Period Ending Owners Earnings Discount Factor PV of FCF Current Value Shares Outstanding Intrinsic Value L 2020A |$ 111,443,000,000 $ Assumptions Discount Rate (r) Growth Rate (g1) Terminal Growth Rate $ 4,187,187,215,982 16,325,000,000 256.49 $ 10.00% 14.20% 4.00% S 2021P 2024P 127,267,906,000 $ 145,339,948,652 $ 165,978,221,361 $ 189,547,128,794 $216,462,821,083 $247,200,541,676 $ 282,303,018,594 $ 1.21 1.77 1.95 120,115,660,043 $ 124,701,894,336 $ 129,463,239,392 $134,406,381,260 $139,538,261,271 $144,866,085,793 $ 1.33 1.10 2022P 115,698,096,364 $ 2023P Complete DCF Model 2025P 1.46 2026P 1.61 2027P 2029P 2028P 322,390,047,235 $ 368,169,433,942 $ 2.14 2.36 150,397,336,341 $ 156,139,780,092 $ 2030P 420.449,493,562 $ 2.59 162,101,480,787 $ TV 7,287,791,221,736 2.59 2,809,759,000,304

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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I calculated two different Apple's fair values by using DCF methods. Even though I used the same discount rate, Free cash flow, growth rate, and terminal rate, I got two different fair values. Which one is the right one?

 

Q
Period Ending
Owners Earnings
Discount Factor
PV of FCF
Current Value
Shares Outstanding
Intrinsic Value
Assumptions
Discount Rate (r)
Growth Rate (g1)
Terminal Growth Rate
$
2020A
$
111,443,000,000 $
$4,187,187,215,982
16,325,000,000
256.49
10.00%
14.20%
4.00%
$
2021P
127,267,906,000 $
1.10
115,698,096,364 $
2022P
2023P
2024P
1.33
Complete DCF Model
2025P
1.46
145,339,948,652 $ 165,978,221,361 $ 189,547,128,794 $216,462,821,083 $247,200,541,676 $ 282,303,018,594 $
1.21
120,115,660,043 | $ 124,701,894,336 $ 129,463,239,392 $134,406,381,260 $139,538,261,271 $ 144,866,085,793 $
2026P
1.61
2027P
1.77
1.95
2028P
2029P
322,390,047,235 $ 368,169,433,942 $
2.14
2.36
150,397,336,341 $ 156,139,780,092 $
2030P
420,449,493,562 $
2.59
162,101,480,787 $
TV
7,287,791,221,736
2.59
2,809,759,000,304
Transcribed Image Text:Q Period Ending Owners Earnings Discount Factor PV of FCF Current Value Shares Outstanding Intrinsic Value Assumptions Discount Rate (r) Growth Rate (g1) Terminal Growth Rate $ 2020A $ 111,443,000,000 $ $4,187,187,215,982 16,325,000,000 256.49 10.00% 14.20% 4.00% $ 2021P 127,267,906,000 $ 1.10 115,698,096,364 $ 2022P 2023P 2024P 1.33 Complete DCF Model 2025P 1.46 145,339,948,652 $ 165,978,221,361 $ 189,547,128,794 $216,462,821,083 $247,200,541,676 $ 282,303,018,594 $ 1.21 120,115,660,043 | $ 124,701,894,336 $ 129,463,239,392 $134,406,381,260 $139,538,261,271 $ 144,866,085,793 $ 2026P 1.61 2027P 1.77 1.95 2028P 2029P 322,390,047,235 $ 368,169,433,942 $ 2.14 2.36 150,397,336,341 $ 156,139,780,092 $ 2030P 420,449,493,562 $ 2.59 162,101,480,787 $ TV 7,287,791,221,736 2.59 2,809,759,000,304
Apple's Free Cash Flow Per Share for the fiscal year that ended in Sep. 2022 is calculated as
Free Cash Flow Per Share
= (Cash Flow from Operations
= (122151
= 111443
= 6.83
(A: Sep. 2022 )
+ Capital Expenditure)
+ -10708)
GuruFocus DCF calculator is a two-stage model. The default values are defined as:
3. Years of Growth Stage: y1 = 10
1. Discount Rate: d = 10%
A reasonable discount rate assumption should be at least the long term average return of the stock market, which can be estimated from risk free rate plus risk.
premium of stock market. We used the 10-Year Treasury Constant Maturity Rate as the risk free rate and rounded up to the nearest integer, then added a risk
premium of 6% to get the estimated discount rate. Some investors use their expected rate of return, which is also reasonable. A typical discount rate can be
anywhere between 6% - 20%.
4. Terminal Growth Rate: g2 = 4%
2. Growth Rate in the growth stage: g1 = 14.20%
Growth Rate in the growth stage = average free cash flow growth rate in the past 10 years. If it is higher than 20%, we use 20%. If it is less than 5%, we use 5%
Instead. > Average Free Cash Flow Growth Rate in the past 10 years was 14.20% which is less than 20% and higher than 5% => Growth Rate: 14.20%
5. Years of Terminal Growth: y2 = 10
/ Shares Outstanding (Diluted Average)
/ 16325.819
/ 16325.819
6. Free Cash Flow per Share: fcf = $6.029
However, GuruFocus DCF calculator is actually a Discounted Earnings calculator, the EPS without NRI is used as the default. The reason we are doing this is we
found that historically stock prices are more correlated with earnings than free cash flow.
All of the default settings can be changed and the results are calculated automatically.
Apple's Intrinsic Value: DCF (FCF Based) for today is calculated as
set x = (1+g1)/(1+d) = (1+0.142)/(1+0.1) = 1.0381818181818
and y = (1+g2)/(1+d) = (1+0.04)/(1+0.1) = 0.94545454545455
Intrinsic Value: DCF (FCF Based) = Free Cash Flow per Share * {[(1+g1)/(1+d) + (1+g1)^2/(1+d)^2 +
+ (1+g1)^10/(1+d)^10
= 6.029
= 139.77
+ (1+g1)^10/(1+d)^10]
[(1+g2)/(1+d) + (1+g2)^2/(1+d)^2 + ... + (1+g2)^10/(1+d)^10]}
Intrinsic Yalue: DCF (FCF Based) = Free Cash Flow per Share * {[x
= Free Cash Flow per Share * [x
* 23.1837
+ x^2
+ ...
*(1-x^10) / (1-x)
+ x^10] + x^10 [y + y^2
+...
+ x^10 * y* (1-y^10) / (1-y)]
+ y^10]}
Transcribed Image Text:Apple's Free Cash Flow Per Share for the fiscal year that ended in Sep. 2022 is calculated as Free Cash Flow Per Share = (Cash Flow from Operations = (122151 = 111443 = 6.83 (A: Sep. 2022 ) + Capital Expenditure) + -10708) GuruFocus DCF calculator is a two-stage model. The default values are defined as: 3. Years of Growth Stage: y1 = 10 1. Discount Rate: d = 10% A reasonable discount rate assumption should be at least the long term average return of the stock market, which can be estimated from risk free rate plus risk. premium of stock market. We used the 10-Year Treasury Constant Maturity Rate as the risk free rate and rounded up to the nearest integer, then added a risk premium of 6% to get the estimated discount rate. Some investors use their expected rate of return, which is also reasonable. A typical discount rate can be anywhere between 6% - 20%. 4. Terminal Growth Rate: g2 = 4% 2. Growth Rate in the growth stage: g1 = 14.20% Growth Rate in the growth stage = average free cash flow growth rate in the past 10 years. If it is higher than 20%, we use 20%. If it is less than 5%, we use 5% Instead. > Average Free Cash Flow Growth Rate in the past 10 years was 14.20% which is less than 20% and higher than 5% => Growth Rate: 14.20% 5. Years of Terminal Growth: y2 = 10 / Shares Outstanding (Diluted Average) / 16325.819 / 16325.819 6. Free Cash Flow per Share: fcf = $6.029 However, GuruFocus DCF calculator is actually a Discounted Earnings calculator, the EPS without NRI is used as the default. The reason we are doing this is we found that historically stock prices are more correlated with earnings than free cash flow. All of the default settings can be changed and the results are calculated automatically. Apple's Intrinsic Value: DCF (FCF Based) for today is calculated as set x = (1+g1)/(1+d) = (1+0.142)/(1+0.1) = 1.0381818181818 and y = (1+g2)/(1+d) = (1+0.04)/(1+0.1) = 0.94545454545455 Intrinsic Value: DCF (FCF Based) = Free Cash Flow per Share * {[(1+g1)/(1+d) + (1+g1)^2/(1+d)^2 + + (1+g1)^10/(1+d)^10 = 6.029 = 139.77 + (1+g1)^10/(1+d)^10] [(1+g2)/(1+d) + (1+g2)^2/(1+d)^2 + ... + (1+g2)^10/(1+d)^10]} Intrinsic Yalue: DCF (FCF Based) = Free Cash Flow per Share * {[x = Free Cash Flow per Share * [x * 23.1837 + x^2 + ... *(1-x^10) / (1-x) + x^10] + x^10 [y + y^2 +... + x^10 * y* (1-y^10) / (1-y)] + y^10]}
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