Apple Inc.

And

Sony Corporation

Financial Analysis
PT II
By Charles Martin
 Table of Contents
Required Rate of Return
Capital asset pricing model…………..……………………….…………..…2
Growth Model………….……………………………………..…………..…5
Weighted Average Cost of Capital…………….……………………………7
WACC growth and return..……………...……………………………8
Recommendation
Comparison ………………….………………….…………….…….10
Conclusion………………...………………………….……..………11
Works Cited………………..………………………………………………..…….12
Appendix………………….………………………………………………………13

1
 Required Return, Expected Returns and Cost of Capital

Capital Asset Pricing Model

(CAPM)

The Capital Asset Pricing Model is a financial model that calculates the systematic risk

and expect returns for an asset, particularly stocks. The CAPM equation stated below is

compromised of the Risk-Free rate, Beta of the investment, and the market risk premium. All of

these sections of the equation can be calculated separately based on a company’s financial

information. This model calculates for the expected returns of a company.

CAPM = Rf + βi (Erm−Rf)

Where:
Rf = Risk-free rate
βi = Beta of the investment
( Erm – Rf ) = Market risk premium

Risk free rate

The Risk-free rate is the rate that an investor would expect from a risk free investment

over a specific time and is calculated from the 90-day treasury bills, the treasury bills are used

because it is considered the least amount of risk for an investment possible and is backed fully by

the U.S government. Investors expect to be compensated based on their exposure to risk, and

time value of money. To calculate the risk-free rate, the average of the 3-month T-bill rates since

1950 are averaged, resulting in a current risk-free rate of: 4.10%

2
Market risk premium

The market risk premium of an investment is calculated as the difference between

expected return on a market portfolio and the risk-free rate. The expected return on the market is

based off of the average monthly returns on the S&P500 since 1950. Once the average monthly

returns are calculated, the risk-free rate (4.10%) is then subtracted from the annualized average

market returns (8.96%); this results in a market risk premium of: 8.96- 4.10 = 4.86%

Beta of the investment

The beta of an individual stock is a coefficient that measured the systematic risk of that

stock compared to the unsystematic risk of an entire market. For this analysis, a regression was

made on both stocks in order to determine the coefficient. This regression and can be found in

the appendix.

Apple (AAPL) – Apple’s stock record dates back to the 80s, so a regression was made

from December of 1980, to now. The beta consisted of the S&P returns as well as the monthly

returns from the 1980s. This beta was found to be not close to analysts, as it came to around 8.4,

so the beta from the regression in the last 10 years was used and this was far closer to the beta

shown by analysts on yahoo finance. The beta for Apple’s stock found was 1.36.

CAPM Calculation for AAPL:

Expected Rate of Return = 0.0410 +1.36 (0.0486) =

0.0410 +0.06609 = 10.71%

3
 Sony (SNE) – Sony’s stock dates back to 1973. For this regression we used the data from

1980 to 2019, along with the S&P data. The beta was somewhat consistent, although we are

going to use the analyst’s beta of 1.55.

CAPM Calculation for SNE:

Expected Rate of Return = 0.0410 +1.55 (0.0486) =

0.0410 +0.07533 = 11.63%

4
 Growth Model

The Gordon Growth model is a financial model used to determine the intrinsic value of a

stock, or the expected return. This is similar to the CAPM model, although this model is based

on dividends per share. The formula for the expected return Growth Model is as follows:

E(r) = D0 (1+ G) / P0 + G
where:
G = Growth Rate
E(r) = Expected rate of return
D0 =Value of dividends
P0 =Price of stock

The current stock price is found using financial tools, specifically yahoo finance. The

constant growth rate for both Sony and Apple are extensive, and date back to the 1980s. The

Growth rate is found by using the 5-year growth rate, and the value of dividend growth rate is

found by averaging the dividends in the last year.

Apple (AAPL) Sony (SNE)

Price of Stock $266.92 $65.93
Value of dividends $0.76 $0.105
Growth Rate 7.31% 1.40%
Expected rate of return 7.60% 1.56%

Industry growth rate; 12.24

5
Apple (AAPL) Calculation:

E® = 0.76 (1+7.31%) / 266.9 + 7.31% = 7.60%

Sony (SNE) Calculation:

E® = 0.105 (1+1.40%) / 65.93 + 1.40% = 1.56

6
 Weighted Average Cost of Capital

WACC

The weighted average cost of capital, otherwise known as WACC, is a financial

calculation of a firms cost of capital. All of the capital components are included such as

stockholder’s equity, bonds, and other long-term debt. A lower WACC for a company is better

for the investor and company because this shows the required return the company would need to

pay off its investors. A higher WACC will increase as the beta and rate of return increase

because WACC denotes a decrease in value, and an increase in uncertainty or risk.

WACC Formula:
𝑬 𝑫
WACC = 𝑽 ∗ 𝑹𝒆 + 𝑽 ∗ 𝑹𝒅 (𝟏 − 𝑻𝒄)

where:
Re = Cost of equity
Rd = Cost of debt
E = Market value of the firm’s equity
D = Market value of the firm’s debt
V = E + D = Total market value of the firm’s financing
E/V = Percentage of financing that is equity
D/V = Percentage of financing that is debt
Tc = Corporate tax rate

7
Apple:

For Apple, the value of equity, or market cap, is around 1185 billion. The market value of

the company’s debt is calculated based off of their outstanding bonds, and capital lease

obligation. The total book value of debt is around 111 billion. The cost of equity was calculated

before, as 10.71%. The Cost of debt was also calculated before as the growth model and is

10.71%. The rest of the information is given, and the calculation of WACC for apple is below.

The calculation is done using the CAPM and also done using the growth model numbers as

shown below, both are used as the ‘Cost of equity’(Re).

Re = 10.71%
Rd = 6.92%
E = 1185
D = 111
V = E + D = 1296
Tc = 16.49%
WACC (CAPM) = ( 1185 / 1296 ) * 0.1071 + (111 / 1296 ) * 0.0692 * ( 1 – 0.1649)
= 10.29%
WACC (G) = ( 1185 / 1296 ) * 0.0762 + (111 / 1296 ) * 0.0692 * ( 1 – 0.1649)
= 7.46%

Sony (SNE):

For Sony, the company’s market cap is around 80.89 billion, and the company’s debt

based off of its bonds and capital lease obligation (not including preferred stock) is averaged at

12.45 billion. The Coast of Equity was calculated prior, as the CAPM model. The Cost of debt is

calculated with the outstanding bonds, and for Sony is around 0.90%. The Corporate tax rate is

averaged and can be found on financial websites such as CSI.com. The calculations are done for

you and shown below. The calculation is done using the CAPM and also done using the growth

model numbers as shown below, both are used as the ‘Cost of equity’(Re).

8
Re = 11.63%
Rd = 2.62%
E = 80.89
D = 12.45
V = E + D = 93.18
Tc = 8.92%

WACC (CAPM) = ( 80.89 / 93.18 ) * 0.1163 + (12.45 / 93.18 ) * 0.0262 * ( 1 – 0.0892)

= 10.40%
WACC (CAPM) = ( 80.89 / 93.18 ) * 0.0156 + (12.45 / 93.18 ) * 0.0262 * ( 1 – 0.0892)
= 1.64%

9
 Recommendation

First, in order to make a proper recommendation you must compare each company to

each other, then compare each company to the industry average. Each company has a solid board

and are multinational. Although, financially the companies are very different. First, comparing

hard financial information ratios done in this project, the table was made to compare Apple to

Sony, and then Apple to the industry as well as Sony to the industry.

Apple Sony Apple v Industry Sony v Industry

Current Ratio + - + -

Quick Ratio + - + -
Debt to Asset Ratio + - - -
Debt to Equity Ratio + - - -
Interest Coverage Ratio - + + +
Inventory Turnover Ratio + - + +
Acc. Recieveable Days + - + +
Total Asset Turnover + - + -
Net Profit Margin + - + -
Return on Assets + - + -
Return on Equity + - + -
P/E ratio + - + +
Market to book ratio + - + -
Dupont analysis + - N/A N/A
Total 13 / 14 1 / 14 11 / 13 4 / 13

10
 The ratios all came back similarly, Apple has a better liquidity ratio, quick ratio, debt to

equity ratio, inventory turnover ratio, accounts receivable days, total asset turnover, and many

more ratios that where completed in this analysis. Twelve out of fourteen analyses are favored

for apple, that leaves only two out of fourteen financial ratios are better for Sony. Apple beats

Sony in almost every aspect, they are considered to be one of the best tech firms in the market.

Their market capitalization is over a trillion, one of the first companies to achieve this. Sony

beats the industry averages four out of thirteen times for the ratios. While apple beats the

industry eleven out of thirteen analysis

Apple has a significant advantage over Sony corp, and this shows greatly in the

Dupont analysis. Sony’s return on equity in 2018 was 16.54%. On the other hand, apple’s return

in 2018 was 55.56%; This is a significant number in any industry. Apple’s net profit margin was

22.41% in 2018, compared to Sony’s 5.74% net profit margin. This shows how much profit a

company keeps after deducting sales. Sony keeps around 5 percent while apple kept around 23

percent. Apple is almost five times more profitable than Sony. Although Sony may have more

assets, Apple is better at generating revenue that at the end of the day.

Although the companies WACC are very close, the WACC of growth for apple is around

5 percent more than Sony, therefore there is a lot more room for growth seen by investors for

apple. Although Apple’s CAPM is less than Sony’s, that does not mean much for the future of

the company, the growth model shows Apple’s expected rate of return as 7.60% compared to

Sony’s 1.56%.

Taking into account all of these strengths and weaknesses of each company, Apple is

considerably a better investment when compared to Sony at this given time.

11
“Apple WACC %.” Apple WACC % | AAPL - GuruFocus.com,
www.gurufocus.com/term/wacc/AAPL/WACC/Apple%2Binc.

Insider, Business. “APPLE INC.DL-NOTES 2013(13/23) Bond | Markets Insider.” Business

Insider, Business Insider, 2018, markets.businessinsider.com/bonds/apple_incdl-
notes_201313-23-bond-2023-us037833ak68.

markets, csi. “Company, Sector, Industry and Market Analysis.” CSIMarket, 2019,
csimarket.com/.

Finance, Yahoo. “Apple Inc. (AAPL) Stock Historical Prices & Data.” Yahoo! Finance, Yahoo!,
9 Oct. 2019,
finance.yahoo.com/quote/AAPL/history?period1=1451624400&period2=15148692
00&interval=1mo&filter=history&frequency=1mo.

Finance, Yahoo. “Sony Corporation (SNE) Stock Historical Prices & Data.” Yahoo! Finance,
Yahoo!, 9 Oct. 2019,
finance.yahoo.com/quote/SNE/history?period1=1456808400&period2=153646560
0&interval=1mo&filter=history&frequency=1mo.

Appendix

12
13
14
 Stock Prices + Dividends

SNE APPL

15