* Research term paper Five major sections:Company background / introductionCompetitive strengths Financial analysis (focus section)Stock valuation analysisInvestment summary & recommendations * Company Competitive strengthsCost / price leadershipDifferentiated productsIndustry positioning: market share, brand & reputation, corporate culture, management track record, etc. * An Economic moat An economic moat is a barrier that protects a firm's margin and profits from competing firms, thus better able to sustain its high margin and profitability. An economic moat comes from a firm’s sustainable competitive advantages over similar companies. Example: Wal-Mart's buying power, economy scale and distribution infrastructure create a wide and sustainable economic moat. Economic moatsA cost advantageA size advantage: economic scaleIntangible assets: patents, brand recognition, government licenses, etc.High switching costNetwork effect: a firm's value increases as number of users increaseSoft moats: exceptional management, unique corporate culture. Example: Intel Corporation Competitive strengths: Low cost producer / economy of scale Generally superior products Dominant market share Well capitalized balance sheet Manufacturing expertise / vertical integration Brand recognition: Intel Inside * Intel: economic moats Sustainable advantages: Dominant market share position well capitalized balance sheet Strong technology and R&D expertise Deep manufacturing knowhow * Financial analysisSales / growth analysisProfitability and margin analysisAsset turn over analysisLiquidity analysisFinancial leverageROE analysis (DuPont formula)WACC analysis and Enterprise valueFree cash flow projections Sales / growth analysis Sales by business segments and by regionsHistoric sales growth rate (last 5 years)Estimating growth rate next 5 years based on the historic sales growth Ratio analysisProfitability and margin analysis:EBIT margin and net marginAsset turn over analysis:Total asset turnoverInventory turnoverLiquidity analysisQuick ratioFinancial leverageDebt/equity ratioEBIT/interest coverage ROE analysis The DuPont Identity: ROE = Net margin * total asset turnover * equity multiplier Free cash flow projections Using the % of sales approach: Look up 2015 year sales, EBITDA, taxes, capex and working capital changeEstimate sales growth rate for next 3 years;estimate growth rates for other income statement items: EBIT, Taxes, capex and working capital changeEstimate free cash flows for next 3 years (see FCF forecast template) WACC analysisMarket value of debtMarket value of equityTotal enterprise valueCost of debt estimateCost of equity estimate using CAPMWACC calculation Financial analysis example: Apple Inc. Company Competitive strengths: Integrated products and services (one eco-system): hardware, software, apps store, iclouds, Pay, etc Brand Customer loyalty Financial strength and profitabi ...

1. *
Research term paper
Five major sections:Company background /
introductionCompetitive strengths Financial analysis (focus
section)Stock valuation analysisInvestment summary &
recommendations
*
Company Competitive strengthsCost / price
leadershipDifferentiated productsIndustry positioning: market
share, brand & reputation, corporate culture, management track
record, etc.
*
An Economic moat
An economic moat is a barrier that protects a firm's margin and
profits from competing firms, thus better able to sustain its high
margin and profitability.
An economic moat comes from a firm’s sustainable competitive

2. advantages over similar companies.
Example: Wal-Mart's buying power, economy scale and
distribution infrastructure create a wide and sustainable
economic moat.
Economic moatsA cost advantageA size advantage: economic
scaleIntangible assets: patents, brand recognition, government
licenses, etc.High switching costNetwork effect: a firm's value
increases as number of users increaseSoft moats: exceptional
management, unique corporate culture.
Example: Intel Corporation
Competitive strengths:
Low cost producer / economy of scale
Generally superior products
Dominant market share
Well capitalized balance sheet
Manufacturing expertise / vertical integration
Brand recognition: Intel Inside
*
Intel: economic moats
Sustainable advantages:

3. Dominant market share position
well capitalized balance sheet
Strong technology and R&D expertise
Deep manufacturing knowhow
*
Financial analysisSales / growth analysisProfitability and
margin analysisAsset turn over analysisLiquidity
analysisFinancial leverageROE analysis (DuPont
formula)WACC analysis and Enterprise valueFree cash flow
projections
Sales / growth analysis
Sales by business segments and by regionsHistoric sales growth
rate (last 5 years)Estimating growth rate next 5 years based on
the historic sales growth
Ratio analysisProfitability and margin analysis:EBIT margin
and net marginAsset turn over analysis:Total asset
turnoverInventory turnoverLiquidity analysisQuick
ratioFinancial leverageDebt/equity ratioEBIT/interest coverage

4. ROE analysis
The DuPont Identity:
ROE
= Net margin * total asset turnover * equity multiplier
Free cash flow projections
Using the % of sales approach: Look up 2015 year sales,
EBITDA, taxes, capex and working capital changeEstimate sales
growth rate for next 3 years;estimate growth rates for other
income statement items: EBIT, Taxes, capex and working
capital changeEstimate free cash flows for next 3 years
(see FCF forecast template)
WACC analysisMarket value of debtMarket value of equityTotal
enterprise valueCost of debt estimateCost of equity estimate
using CAPMWACC calculation
Financial analysis example:
Apple Inc.
Company Competitive strengths:
Integrated products and services (one eco-system): hardware,
software, apps store, iclouds, Pay, etc
Brand
Customer loyalty

5. Financial strength and profitability
Ability to leverage current platform: Apple Pay, Watch
Management
Apple Inc.
Competitive strategies:
Differentiated products
Product quality and innovations
Integrated offerings: hardware, software and services
Third party developer contents and apps
Company-own distribution network: retail stores
New products/ services: Pay
Apple: Free cash flow projections
From Yahoo/finance:
For FY2015:EBIT: $71.2 b D&A: $11.2 bTaxes: 19.1 bCapex:
11.2 bw/capital increase: $4 b
Apple FCF forecast
(see template)
*

6. Apple: WACC analysisMarket value of debt: use book value of
debt at $64.5 bCost of debt: average about 1.5%Market value of
equityMarket capitalization at $528 b Total enterprise
valueDebt + equity = 64.5 + 528 = $592.5 bDebt % = 64.5 /
592.5 = 11%Equity % = 528 / 592.5 = 89%
Apple: stock data
(from yahoo/finance)
Stock Price: $95 (as of 2/24/2016)Current dividend: $2.08 per
shareBeta: 1.35 (will use 1.1) Growth rate (next 5-year):
12.7%Total shares outstanding: 5.5 billion
Stock Market assumptions:Market beta: 1.0Long term risk free
rate: 4.5%Long term risk premium: 6%
Apple: WACC analysis
Cost of equity estimate using CAPM:Re = 4.5% risk free rate +
1.1 beta* 6% risk premium = 11.1%
WACC calculation:WACC = Re * (E%) + Rd *D% (1 – t)
= 11.1% * 89% + 1.5%*11% (1 -35%) = 10%
*

7. Stock valuation analysis
Estimate the stock betaEstimate stock discount rate using
CAPMEstimate dividend growth ratestock valuations
model:Dividend Growth Model Discount Free Cash Flow
modelSet weighted price targetUse the investment criteria to
make buy /sell decision
Investment buy criteria
To buy a stock:Strong competitive strengthsStrong financial
conditionsFree cash flow generationStock price target from
DGM and DCF models: upside potential from current price at
least 20%
Apple: stock data
(from yahoo/finance)
Stock Price: $95 (as of 2/24/2016)Current dividend: $2.08 per
shareBeta: 1.35 (will use 1.1) Growth rate (next 5-year): 12.7%
Long term growth rate: Total shares outstanding: 5.5 billion
Market assumptions:Market beta: 1.0Long term risk free rate:
4.5%Long term risk premium: 6%
Apple: discount rate & growth rate
Apple Beta = 1.1Discount rate using CAPM:
k = 4.5% + 1.1 *6% = 11.1%

8. 5-year growth rate estimate: 11.9% (yahoo/finance)For my
models, I will use 9% 5-year growth rate.
Apple Inc:
Perpetual DDM modelCurrent dividend: $2.08 per sharedividend
growth rate: 9% (assumption)Equity discount rate: 11.1%
Fair value = $2.08 (1+9%) / (11.1% - 9%) = $108
Apple: DCF Model
From the DCF spread sheet:3-year growth rate: 9.55%Discount
rate: WACC = 10%
Equity fair value = $133
*
*
Apple: Setting price target
DDM fair value : $108DCF fair value: $133
Weighted average price target: $120.5
Current price: $95Stock upside potential: 26.8%
Investment recommendation: buy

9. Apple:
Investment summary & recommendation
Investment summary:Strong competitive positions with leading
market share, integrated products and services (one eco-
system), strong brand and customer loyaltyStrong financial
strength and profitabilityStock fair value: over 20% upside
from current price
Recommendation: buy
Team discussions items:What are the company’s competitive
strengths?How are the company’s financial conditions? What
are reasonable estimates for company beta and growth rate and
discount rate? What is the fair value from the DDM and DCF
models?Does the price target from the stock valuation models
provide 20% upside? What’s the investment recommendation
based on the buy criteria?
Free Cash FlowForecast Template
Appl Inc.
(billions of dollars)
2015 2016 2017 2018
Sales $233.7 $252.4 $272.6 $294.4
% increase 8.0%

10. EBIT 71.2
Depreciation 11.2
EBITDA 82.4 89.8 97.9 106.7
% increase 9.0%
Tax Expenses 19.1 20.8 22.7 24.7
% increase 9.0%
Operating Cash flow 63.3 69.0 75.2 82.0
Capex 11.2 12.0 12.8 13.7
% increase 7.0%
YoY increse in w/capital 4 4.3 4.7 5.0
% increase 8.0%
Levered Free cash flow $48.10 $52.69 $57.72 $63.22
growth rate 9.55% 9.54% 9.53%
Free Cash FlowForecast Template
Appl Inc.
(billions of dollars)
2015201620172018
Sales $233.7$252.4$272.6$294.4
% increase 8.0%
EBIT 71.2
Depreciation 11.2
EBITDA 82.489.897.9106.7
% increase 9.0%
Tax Expenses 19.120.822.724.7
% increase 9.0%
Operating Cash flow 63.369.075.282.0
Capex 11.212.012.813.7
% increase 7.0%
YoY increse in w/capital 44.34.75.0

11. % increase 8.0%
Levered Free cash flow$48.10$52.69$57.72$63.22
growth rate 9.55%9.54%9.53%
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Discount free cash flow model
Apple Inc.

12. Date: 2/24/16
assumptions:
3-year growth rate 9.55%
discount rate (wacc) 10.0%
discount factor 1.10 1.21 1.33
2015 2016 2017 2018 terminal value
free cash flow 48.1$
52.70$
57.70$ 63.20$ 632.0$
growth rate 9.55% 9.55% 9.55%
discount factor 1.10 1.21 1.33 1.33
Present value 47.9$
47.7$
47.5$ 474.8$
total firm value per share
617.9$
billions
debt 64.5$
cash 180.0$
total equity value 733.4$
shares outstanding 5.5$
equity value per share $133.3
terminal value calculation:

13. using the 10 factor 632.0$
Note: Red numbers indicate required inputs
Discount free cash flow model
Apple Inc.
Date: 2/24/16
assumptions:
3-year growth rate9.55%
discount rate (wacc)10.0%
discount factor 1.101.211.33
2015201620172018 terminal value
free cash flow 48.1$
52.70$
57.70$ 63.20$ 632.0$
growth rate 9.55%9.55%9.55%
discount factor 1.101.211.331.33
Present value 47.9$
47.7$
47.5$ 474.8$
total firm value per share
617.9$
billions
debt 64.5$
cash 180.0$
total equity value 733.4$
shares outstanding 5.5$
equity value per share $133.3
terminal value calculation:

14. using the 10 factor632.0$
Note: Red numbers indicate required inputs