Gross Margin

Net Margin

Samsung 11.2% 7.9% 37.3% 9.3%

Microsoft 22.1% 9.1% 61.3% 19.8%

HP Inc. 16.7% 4.3% 22.2% 4.5%

Lenovo -3.6% -0.5% 13.4% -2.9%

Apple 46.3% 20.5% 38.5% 23.1%

Source: FactSet

While the gross margin for Apple Inc. is similar to that of Samsung, Apple has been able to have a much higher net margin due to significantly less R&D expenses and a lower effective tax rate.

Further, Apple through the phenomenal sale of its products has been able to generate strong cash flows. By far Apple has the best cash balances on its balance sheet, totaling $205 Billion including cash, cash equivalent, and securities for FY15. The strong cash balances given Apple a competitive advantage to invest in R&D, pay dividends to stockholders and buyback shares.

Current Ratio

Quick Ratio Cash Ratio

Samsung 2.47 2.10 1.42

Microsoft 2.35 2.31 1.91

HP Inc. 1.23 1.07 0.41

Lenovo 0.85 0.69 0.13

Apple 1.11 1.08 0.70

Source: FactSet

ECONOMIC OUTLOOK

Consumer Confidence

Apple Inc. is a company strongly driven by sales of its products- iPhones, iPad and Macs. A reliable indicator of sales is the consumer confidence. The consumer confidence index stood at 101.1 in August, rising slightly over the previous month. The index rose on improved labor market and business conditions. Short term expectations regarding business and employment conditions also improved. (48)

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Source: Fred

We forecast consumer confidence to remain stagnant over the next six months, while increasing slightly over the next two years. Most of Apple products are discretionary products such as smartphones, tablets, PCs, watches, the sales of which are strongly correlated with the consumer confidence index, which has slowly been on the rise since the recession of 2008.

Interest Rates

We forecast the fed funds rate to remain at 0.50% over the 6 months horizon, while we estimate it to reach 1.00% over the next two years. The Fed fund rate hikes are bound to increase the borrowing costs and thus affect Apple as businesses around US will find themselves with lesser liquidity, which in turn will stagnate employee wages, and leave them with lesser discretionary income to buy Apple products. We have factored the increased borrowing costs into our model while assuming a CAGR of 3.8% Y-O-Y growth.

US GDP growth

Source: Bureau of Economic Analysis

With real GDP growth for 2Q2016 at 1.2% (49), the Henry Fund research teams’ short-term forecast (6 month) for US Real GDP growth is 2%. Our long-term forecast (2 year) expects growth to increase to 2.3% by 2018. A faster US GDP growth will spell an increased budget for

discretionary items, thus boosting sales for Apple products.

Global GDP growth

In the wake of Brexit, the World Bank has revised its forecast for the Global GDP to grow at 2.4%, 2.8% and 3.0% in 2016, 2017 and 2018 respectively. (37)We have assumed a 3% GDP growth to continue beyond 2020 and have grown the CV NOPLAT in our model at this rate as Apple is truly a global multinational that operates equally in domestic and international markets. Since our model is extremely sensitive to this assumption, we conduct a worst case scenario with a threshold of 0%. This gives us a value of $129, and re-affirms our analysis that the stock is under-valued.

Source: World Bank

Real Disposable Personal Income

August 2016 saw personal income increasing by 0.2% or $39.3 and personal consumption expenditures increased by $6.2B (<0.1%). The increase reflects an increase in employee wages, personal increase receipt on assets, and government social benefits to people. (54)

Source: FRED

As per the above chart, real disposable income has been on a steadily increasing trend. This trend is likely to make

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consumers better-off and leave them with greater discretionary income to spend on premium products such as Apple iPhone. We expect Apple to experience tail-winds from this macroeconomic indicator.

Exchange Rates

The international market for Apple Inc. accounts for 65% of the revenue, making the company susceptible to foreign currency exchange rates. We expect the $ Euro rate to stand at 1.12 in the coming 6 months, while the Yen $ rate to stand at 100.75. However, Apple Inc., which keeps much of its international profits overseas due to tax benefits is less likely to be hurt by exchange rate fluctuations. A strengthening dollar, however will help Apple Inc. with it supplier base, which are mostly located in Asia.

CATALYSTS FOR GROWTH

Sales of iPhone 7:

The single biggest catalyst for growth is the reception by and sales of the iPhone 7 to consumers. The product accounts for roughly 2/3rd of the revenues. Any defect, logistics issue, bad publicity, battery issues has the potential to jeopardize the value of the stock.

Samsung Recall

The recent recall by Samsung of its smartphones due to battery issues has presented Apple with a perfect opportunity to capture the market share from the top competitor.

INVESTMENT POSITIVES

• Apple has a strategic brand significance in every business line it competes. The company has been able to produce some of the most innovative products, which are difficult for its competitors to match. Thus, the company has been able to command a price premium.

• A gross and a net margin of 38.5% and 23.1%, which are the best in the industry. By outsourcing its manufacturing, and using subsidiaries in Ireland as tax haven, the company has been able to achieve significant margins.

• Relatively low P/E ratio of 13.4 indicates that the company is undervalued and is a value stock.

• Strong cash balances totaling to $205 Billion that include cash, cash equivalent and securities allows it to be liquid and tide over short term issues or economic downturns better than its competitors.

• The launch of the new iPhone 7 in September 2016 is expected to revive the declining sales of the smartphone. Coupled with the recall of Samsung’s smartphone products due to faulty batteries, this launch has the potential for Apple to increase its market share in the segment.

• Heavy investment in Research and Development to the tune of $8.1B, $6B, and $4.5B in 2015, 2014, and 2013 respectively, has the potential to churn out state-of-art products.

INVESTMENT NEGATIVES

• The success of the company is tied up to a single product line as nearly 2/3rd of the top line is driven by the sale of the iPhone. Increasing dependence on the smartphone segment and less diversification is a potential risk to the value of the stock.

• The personal computing market and segment runs the risk of being commoditized in future. Till date, Apple has been able to successfully ward of competition by differentiating itself. But competitors may match Apple capabilities in the future and put a downward pressure on margins in the segment.

• The European Commission has ordered Ireland to collect the $14.5 B plus interest in taxes from the company. Apple is set to appeal the order. However, if the order goes against the company, it may put a downward pressure on the stock of the company.

VALUATION

Apple follows a 52/53 week fiscal year ending in September. The valuation of Apple Inc. was carried out using DCF, DDM and Relative P/E valuation techniques. The three approaches presented a price of $168.72, $111.67 and $171.78 respectively. We believe the stock value is most closely captured by the DCF valuation as it most closely captures the revenue decomposition and growth forecasts of the different lines of business. Hence, we have given a BUY rating to the stock. The stock currently trades for around $114.92 and thus we estimate an upside of 46.81% that can be captured in the long run.

Page 13

The DDM valuation presented a price of $111.67. In our analysis, we have used DDM valuation method, but we believe that this approach under-quotes the true value of the stock. The company has a commitment to pay dividends in the future to return value to shareholders.

Source: Forbes

The Relative P/E valuation presented a price of $171.78. In carrying out Relative P/E valuation we chose technology companies such as Google, Microsoft, Facebook, Hewlett Packard Enterprise and Intel that have historically been innovative growth companies, that have large market capitalization and those that have catered to large user bases. Further, these companies are known to be market leaders in their respective areas of business and are known to be mature companies, with the exception of Facebook. We have also included Hewlett Packard Inc., which competes with Apple in the personal computing space. We are cognizant of the fact that the closest archrival of Apple on a head on basis is Samsung, but we chose to disregard Samsung as the company does not trade on American exchanges. Thus, we understand that the peers chosen have different business models and revenue generation segments and are not strictly competitors of each other. We expect Apple to trade at multiples similar to these companies as it is a mature company just like its peers. Hence, the Relative valuation model is a good approximation of the true value of the Apple stock and supports the valuation generated by DCF approach as explained below.

The DCF valuation is based on the revenue decomposition of different areas of business. Apple generates most of its revenue from the sale of iPhones. This product accounts for around 66% of the company’s revenues and is the primary driver behind this valuation. The FY 2015 saw a whopping 52% Y-O-Y increase in iPhone sales due to the launch of iPhone 6 and iPhone 6s in the last quarter of FY14 and due to a burgeoning demand in the Chinese market.

The product was well received by consumers owing to the increase in screen-size. The sales for FY16 for the first three quarters have however fallen by 12%. We expect this trend to continue in the fourth quarter and have, thus, assumed a decrease of 12% for the FY16. This, steep drop in sales was, nonetheless, to- be expected due to the sharp increase in sales in the previous year, no new product launches in between, and softness in the Chinese market. However, we expect the sales of iPhone to show a recovery in the years 2017-2020 due to the launch of the iPhone 7 in September 2016. Thus we have assumed a unit shipment CAGR of 3.78% Y-O-Y in line with the global shipment of smartphones, as seen in the chart below. This translates to a revenue CAGR of 2.05% Y-O-Y for the same period as we expect the average unit price to increase in 2017 due to launch of iPhone 7 and then decrease by 1% every year, due to price competition by other players.

Source: Statista

We see a trend of healthy but slower growth in the foreseeable future, as compared to the trend for past 3 quarters, in the smartphone space.

The second line of business includes the iPad. The iPad accounts for roughly 11% of the company’s revenues. The revenue from the product decreased by 16% in the first 9 months of FY16, while the unit sales were down by 16%. The sale per unit, however, showed a slight improvement of 2.48% from $423 in FY15 to $434 in FY16. The sales of the product are experiencing a steady decline, since 2014. We expect the demand to be flat in FY17, and the sales increasing modestly thereafter.

The below charts serve the rationale behind our iPad forecasts. As per the chart, the global shipments of tablets

Page 14

are expected to increase from 181 million in 2017 to 194 million in 2020.

Source: Statista

Further, the market share of Apple iPad is expected to remain at 26% for the years 2017-2019, and decrease to 23% in 2020.

Source: Statista

Thus, we obtain the Apple iPad shipments forecasts for the years 2017-2020, as below. Assuming, the Sale/ Unit declines by 1% every year from a price of $434 in FY16 for the forecasted years, we obtain a flat revenue growth for 2017, with the revenue slowly picking up there-after. Here, we assume that price competition will force Apple to slightly lower the price of their tablets, which run the risk of being commoditized.

2017 2018 2019 2020

Global Tablet Shipment Forecast 181 184 189 194

Apple Market Share iPad Forecast 26% 26% 26% 23%

Apple iPad Shipment Forecast 46 47 49 44

The Mac segment accounts for 11% of the total revenue and is the second biggest product line. The Mac revenues were down 8% in the first nine months of FY16, after showing a healthy growth of 6% in FY15. Our research indicates that the personal computing market is saturated and commoditized to a great extent and thus, we expect a zero percent growth in the PC market for the years 2017-2020, an assumption supported by the below chart.

Source: Statista

However, we expect Mac, being premium and niche products, to capture market share from competitors in the coming years and have assumed a modest 1% CAGR for the unit sales that translates to almost a flat revenue growth as we expect the price of the Mac to decline 1% every year for the forecasted years 2017-2020.

The Other Products segment accounts for around 4% of the company’s revenues and is driven primarily by the sales of Apple Watch and the iPod. In the absence of

Page 15

historical data in the Apple 10K, we assume a healthy CAGR of 5% in the Other Products segment. The company’s choice to bundle together a plethora of products under a single section in the 10k, is driven by a desire to maintain a competitive advantage over its rivals.

Source: Statista

The Services segment has shown a CAGR of 11% from 2012 to 2015. We expect the growth to continue, but at a slower pace of 5%. This segment accounts for around 9% of the revenue of the company. The launch of Apple Music in June 2015 is a factor behind our 5% CAGR assumption.

Source: Statista

Capital Expenditures: In regards to the capital

expenditures, we have grown the property, plant and

equipment at a rate of 35%, slightly higher than the past

three year’s average. We estimate that Apple Inc.’s

project of self-driven cars will require significant PPE

investments, and thus the higher rate.

Risk Premium: We believe that a 5% risk premium

adequately captures the risk associated with the market

over and above the risk free rate.

Beta: We set the beta to 1.38 as per the estimate available on FactSet. This value reflects the historical deviation of the Apple stock in relation to the market.

CV growth of NOPLAT: Statista forecasts the global GDP to grow at 3.8% in 2018. We assume a conservative long-term growth of 3% beyond 2020, when we expect the business to mature. Since Apple generates roughly 35% revenue domestically and 65% internationally, we feel that growing the company in line with the global gdp level will be a rationale choice. Hence we approximate the long term growth rate at 3%. Further since the price of the stock is extremely sensitive to the CV growth rate, we have conducted a sensitivity analysis. We see that even at a 0% CV growth rate, the stock has an intrinsic value of 129 and thus there is an upside. The sensitivity analysis re-affirms our belief that this is a value stock.

Source: Statista

Amortization of Intangibles:

We have amortized the intangibles according to the schedule presented in the company 10k

Amortization Table

2016 2017 2018 2019 2020

1288 1033 786 342 166

Source: Apple Inc. 10K

Page 16

Current Portion of Long-Term Debt:

The principal due for the forecasted years is presented in the 10K as below:

Principal Due

2016 2017 2018 2019 2020

3500 6000 3775 5581 5581

Source: Apple Inc. 10K

Cost of Sales: We have grown the cost of sales at last three

years average of 61.24% as percentage of sales. We do not

expect the cost of sales to significantly differ in the

foreseeable future from this value.

SG&A: We have grown the SG&A at last three years

average of 6.34% as percentage of sales. We do not expect

the SG&A costs to rise significantly in the foreseeable

future.

R&D: The Company is heavily focused on Research and

Development to furnish new updates, features, and

products. The years 2013, 2014, 2015 saw a R&D

expenditure of $4.4B, $6B and $8B respectively. This

translates to a CAGR rate of 22% in R&D since 2013. We

have grown the R&D for the forecasted years at the

historical average of 3.5% as percentage of sales.

The 44 analysts that currently cover Apple have presented

a consensus target price of 123.66 and have a price range

of $65 to $173. The median price is around 125. Our target

price is higher than analyst expectations. The reason for

our higher expectations has been the launch of the

iPhone7, which is expected to add to the top line. A lot of

the analyst reports have not been updated based on the

latest iPhone launch and, hence, we feel the consensus

target price is not rectified. To achieve a price range we

have conducted various sensitivity analysis by minutely

varying parameters such as Beta, Risk Premium,

Continuing value of NOPLAT growth and WACC.

KEYS TO MONITOR

Samsung Recall

The recent news of Samsung recalling its products due to faulty batteries has presented Apple with an opportunity

to increase market share. It is important to monitor how fast Samsung reacts and takes steps to cut losses. Actions such as price cuts could force Apple to cut margins.

iPhone 7 reviews by consumer

The most crucial parameter to monitor is the reception of iPhone 7 by consumers. Any defects, logistics issues, bad reviews has the potential to destroy value for the company. Further, this can trickle to other segments of the company and result in loss of market share.

REFERENCES

1. Apple Inc. 10 K. 2. Wikipedia

https://en.wikipedia.org/wiki/Apple_Inc. 3. Fact Set 4. Yahoo Finance 5. IBIS World 6. Bloomberg 7. Statista 8. Gartner 9. Mergent 10. S &P IQ 11. US Treasury website

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

12. Bloomberg: http://www.bloomberg.com/news/articles/2016-09-08/here-s-how-much-or-little-apple-s-iphone-has-changed-through-the-years?utm_content=business&utm_campaign=socialflow-organic&utm_source=facebook&utm_medium=social&cmpid%3D=socialflow-facebook-business

13. Wall Street Journal: http://www.wsj.com/articles/apple-reports-slowing-growth-in-iphone-sales-1453843920

14. Gartner http://www.gartner.com/newsroom/id/3323017

15. Nasdaq http://www.nasdaq.com/article/why-and-how-to-invest-in-samsung-ssnlf-cm610116

16. Dividend.com http://www.dividend.com/dividend-stocks/technology/personal-computers/aapl-apple-inc/

Page 17

17. Fortune http://fortune.com/2016/01/21/apple-watch-q1-2016/

18. http://www.bloomberg.com/news/articles/2016-04-26/apple-forecasts-another-sales-decline-as-iphone-demand-cools

19. Fool.com http://www.fool.com/investing/general/2016/02/24/gartner-reports-apples-iphone-business-is-already.aspx

20. World Bank https://www.worldbank.org/en/publication/global-economic-prospects

21. Investopedia iPhone 7 http://www.investopedia.com/news/apple-down-after-iphone-7-announcements-aapl/?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186

22. Investopedia http://www.investopedia.com/articles/investing/022316/economics-iphone-aapl.asp

23. Investopedia http://www.investopedia.com/news/apple-debuts-new-iphones-and-apple-watch-aaplfit/

24. Investopedia http://www.investopedia.com/news/iphone-7-plus-initial-stock-sold-out-says-apple-aapl/

25. Wall Street Journal http://www.wsj.com/articles/apples-new-iphones-arrive-as-glow-fades-1473099607

26. CNBC http://www.cnbc.com/2016/09/14/apple-shares-just-did-something-they-havent-done-since-2009.html

27. WSJ - Turi acquisition http://www.wsj.com/articles/apple-buys-machine-learning-startup-turi-1470448718

28. Fortune - Turi Acquisition http://fortune.com/2016/08/08/apple-machine-learning-turi/

29. Bloomberg - Turi acquisition http://www.bloomberg.com/news/articles/2016-08-05/apple-buys-ai-startup-turi-for-about-200-million

30. Fortune - Emotient acquisition http://fortune.com/2016/01/07/apple-emotient-acquisition/

31. Verge - Emotient acquisition

http://www.theverge.com/2016/1/7/10731232/apple-emotient-ai-startup-acquisition

32. Venturebeat http://venturebeat.com/2016/01/07/apple-has-reportedly-acquired-facial-expression-recognition-startup-emotient/

33. WSJ - Emotient Acquisition http://www.wsj.com/articles/apple-buys-artificial-intelligence-startup-emotient-1452188715

34. WSJ – Gliimpse Acquisition http://www.wsj.com/articles/apple-purchases-medical-startup-gliimpse-1471891422

35. Verge http://www.theverge.com/2016/8/22/12584416/apple-gliimpse-acquisition-personal-health-big-data

36. WSJ http://www.wsj.com/articles/apple-purchases-medical-startup-gliimpse-1471891422

37. Techcrunch https://techcrunch.com/2016/08/22/apple-acquired-gliimpse-a-personal-health-data-startup/

38. Fortune – Gliimpse Acquisition http://fortune.com/2016/08/22/apple-acquires-gliimpse/

39. Forbes – Warren Buffett investment http://www.forbes.com/sites/gurufocus/2016/05/23/warren-buffetts-billion-dollar-apple-investment/#2bca1c771522

40. NPR http://www.npr.org/sections/thetwo-way/2016/08/30/491913544/apple-owes-ireland-14-5-billion-in-taxes-european-commission-says

41. Apple Insider http://appleinsider.com/articles/16/09/15/us-treasury-guidance-could-stop-apple-from-recouping-irish-taxes-at-home

42. New York Times http://www.nytimes.com/2016/08/31/technology/apple-tax-eu-ireland.html?_r=0

43. New York Times – Ireland Taxes http://www.nytimes.com/2016/09/12/business/international/ireland-doesnt-want-apples-back-taxes-but-the-irish-arent-so-sure.html

44. Fortune http://fortune.com/2016/08/23/apple-samsung-smartphone-profits/

45. Apple Insider

Page 18

http://appleinsider.com/articles/15/11/16/apple-inc-now-inhaling-94-percent-of-global-smartphone-profits-selling-just-145-percent-of-total-volumes

46. CNBC – Tablet market http://www.cnbc.com/2016/04/28/the-tablet-market-is-collapsing.html

47. CNBC – PC market http://www.cnbc.com/2016/01/13/pc-market-has-worst-year-ever-apple-bucks-the-trend.html

48. Consumer Conference Board https://www.conference-board.org/data/consumerconfidence.cfm

49. Bureau of Economic Analysis http://www.bea.gov/newsreleases/national/gdp/2016/gdp2q16_adv.htm

50. World Bank http://www.worldbank.org/en/publication/global-economic-prospects#data

51. Bloomberg – Apple Store http://www.bloomberg.com/news/articles/2016-09-16/the-apple-store-line-is-dying-as-iphone-fans-order-more-online?utm_content=business&utm_campaign=socialflow-organic&utm_source=facebook&utm_medium=social&cmpid%3D=socialflow-facebook-business

52. Fortune – Taxes Ireland http://fortune.com/2016/08/30/apple-tax-ireland-ruling/

53. WSJ- Ireland Taxes http://www.wsj.com/articles/apple-received-14-5-billion-in-illegal-tax-benefits-from-ireland-1472551598

54. BEA http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm

55. Trading economics- Disposable income http://www.tradingeconomics.com/united-states/disposable-personal-income

56. FRED- Disposable Income https://fred.stlouisfed.org/series/DSPIC96

57. Statista- Disposable Income https://www-statista-com.proxy.lib.uiowa.edu/statistics/216773/monthly-percentage-of-change-in-the-disposable-personal-income-in-the-us/

IMPORTANT DISCLAIMER

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

Apple Inc.

Revenue Decomposition

Fiscal Years Ending Sep. 26‐2015 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Total Net Revenue 170910 182795 233715 221020 229517 235651 242197 246662

% Change Y-Y 9.20% 6.95% 27.86% ‐5.43% 3.84% 2.67% 2.78% 1.84%

Net Sales by Product: 

iPhone  91279 101991 155041 140749 147530 151576 155732 160003

% Change Y-Y 16.00% 11.74% 52.01% ‐9.22% 4.82% 2.74% 2.74% 2.74%

iPad  31980 30283 23227 20050 19929 20088 20451 18518

% Change Y-Y 3.34% ‐5.31% ‐23.30% ‐13.68% ‐0.61% 0.80% 1.81% ‐9.45%

Mac  21483 24079 25471 23423 23421 23419 23416 23414

% Change Y-Y ‐7.48% 12.08% 5.78% ‐8.04% ‐0.01% ‐0.01% ‐0.01% ‐0.01%

Services  16051 18063 19909 24228 25439 26711 28047 29449

% Change Y-Y 24.52% 12.54% 10.22% 21.69% 5.00% 5.00% 5.00% 5.00%

OtherProducts(Includes Ipod) 10117 8379 10067 12569 13197 13857 14550 15278

% Change Y-Y ‐5.98% ‐17.18% 20.15% 24.85% 5.00% 5.00% 5.00% 5.00%

Unit Sales by Product:

iPhone 150257 169219 231218 214417 222522 230933 239663 248722

% Change Y-Y 20.16% 12.62% 36.64% ‐7.27% 3.78% 3.78% 3.78% 3.78%

iPad 71033 67977 54856 46206 46390 47233 48573 44426

% Change Y-Y 21.82% ‐4.30% ‐19.30% ‐15.77% ‐0.61% 0.80% 1.81% ‐9.45%

Mac 16341 18906 20587 19307 19500 19695 19892 20091

% Change Y-Y ‐10.01% 15.70% 8.89% ‐6.22% 1.00% 1.00% 1.00% 1.00%

Sales/iPhone 607 603 671 656 663 656 650 643

Sales/iPad 450 445 423 434 430 425 421 417

Sales/Mac 1315 1274 1237 1213 1201 1189 1177 1165

Apple Inc.

Income Statement

Fiscal Years Ending Sep. 26‐2015 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Net sales 170910 182795 233715 221020 229517 235651 242197 246662

Cost of sales 106606 112258 140089 135358 140562 144319 148328 151062

Gross margin 64304 70537 93626 85662 88955 91332 93869 95600

Research & development expense 4475 6041 8067 7736 8033 8248 8477 8633

Selling, general & administrative expense 10830 11993 14329 14019 14558 14947 15362 15645

Total operating expenses 15305 18034 22396 21755 22591 23195 23839 24279

Operating income (loss) 48999 52503 71230 63907 66364 68138 70030 71321

Interest & dividend income 1616 1795 2921 2341 2431 2496 2565 2612

Interest expense 136 384 733 579 601 617 634 646

Other income (expense), net -324 -431 -903 ‐598 ‐621 ‐638 ‐655 ‐667

Other income (expenses), net 1156 980 1285 1164 1209 1241 1276 1299

Income (loss) before provision for income taxes 50155 53483 72515 65071 67573 69379 71306 72620

Provision for (benefit from) income taxes 13118 13973 19121 17939 18628 19126 19657 20020

Net income (loss) 37037 39510 53394 47132 48944 50253 51649 52601

Year end shares outstanding 6294.491 5866.161 5578.753 5,318 5,079 4,860 4,660 4,538

Net earnings (loss) per common share - basic 5.719 6.49 9.28 8.86 9.64 10.34 11.08 11.59

Cash dividends declared per common share 1.629 1.82 1.98 2.00 2.02 2.04 2.06 2.08

Payout Ratio 28.48% 28.04% 21.34% 22.56% 20.96% 19.73% 18.59% 17.95%

Apple Inc.

Balance Sheet

Fiscal Years Ending Sep. 26‐2015 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Cash & cash equivalents 14259 13844 21120 23772 38528 46910 52894 49678

Short-term marketable securities 26287 11233 20481 22324 24333 26523 28911 31513

Accounts receivable, gross 13201 17546 16931 16188 16811 17260 17740 18067

Allowances 99 86 82 111 116 119 122 124

Accounts receivable, net 13102 17460 16849 16077 16695 17141 17618 17942

Inventories 1764 2111 2349 2352 2442 2507 2577 2625

Deferred tax assets 3453 4318 5546 5156 5354 5497 5650 5754

Vendor non-trade receivables 7539 9759 13494 15471 16066 16496 16954 17266

Other current assets 6882 9806 9539 15471 16066 16496 16954 17266

Total current assets 73286 68531 89378 100624 119486 131571 141557 142044

Long-term marketable securities 106215 130162 164065 173909 184343 195404 207128 219556

Gross property, plant & equipment 28519 39015 49257 66497 89771 121191 163607 220870

Accumulated depreciation & amortization 11922 18391 26786 36810 50052 67770 91599 123720

Property, plant & equipment, net 16597 20624 22471 29687 39718 53421 72008 97150

Goodwill 1577 4616 5116 5116 5116 5116 5116 5116

Acquired intangible assets, net 4179 4142 3893 3762 4057 4796 6207 8053

Other assets 5146 3764 5556 5556 5556 5556 5556 5556

Total assets 207000 231839 290479 318654 358277 395865 437572 477475

Accounts payable 22367 30196 35490 32999 34268 35184 36161 36828

Accrued expenses 13856 18453 25181 21348 22169 22761 23393 23825

Deferred revenue 7435 8491 8940 9186 9539 9794 10066 10251

Commercial paper - 6308 8499 7832 8133 8351 8583 8741

Current portion of long-tm debt - - 2500 3500 6000 3775 5581 5581

Total current liabilities 43658 63448 80610 74865 80108 79864 83784 85225

Deferred revenue - non-current 2625 3031 3624 8454 8779 9014 9264 9435

Long-term debt 16960 28987 53463 49963 43963 40188 34607 29026

Deferred tax liabilities 16489 20259 24062 22858 23737 24371 25048 25510

Other non-current liabilities 3719 4567 9365 6396 6642 6819 7009 7138

Other non-current liabilities 20208 24826 33427 29254 30379 31190 32057 32648

Total liabilities 83451 120292 171124 162536 163229 160257 159712 156334

Common stock 19764 23313 27416 27681 27925 28148 28354 28476

Retained earnings 104256 87152 92284 128782 167467 207805 249851 293009

Accumulated other comprehensive income (loss) -471 1082 -345 ‐345 ‐345 ‐345 ‐345 ‐345

Total shareholders' equity 123549 111547 119355 156118 195047 235608 277860 321141

Total Liabilities and Stockholders equity 207000 231839 290479 318654 358277 395865 437572 477475

Apple Inc.

Cash Flow Statement

Fiscal Years Ending Sep. 26‐2015 2013 2014 2015

Cash & cash equivalents, beginning of the year 10746 14259 13844

Net income (loss) 37037 39510 53394

Depreciation & amortization 6757 7946 11257

Share-based compensation expense 2253 2863 3586

Deferred income tax expense (benefit) 1141 2347 1382

Accounts receivable, net -2172 -4232 611

Inventories -973 -76 -238

Vendor non-trade receivables 223 -2220 -3735

Other current & non-current assets 1080 167 -179

Accounts payable 2340 5938 5400

Deferred revenue 1459 1460 1042

Other current & non-current liabilities 4521 6010 8746

Net cash flows from operating activities 53666 59713 81266

Purchases of marketable securities -148489 -217128 -166402

Proceeds from maturities of marketable securities 20317 18810 14538

Proceeds from sales of marketable securities 104130 189301 107447

Payments made in connection with business acquisitions, net -496 -3765 -343

Payment for acquisition of property, plant & equipment -8165 -9571 -11247

Payment for acquisition of intangible assets -911 -242 -241

Other cash flow from investing activities -160 16 -26

Net cash flows from investing activities -33774 -22579 -56274

Proceeds from issuance of common stock 530 730 543

Excess tax benefits from equity awards 701 739 749

Taxes paid related to net share settlement of equity awards -1082 -1158 -1499

Dividends & dividend equivalent -10564 -11126 -11561

Repurchases of common stock -22860 -45000 -35253

Proceeds from issuance of term debt, net 16896 11960 27114

Proceeds from issuance of commercial paper, net - 6306 2191

Net cash flows from financing activities -16379 -37549 -17716

Increase (decrease) in cash & cash equivalents 3513 -415 7276

Cash & cash equivalents, end of the year 14259 13844 21120

Cash paid (received) for income taxes, net 9128 10026 13252

Cash paid during the year for interest - 339 514

Apple Inc.

Cash Flow Forecasted Statement

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

Net income 47132 48944 50253 51649 52601

Add: Depreciation 10024 13243 17717 23830 32121

Add: Amortization 1288 1033 786 342 166

Accounts Receivable, net 772 ‐618 ‐446 ‐476 ‐325

Inventories ‐3 ‐90 ‐65 ‐70 ‐48

Vendor Non Trade Receivables ‐1977 ‐595 ‐429 ‐458 ‐313

Prepaid expenses & other current assets ‐5932 ‐595 ‐429 ‐458 ‐313

Deferred Tax Assets 390 ‐198 ‐143 ‐153 ‐104

Other assets 0 0 0 0 0

Accounts payable ‐2491 1269 916 977 667

Accrued expenses & other current liabilities ‐3833 821 592 632 431

Deferred Revenue 246 353 255 272 186

Deferred revenue & deposits 4830 325 235 250 171

Other liabilities,net ‐4173 1125 812 866 591

Net cash flows from operating activities 46272 65016 70052 77204 85831

Intangible assets, Gross ‐1157 ‐1328 ‐1526 ‐1752 ‐2012

Short-term marketable securities ‐1843 ‐2009 ‐2190 ‐2387 ‐2602

Long-term marketable securities ‐9844 ‐10435 ‐11061 ‐11724 ‐12428

Property & equipment, Gross ‐17240 ‐23274 ‐31420 ‐42417 ‐57263

Goodwill 0 0 0 0 0

Commercial Paper ‐667 301 217 232 158

Net cash flows from investing activities ‐30750 ‐36745 ‐45979 ‐58048 ‐74147

Current portion of Long-term debt 1000 2500 ‐2225 1806 0

Long-term debt ‐3500 ‐6000 ‐3775 ‐5581 ‐5581

Cash Dividend Payment ‐10635 ‐10259 ‐9915 ‐9602 ‐9443

Accumulated other Comprehensive Income 0 0 0 0 0

Common Stock 265 244 223 205 123

Net cash flows from financing activities ‐12869 ‐13515 ‐15692 ‐13172 ‐14901

Cash Flow from all activities: 2652 14756 8382 5984 ‐3216

Net increase in cash & cash equivalents

Cash & cash equivalents, beginning of year 21120 23772.374 38528.272 46910.238 52894.057

Cash & cash equivalents, end of year 23772 38528 46910 52894 49678

Apple Inc.

Common Size Income Statement

Fiscal Years Ending Sep. 26‐2015 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Net sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Cost of sales 62.38% 61.41% 59.94% 61.24% 61.24% 61.24% 61.24% 61.24%

Gross margin 37.62% 38.59% 40.06% 38.76% 38.76% 38.76% 38.76% 38.76%

Research & development expense 2.62% 3.30% 3.45% 3.50% 3.50% 3.50% 3.50% 3.50%

Selling, general & administrative expense 6.34% 6.56% 6.13% 6.34% 6.34% 6.34% 6.34% 6.34%

Total operating expenses 8.96% 9.87% 9.58% 9.84% 9.84% 9.84% 9.84% 9.84%

Operating income (loss) 28.67% 28.72% 30.48% 28.91% 28.91% 28.91% 28.91% 28.91%

Interest & dividend income 0.95% 0.98% 1.25% 1.06% 1.06% 1.06% 1.06% 1.06%

Interest expense 0.08% 0.21% 0.31% 0.26% 0.26% 0.26% 0.26% 0.26%

Other income (expense), net ‐0.19% ‐0.24% ‐0.39% ‐0.27% ‐0.27% ‐0.27% ‐0.27% ‐0.27%

Other income (expenses), net 0.68% 0.54% 0.55% 0.53% 0.53% 0.53% 0.53% 0.53%

Income (loss) before provision for income taxes 29.35% 29.26% 31.03% 29.44% 29.44% 29.44% 29.44% 29.44%

Provision for (benefit from) income taxes 7.68% 7.64% 8.18% 8.12% 8.12% 8.12% 8.12% 8.12%

Net income (loss) 21.67% 21.61% 22.85% 21.33% 21.33% 21.33% 21.33% 21.33%

Apple Inc.

Common Size Balance Sheet

Fiscal Years Ending Sep. 26‐2015 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Cash & cash equivalents 8.34% 7.57% 9.04% 10.76% 16.79% 19.91% 21.84% 20.14%

Short-term marketable securities 15.38% 6.15% 8.76% 10.10% 10.60% 11.26% 11.94% 12.78%

Accounts receivable, gross 7.72% 9.60% 7.24% 7.32% 7.32% 7.32% 7.32% 7.32%

Allowances 0.06% 0.05% 0.04% 0.05% 0.05% 0.05% 0.05% 0.05%

Accounts receivable, net 7.67% 9.55% 7.21% 7.27% 7.27% 7.27% 7.27% 7.27%

Inventories 1.03% 1.15% 1.01% 1.06% 1.06% 1.06% 1.06% 1.06%

Deferred tax assets 2.02% 2.36% 2.37% 2.33% 2.33% 2.33% 2.33% 2.33%

Vendor non-trade receivables 4.41% 5.34% 5.77% 7.00% 7.00% 7.00% 7.00% 7.00%

Other current assets 4.03% 5.36% 4.08% 7.00% 7.00% 7.00% 7.00% 7.00%

Total current assets 42.88% 37.49% 38.24% 45.53% 52.06% 55.83% 58.45% 57.59%

Long-term marketable securities 62.15% 71.21% 70.20% 78.68% 80.32% 82.92% 85.52% 89.01%

Gross property, plant & equipment 16.69% 21.34% 21.08% 30.09% 39.11% 51.43% 67.55% 89.54%

Accumulated depreciation & amortization 6.98% 10.06% 11.46% 16.65% 21.81% 28.76% 37.82% 50.16%

Property, plant & equipment, net 9.71% 11.28% 9.61% 13.43% 17.31% 22.67% 29.73% 39.39%

Goodwill 0.92% 2.53% 2.19% 2.31% 2.23% 2.17% 2.11% 2.07%

Acquired intangible assets, net 2.45% 2.27% 1.67% 1.70% 1.77% 2.04% 2.56% 3.26%

Other assets 3.01% 2.06% 2.38% 2.51% 2.42% 2.36% 2.29% 2.25%

Total assets 121.12% 126.83% 124.29% 144.17% 156.10% 167.99% 180.67% 193.57%

Accounts payable 13.09% 16.52% 15.19% 14.93% 14.93% 14.93% 14.93% 14.93%

Accrued expenses 8.11% 10.09% 10.77% 9.66% 9.66% 9.66% 9.66% 9.66%

Deferred revenue 4.35% 4.65% 3.83% 4.16% 4.16% 4.16% 4.16% 4.16%

Commercial paper - 3.45% 3.64% 3.54% 3.54% 3.54% 3.54% 3.54%

Current portion of long-tm debt - - 1.07% 1.58% 2.61% 1.60% 2.30% 2.26%

Total current liabilities 25.54% 34.71% 34.49% 33.87% 34.90% 33.89% 34.59% 34.55%

Deferred revenue - non-current 1.54% 1.66% 1.55% 3.83% 3.83% 3.83% 3.83% 3.83%

Long-term debt 9.92% 15.86% 22.88% 22.61% 19.15% 17.05% 14.29% 11.77%

Deferred tax liabilities 9.65% 11.08% 10.30% 10.34% 10.34% 10.34% 10.34% 10.34%

Other non-current liabilities 2.18% 2.50% 4.01% 2.89% 2.89% 2.89% 2.89% 2.89%

Other non-current liabilities 11.82% 13.58% 14.30% 13.24% 13.24% 13.24% 13.24% 13.24%

Total liabilities 48.83% 65.81% 73.22% 73.54% 71.12% 68.01% 65.94% 63.38%

Common stock 11.56% 12.75% 11.73% 12.52% 12.17% 11.94% 11.71% 11.54%

Retained earnings 61.00% 47.68% 39.49% 58.27% 72.97% 88.18% 103.16% 118.79%

Accumulated other comprehensive income (loss) ‐0.28% 0.59% ‐0.15% ‐0.16% ‐0.15% ‐0.15% ‐0.14% ‐0.14%

Total shareholders' equity 72.29% 61.02% 51.07% 70.64% 84.98% 99.98% 114.72% 130.19%

Apple Inc.

Value Driver Estimation

Fiscal Years Ending Sep. 26‐2015 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Marginal Tax Rate Calculation

Federal Statuatory rate 35% 35% 35% 35% 35% 35% 35% 35%

State income taxes, net of federal tax benefit 2% 1% 1% 2% 2% 2% 1% 1%

Foreign rate differential  ‐2% ‐3% ‐4% ‐5% ‐4% ‐4% ‐4% ‐4%

Marginal Tax Rate  34% 33% 32% 32% 32% 32% 32% 32%

EBITA Calculation

Total Revenue 170910 182795 233715 221020 229517 235651 242197 246662

‐COGS ‐106606 ‐112258 ‐140089 ‐135358 ‐140562 ‐144319 ‐148328 ‐151062

‐SG&A ‐10830 ‐11993 ‐14329 ‐14019 ‐14558 ‐14947 ‐15362 ‐15645

‐Research and Development ‐4475 ‐6041 ‐8067 ‐7736 ‐8033 ‐8248 ‐8477 ‐8633

‐Amortization of Purchased Intangible Assets 0 0 0 ‐1288 ‐1033 ‐786 ‐342 ‐166

+Implied Interest on Operating Leases 137 145 181 181 194 208 223 239

EBITA 49136 52648 71411 62800 65525 67560 69912 71395

Less Adjusted Income Taxes

Provision for income taxes 13118 13973 19121 17939 18628 19126 19657 20020

+Tax Shield on Interest expense 47 129 237 186 194 199 205 209

‐Tax Shield on Interest income ‐554 ‐601 ‐946 ‐751 ‐783 ‐805 ‐830 ‐846

+Tax Shield  on Foreign Exchange Currency Loss 0 0 0 1 2 3 4 5

‐Tax Shield  on Other Income,net ‐111 ‐144 ‐292 ‐192 ‐200 ‐206 ‐212 ‐216

+Tax Shield on Op Lease interest 47 49 59 58 62 67 72 78

Total Adjusted Taxes 12546 13405 18178 17240 17904 18384 18897 19249

Plus Changes in Deferred Taxes

Change in Deferred Taxes 1141 2347 1382 ‐390 198 143 153 104

NOPLAT: EBITA‐Adjusted Taxes+Change in DT

NOPLAT 37730 41590 54615 45170 47820 49319 51167 52250

Calculation of Invested Capital 

Operating Current Assets

Cash 14259 13844 21120 23772 38528 46910 52894 49678

Cash as percentage of revenue 3418 3656 4674 4420 4590 4713 4844 4933

Normal Cash 3418 3656 4674 4420 4590 4713 4844 4933

Accounts Receivable 13102 17460 16849 16077 16695 17141 17618 17942

Vendor non‐trade receivables 7539 9759 13494 15471 16066 16496 16954 17266

Inventories 1764 2111 2349 2352 2442 2507 2577 2625

Prepaid Expenses and Other Current assets 6882 9806 9539 15471 16066 16496 16954 17266

Current Operating Assets 32705 42792 46905 53792 55860 57353 58946 60033

Accounts Payable 22367 30196 35490 32999 34268 35184 36161 36828

Accrued expenses & other current liabilities 13856 18453 25181 21348 22169 22761 23393 23825

Deferred revenue & deposits 7435 8491 8940 9186 9539 9794 10066 10251

Current Operating Liabilities 43658 57140 69611 63533 65975 67738 69620 70903

Net Operating Working Capital ‐10953 ‐14348 ‐22706 ‐9741 ‐10115 ‐10385 ‐10674 ‐10871

Plus, Net Property Plant and Equipment 16597 20624 22471 29687 39718 53421 72008 97150

Intangible Assets, Net 4179 4142 3893 3762 4057 4796 6207 8053

Capitalized PV of Operating Leases 4061 4305 5370 5760 6177 6626 7106 7622

Other Operating Assets 5146 3764 5556 5556 5556 5556 5556 5556

Plus, Other Operating Assets, net depreciation 13386 12211 14819 15077 15790 16978 18869 21231

Other long term liabilities 3719 4567 9365 6396 6642 6819 7009 7138

Deferred revenue - non-current 2625 3031 3624 8454 8779 9014 9264 9435

Less: Other Operating Liabilities 6344 7598 12989 14850 15421 15833 16273 16573

Invested Capital 12686 10889 1595 20173 29972 44180 63930 90937

Calculation of Return on Invested Capital

NOPLAT 37730 41590 54615 45170 47820 49319 51167 52250

Beginning Invested Capital 27878 12686 10889 1595 20173 29972 44180 63930

ROIC 135.34% 327.84% 501.55% 2831.39% 237.04% 164.55% 115.82% 81.73%

Economic Profit: Begin IC * ( ROIC ‐WACC) 

Beginning Invested Capital 27878 12686 10889 1595 20173 29972 44180 63930

ROIC 135% 328% 502% 2831% 237% 165% 116% 82%

WACC 8.59% 8.59% 8.59% 8.59% 8.59% 8.59% 8.59% 8.59%

Economic Profit  35335 40500 53679 45033 46087 46744 47372 46758

FCF: NOPLAT+Change in  Invested Capital

NOPLAT 37730 41590 54615 45170 47820 49319 51167 52250

Add: Beg Invested Capital 27878 12686 10889 1595 20173 29972 44180 63930

Less: Current Invested Capital 12686 10889 1595 20173 29972 44180 63930 90937

FCF 52922 43387 63908 26592 38021 35111 31418 25243

Apple Inc.

Weighted Average Cost of Capital (WACC) Estimation

Marginal Tax Rate 32%

Cost of equity Calculation

Risk Free Rate  2.27%

+

Beta* 1.38

Market Risk Premium 5.00%

= Cost of Equity 9.17%

WACC Calculation

Shares outstanding* 5578.753

MV of share $114.92

=Total MV of Equity [E] $641,110.29

MV of debt [D] 58833

Cost of Debt 3.37%

MV of equity $641,110.29

+

MV of debt 58833

= MV of the firm [V] $699,943.32

Cost of Equity * 9.17%

(E/V) 0.916

+

Cost of Debt * 3.37%

(1‐Marginal tax Rate) 68%

(D/V) 0.084

= WACC 8.59%

Apple Inc.

Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:

     CV Growth 3%

     CV ROIC 82%

     WACC 8.59%

     Cost of Equity 9.17%

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

DCF Model

Discount period 1 2 3 4 5

NOPLAT  45170 47820 49319 51167 52250

Continuing Value  900273

Free Cash Flow 26592 38021 35111 31418 25243

Net FCF 26592 38021 35111 931691

PV of free cash flows 24488 32243 27420 670040

Value of Operations 754191

Non Operating Assets

Excess Cash 16446

ST Instruments 20481

LT Instruments 164065

Value of Non Operating Assets 200992

Non Operating Liabilities

PV of Operating Leases 5370

Total Debt 64462

PV of employee stock options 110

Value of Non Operating Liabilities 69942

Equity Value 885240

Shares outstanding 5579

Intrinsic Share Price $158.68

Current Share Price  115

EP Model

Periods to discount 1 2 3 4 5

Economic Profit 45033 46087 46744 47372 46758

Continuing Value 836343

Net  EP  45033 46087 46744 883715

PV of Economic Profit 41470 39083 36504 635538

Initial Invested Capital 1595

Value of Operations 754191

Non Operating Assets

Excess Cash 16446

ST Instruments 20481

LT Instruments 164065

Value of Non Operating Assets 200992

Non Operating Liabilities

PV of Operating Leases 5370

Total Debt 64462

PV of employee stock options 110

Value of Non Operating Liabilities 69942

Equity Value 885240

Shares outstanding 5579

Intrinsic Share Price $158.68

Current Share Price  115

Today 11/16/2016

Next FYE 9/26/2016

Last FYE 9/26/2015

Days in FY 366             

Days to FYE 417             

Elapsed Fraction 1.139

Intrinsic Value Today $170.43

Apple Inc.

Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Sep. 26‐

2015 2016E 2017E 2018E 2019E 2020E

Period of Discount 1 2 3 4 5

EPS 8.86$             9.64$       10.34$     11.08$     11.59$    

Key Assumptions   CV growth 3.00%

   CV ROE 16.38%

   Cost of Equity 9.17%

Future Cash Flows     P/E Multiple (CV Year) 13.24

     EPS (CV Year) 11.59$    

     Future Stock Price 153.47$  

     Dividends Per Share 2.00 2.02 2.04 2.06 2.08

     Future Cash Flows 2.00 2.02 2.04 2.06 155.55$  

     Discounted Cash Flows 1.83 1.69 1.57 1.45 100.31

Intrinsic Value $105.03

Price Today  $114.92

Today 11/16/2016

Next FYE 9/26/2016

Last FYE 9/26/2015

Days in FY 366

Days to FYE 417

Elapsed Fraction 1.139344262

Intrinsic Value Today $112.80

Apple Inc.Relative Valuation Models

EPS EPSTicker Company Price 2016E 2017E P/E 16 P/E 17

GOOGL Alphabet Inc. $807.49 $34.22  $40.52  23.6          19.9         

MSFT Microsoft $57.59 $2.90  $3.23  19.9          17.8         

FB Facebook $130.73 $3.92  $5.03  33.3          26.0         

CSCO Cisco $31.80 $2.43  $2.56  13.1          12.4         

INTC Intel Corp $36.40 $2.47  $2.71  14.7          13.4         

IBM IBM $161.47 $13.51  $14.11  12.0          11.4         

TWTR Twitter Inc. $19.11 $0.50  $0.58  38.2          32.9         

HPQ Hewlett Packard Inc. $14.07 $1.61  $1.60  8.7            8.8           HPE Hewlett Packard Enterp $20.92 $1.92  $2.06  10.9          10.2         

Average 19.4         17.0        

APPL Apple Inc. $114.92 $8.86  $9.64  13.0          11.9         

Implied Value:

   Relative P/E (EPS16)  $  171.78 

   Relative P/E (EPS17) 163.76$  

Apple Inc.

Key Management Ratios

Fiscal Years Ending Sep. 26‐2015 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Liquidity RatiosCurrent Ratio (Current Assets/ Current Liabilities) 1.50 1.68 1.08 1.11 1.34 1.49 1.65 1.69 1.67

Cash Ratio (Cash/ Current Liabilities) 0.28 0.33 0.22 0.26 0.32 0.48 0.59 0.63 0.58

Quick Ratio (Cash + Other Liquid Assets) / current liabilities 0.56 0.63 0.49 0.47 0.53 0.69 0.80 0.84 0.79

Activity or Asset‐Management RatiosAsset Turnover Ratio (Sales/Total Assets) 0.89 0.83 0.79 0.80 0.69 0.64 0.60 0.55 0.52

Receivables Turnover Ratio (Sales/Average Accounts Receivable) 14.32 13.04 10.47 13.87 13.75 13.75 13.75 13.75 13.75

Financial Leverage RatiosDebt‐to‐Equity Ratio (Total Debt/Total Equity) 3.20% 17.01% 29.85% 49.29% 35.69% 25.71% 19.87% 15.01% 11.41%

Equity Ratio (Total Equity/ Total Assets) 67.14% 59.69% 48.11% 41.09% 48.99% 54.44% 59.52% 63.50% 67.26%

Interest Coverage (Operating Income) / (Interest Expense) ‐ 360 137 97 110.42 110.42 110.42 110.42 110.42

Profitability RatiosReturn on Assets (Net Income/Total Assets) 23.70% 17.89% 17.04% 18.38% 14.79% 13.66% 12.69% 11.80% 11.02%

Return on Equity (Net Income/Shareholders Equity) 35.30% 29.98% 35.42% 44.74% 30.19% 25.09% 21.33% 18.59% 16.38%

Gross Margin (Revenue‐COGS)/Revenue 43.87% 37.62% 38.59% 40.06% 38.76% 38.76% 38.76% 38.76% 38.76%

EBIT Margin (EBIT/Sales) 35.30% 28.67% 28.72% 30.48% 28.91% 28.91% 28.91% 28.91% 28.91%

Profit Margin (Net Income/Sales) 26.67% 21.67% 21.61% 22.85% 21.33% 21.33% 21.33% 21.33% 21.33%

Payout Policy Ratios5.97% 89.41% 140.92% 86.71% 22.56% 20.96% 19.73% 18.59% 17.95%

Payout Ratio (Dividend Payout Ratio) 5.94% 28.48% 28.04% 21.34% 22.56% 20.96% 19.73% 18.59% 17.95%

Total Payout Ratio (Dividends paid + Repurchases)/NI

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

Fiscal Years Ending Sep. 26‐2015 Leases Fiscal Years Ending Sep. 26‐2015 Leases Fiscal Years Ending 2016 Leases Fiscal Years Ending 2020 Leases

2016 772 2015 662 2014 610 2013 516

2017 774 2016 676 2015 613 2014 556

2018 744 2017 645 2016 587 2015 542

2019 715 2018 593 2017 551 2016 513

2020 674 2019 534 2018 505 2017 486

Thereafter 2592 Thereafter 1877 Thereafter 1855 Thereafter 1801

Total Minimum Payments 6271 Total Minimum Payments 4987 Total Minimum Payments 4721 Total Minimum Payments 4414

Less: Interest 901 Less: Interest 682 Less: Interest 660 Less: Interest 630

PV of Minimum Payments 5370 PV of Minimum Payments 4305 PV of Minimum Payments 4061 PV of Minimum Payments 3784

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%

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

Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment

1 772 746.8 1 662 640.4 1 610 590.1 1 516 499.2

2 774 724.4 2 676 632.6 2 613 573.7 2 556 520.3

3 744 673.6 3 645 584.0 3 587 531.4 3 542 490.7

4 715 626.2 4 593 519.4 4 551 482.6 4 513 449.3

5 674 571.1 5 534 452.4 5 505 427.9 5 486 411.8

6 & beyond 674 2028.0 6 & beyond 534 1476.5 6 & beyond 505 1455.4 6 & beyond 486 1412.3

PV of Minimum Payments 5370.0 PV of Minimum Payments 4305.3 PV of Minimum Payments 4061.1 PV of Minimum Payments 3783.6

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares):  1.2

Average Time to Maturity (years): 4.10

Expected Annual Number of Options Exercised: 0.29

Current Average Strike Price: 15.08$         

Cost of Equity: 9.17%

Current Stock Price: $114.92

2016E 2017E 2018E 2019E 2020E 2021E 2022E

Increase in Shares Outstanding: 0.29 0.29 0.29 0.29 0.03

Average Strike Price: 15.08$          15.08$          15.08$          15.08$          15.08$         

Increase in Common Stock Account: 4                     4                     4                     4                     0.4                 

Change in Treasury Stock ‐30,000.0 ‐30,000.0 ‐30,000.0 ‐30,000.0 ‐20,000.0

Expected Price of Repurchased Shares: 114.92$        125.46$        136.96$        149.52$        163.23$       

Number of Shares Repurchased: (261)               (239)               (219)               (201)               (123)              

Shares Outstanding (beginning of the year) 5,579 5,318 5,079 4,860 4,660

Plus: Shares Issued Through ESOP 0 0 0 0 0

Less: Shares Repurchased in Treasury (261)               (239)               (219)               (201)               (123)              

Shares Outstanding (end of the year) 5,318 5,079 4,860 4,660 4,538

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol APPL

Current Stock Price $114.92

Risk Free Rate 2.27%

Current Dividend Yield 2.12%

Annualized St. Dev. of Stock Returns 33.00%

Average Average B‐S Value

Range of Number Exercise Remaining Option of Options

Outstanding Options of Shares Price Life (yrs) Price Granted

Range 1 1 15.08 4.10 91.62$         110$                  

Total 1 15.08$         4.10 101.18$      110$                  

Sensitivity Analysis

Beta

170.43 0.8 1 1.2 1.38 1.5 1.6 1.7

4% 392.0 300.5 245.7 212.3 195.2 183.2 172.8

4.25% 363.9 280.6 230.4 199.6 183.9 172.8 163.2

Risk Premium 5% 339.7 263.4 217.1 188.7 174.0 163.7 154.8

4.75% 318.8 248.4 205.5 179.0 165.4 155.8 147.5

5% 300.5 235.2 195.2 170.4 157.7 148.7 140.9

5.25% 284.4 223.5 186.0 162.8 150.8 142.4 135.0

6% 270.0 213.0 177.8 156.0 144.7 136.7 129.8

5.75% 257.2 203.7 170.4 149.8 139.1 131.6 125.0

6% 245.7 195.2 163.7 144.2 134.1 126.9 120.7

6.25% 235.2 187.5 157.7 139.1 129.5 122.7 116.8

Beta

170.43 0.8 1 1.2 1.38 1.5 1.6 1.7

1.75% 227.2 191.1 166.0 149.3 140.2 133.7 127.9

2.00% 238.2 198.1 170.8 152.9 143.2 136.3 130.2

2.25% 250.6 205.8 176.1 156.7 146.4 139.1 132.6

CV Growth 2.50% 264.8 214.5 181.8 160.9 149.9 142.1 135.2

2.75% 281.3 224.2 188.2 165.5 153.6 145.3 137.9

3.00% 300.5 235.2 195.2 170.4 157.7 148.7 140.9

3.10% 309.2 240.0 198.2 172.5 159.4 150.1 142.1

3.50% 350.9 262.1 211.6 181.8 166.8 156.4 147.5

3.75% 384.7 278.8 221.4 188.4 172.0 160.8 151.2

CV Growth

170.43 1.75% 2% 2.25% 2.50% 2.75% 3.00% 3.25% 3.50% 3.75%

6.00% 224.1 234.7 246.7 260.3 276.1 294.5 316.3 342.4 374.3

6.50% 203.2 211.5 220.7 231.0 242.7 256.1 271.6 289.7 311.0

7.00% 186.4 192.9 200.2 208.3 217.3 227.4 238.9 252.1 267.2

WACC 7.40% 175.0 180.6 186.7 193.4 200.9 209.2 218.5 229.0 240.9

8.20% 156.7 160.8 165.2 170.1 175.4 181.2 187.6 194.6 202.5

8.51% 150.7 154.4 158.4 162.7 167.4 172.5 178.1 184.3 191.1

9.00% 142.4 145.5 148.9 152.5 156.5 160.7 165.3 170.4 175.9

9.50% 135.0 137.7 140.6 143.7 147.0 150.5 154.4 158.5 163.0

10.00% 128.6 130.9 133.3 136.0 138.8 141.8 145.0 148.5 152.3

Beta

170.43 0.8 1 1.2 1.38 1.5 1.6 1.7

0% 274.5 215.5 179.4 157.1 145.5 137.4 130.4

1% 281.1 220.5 183.4 160.5 148.6 140.3 133.1

2% 287.9 225.7 187.5 164.0 151.8 143.2 135.8

iPhone Sales 

CAGR% 3% 294.9 231.0 191.8 167.6 155.1 146.3 138.6

4% 300.5 235.2 195.2 170.4 157.7 148.7 140.9

5% 309.5 242.0 200.6 175.1 161.9 152.6 144.5

6% 317.2 247.8 205.3 179.0 165.4 155.9 147.6

7% 325.0 253.7 210.0 183.0 169.1 159.3 150.7

8% 333.1 259.8 214.9 187.1 172.8 162.7 154.0

CV Growth

170.43 1.75% 2% 2.25% 2.50% 2.75% 3.00% 3.25% 3.50% 3.75%

0% 138.1 141.3 144.8 148.6 152.6 157.1 161.9 167.2 173.1

1% 141.0 144.3 147.8 151.7 155.9 160.5 165.4 170.9 177.0

2% 143.9 147.3 151.0 154.9 159.3 164.0 169.1 174.7 181.0

iPhone Sales 

CAGR% 3% 146.9 150.4 154.2 158.3 162.7 167.6 172.8 178.7 185.1

4% 149.3 152.9 156.7 160.9 165.5 170.4 175.9 181.8 188.4

5% 153.1 156.8 160.9 165.2 169.9 175.1 180.7 186.9 193.7

6% 156.4 160.2 164.3 168.8 173.7 179.0 184.8 191.1 198.1

7% 159.7 163.7 167.9 172.5 177.5 183.0 189.0 195.5 202.7

8% 163.2 167.2 171.6 176.4 181.5 187.1 193.3 200.0 207.5

CV Growth

170.43 1.75% 2% 2.25% 2.50% 2.75% 3.00% 3.25% 3.50% 3.75%

58.50% 167.0 171.1 175.5 180.3 185.5 191.2 197.4 204.2 211.7

59.50% 160.5 164.4 168.7 173.2 178.2 183.6 189.5 196.0 203.2

Cost of Sales 60.50% 154.1 157.8 161.8 166.2 170.9 176.1 181.7 187.9 194.7

61.24% 149.3 152.9 156.8 160.9 165.5 170.5 175.9 181.8 188.4

62.50% 141.2 144.5 148.1 152.0 156.3 160.9 166.0 171.5 177.7

63.50% 134.7 137.9 141.3 145.0 149.0 153.3 158.1 163.4 169.1

64.50% 128.2 131.2 134.4 137.9 141.7 145.8 150.3 155.2 160.6

65.50% 121.8 124.6 127.6 130.8 134.3 138.2 142.4 147.0 152.1

66.50% 115.5 118.1 120.9 123.9 127.2 130.8 134.7 139.0 143.8

170.43 3% 170.43 3%Research and 

Development 2.30% 179.52 SG&A 5% 180.5981

2.60% 177.25 5.50% 176.8125

2.90% 174.97 6.00% 173.0269

3.20% 172.70 6.34% 170.4526

3.50% 170.43 7% 165.4553

3.80% 168.16 7.50% 161.6693

4.10% 165.89

4.40% 163.62