AppleiTVPres - Aswath Damodaran 1 Apple iTV: The Analysis...

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Unformatted text preview: Aswath Damodaran 1 Apple iTV: The Analysis Aswath Damodaran Stern School of Business Aswath Damodaran 2 Executive Summary  On a stand-alone basis, this project is a good project (but barely) • The average return on capital, even under the more conservative fnite liFe assumption, is 26.91%, which is higher than the cost oF capital oF 10.47%. • The net present value oF this project, using a cost oF capital oF 10.47% • is $ 138 million, under the fnite liFe assumption oF a oF 10 years • is $ 473 million, under the assumption oF an infnite liFe. Choosing an intermediate liFe gives you numbers between $138 and $473 million. • On the two variables that are the most critical - market share and operating margin - the frm has a reasonable margin For error on market share and a narrower margin For error on operating margins.  If we consider the potential project synergies (i.e. the gains in sales on other products sold by Apple), it will make this project a more attractive one. Aswath Damodaran 3 Cost of Capital: Apple iTV  Debt to Equity ratio for Apple • Market Value of Equity = $ 90* 900 mil = $ 81,000 million • Market Value of Interest bearing Debt = $ 0 • PV of Operating lease commitments = $3.368 billion • Market Value D/E Ratio = 4.16%; MV Debt/Capital Ratio = 3.99%  Unlevered Beta for Electronics Business • Average Beta of Electronics Frms = 1.19 • Aggregate D/E Ratio of Electronics Frms = 14.41% • Unlevered Beta = 1.19/(1+ (1-.4) (.1441)) = 1.09 • Aggregate Cash/¡irm Value for Electronics Frms = 13.60% • Unlevered Beta corrected for cash = 1.09/ (1- .136) = 1.2647  Beta for Apple iTV = 1.2647 (1+ (1-.4)(.0416)) = 1.2693  Cost of capital calculation for iTV project • Cost of Equity = 3% + 1.2693 (6%) = 10.78% • After-tax Cost of Debt = 5.25% (1-.4) = 3.15% • Cost of Capital = 10.78% (.9601) + 3.15% (.0399) = 10.47% Aswath Damodaran 4 Your fndings on cost oF capital Aswath Damodaran 5 Apple iTV: Operating Income Aswath Damodaran...
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This note was uploaded on 04/25/2011 for the course FIN 421 taught by Professor Anupchowdhury during the Spring '11 term at BRAC University.

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AppleiTVPres - Aswath Damodaran 1 Apple iTV: The Analysis...

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