Factors affecting Apple Inc.'s stock price and valuation

Finance

Stock Valuation Questions

The market price for a stock or a bond may be influenced by both positive and negative risks. Using the example of Apple it is possible to consider two potential risks.

Risk

Apple Inc. is well-known for its aggressive defense of its patents; the best known cases are between Apple and Samsung with cases in more than 50 cases across multiple countries at one point in 2012 (Mueller, 2012). Apple and Samsung both had victories and defeats which were aggressively fought. These battles show how important development and ownership of a patient can be, with firms seeking to protect their intellectual property. A potential threat may emerge if Apple faced a claim of credible claim of patent breach from another major supplier for a core product, where stockholders may fear that the firm may be liable for a potentially large settle and/or withdraw the offending products from relevant markets. The potential of a major claim which could impact on profits may drive down the share price.

Question 1 (b)

If interest rates rise, this could impact on bond and share prices. If interest rates rise then returns on money in deposit accounts and new bonds issued will receive a higher rate. This will raise the risk free rate so the expected rate of return which is the risk free rate plus the risk premium will increase. To increase the level of return, as the rate of return cannot simply be increased, the price of the shares or the bonds may fall to the return expected or forecast, is more in line with the new market conditions.

Question 1(c)

If the gross domestic product (GDP) were negative, this would mean production was shrinking and the economy was contracting, and could even be in a recession. During these types of occasions there may be less demand for shares as there is less disposable income which may negatively impact on the share value. Likewise, the outlook for the firm may change, for example in a recession they may be expected to earn less which may impact on their expected results; as the value of a firm is often believed to reflect their expected results, a decline in expectations will impact negative on the value of a stock.

Question 2

Beta is used to assess risk; it is a measure of the share price volatility compared to the entire market. If the beta is 1, it means that the level of movements is the same as the entire stick market, but if is it is 2, it means that it is twice ad volatile as the stock market as a whole (Howells & Bain, 2007).

The beta for Apple is 0.73 (Yahoo Finance, 2014). This means that the share is less volatile than the stock market as a whole. Apple is a popular firm with a high level of sales, and a strong market position, this may indicate that the share remains in favor of the stock holders so is not subject to wider fluctuations of supply and demand which will impact on the price (Howells & Bain, 2007). The firm is also making dividend payments; the current payment ratio is 2.3%. Where dividends are paid shareholders are gaining a short-term return on their money, so this may also reduce the potential volatility of the share price, as stock holders know they will get at least some return in their investment (Howells & Bain, 2007), These two factors may reduce the pressures that cause stick prices to rise and fall.