After graduating with a degree in finance, you land a job at Apple as a financial analyst. The first project to which you have been assigned is the valuation of a potential acquisition target. Apple is considering widening its competition with Amazon to include big-box retail sales. To that end, Apple is exploring the purchase of a mass merchandiser that is likely to be valued at around $115 billion.

You have been asked to retrieve Apple's WACC as it is often used as the appropriate discount rate when valuing acquisition targets. Sitting at a Bloomberg terminal, you pull up Apple's current WACC.

Before sending the WACC to your manager, you pause and ponder the following questions:

1. Is it appropriate to use Apple's WACC to value this target firm? Why or why not?

2. Will using Apple's WACC as the required return cause us to make a bad investment decision? Why or why not?

3. If we choose not to use Apple's WACC, how can we come up with an appropriate required return for this investment?

4. What would be the most challenging aspects of running an analysis to come up with the appropriate required return?

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Apple Inc Cost of Capital - Current Market Value 3) Equity 4) Debt Cost (A-T) 5) Preferred Equity WACC 11.00- 10.50- 6) History WACC EVA ROIC EVA Spread Track Annotate Q, Zoom 10.00- 9.3312 9.00 8.50- 8.00- 7.50- WACC 9.3312 '12 '13 '14 Weight 95.9% 9.6% 4.1% 2.3% 0.0% 0.0% Cost W x C 9.2% 0.1% 0.0% 9.3% '15 '16 '17 '18 '19 '20 '21 Period MR 2022Q1 Capital Structure (Millions of USD) V Market Cap 2,880,565.2 95.9% 16,169.0 0.5% 106,629.0 3.6% 0.0 0.0% 3,003,363.2 100.0% ST Debt LT Debt Pref. Eqty Total Economic Value Added (Millions of USD) 7) Net Operating Profit 8) Cash Operating Taxes NOPAT ROIC EVA Spread 9) Total Investment Capital Capital Charge Economic Value Added 116903.00 11402.75 105500.25 194730.00 18170.67 87329.59 54.18% 44.85% Apple Inc Cost of Capital - Current Market Value 3) Equity 4) Debt Cost (A-T) 5) Preferred Equity WACC 11.00- 10.50- 6) History WACC EVA ROIC EVA Spread Track Annotate Q, Zoom 10.00- 9.3312 9.00 8.50- 8.00- 7.50- WACC 9.3312 '12 '13 '14 Weight 95.9% 9.6% 4.1% 2.3% 0.0% 0.0% Cost W x C 9.2% 0.1% 0.0% 9.3% '15 '16 '17 '18 '19 '20 '21 Period MR 2022Q1 Capital Structure (Millions of USD) V Market Cap 2,880,565.2 95.9% 16,169.0 0.5% 106,629.0 3.6% 0.0 0.0% 3,003,363.2 100.0% ST Debt LT Debt Pref. Eqty Total Economic Value Added (Millions of USD) 7) Net Operating Profit 8) Cash Operating Taxes NOPAT ROIC EVA Spread 9) Total Investment Capital Capital Charge Economic Value Added 116903.00 11402.75 105500.25 194730.00 18170.67 87329.59 54.18% 44.85%

Answer rating: 100% (QA)

Using Apples WACC to value the potential acquisition target may not be appropriate as the target fir... View the full answer