Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Management

Siddhanta Chandra [siddhanta-chandra@uiowa.edu]

Apple Incorporated (AAPL) April 18, 2017

Information Technology – Technology Hardware Stock Rating Buy

Investment Thesis Target Price $155-160 Apple is the world’s largest technology company with class leading sales in smartphones, tablets, and several other consumer electronics categories. We recommend a strong buy for Apple as the stock will continue an upwards trajectory in 2017 and 2018 based on strong sales and stock buybacks. Our model anticipates at least a 10% upside in the short term on this security. Drivers of Thesis

• The New iPhones

• iPhones form 2/3rd of Apple’s revenues.

• Sold 78.3M units 1Q17 – a record. 5% YoY growth.

• New iPhones are expected to see a 7.5-8% growth and be chart-toppers. Revenue expected to be in the region of $149-152B

• Services and New Products

• Recorded a 22.3% YoY growth in 1Q17.

• Expected to grow by 21.5%(2 yr avg) in 2017-18

• Key drivers will be App Store, iTunes Store – largest music vendor, Apple Music – 20M subscribers and Apple Watch – the bestselling smartwatch.

Risks to Thesis

• Lack of Innovation

• Apple will be hurt if it doesn’t stay ahead of the game by innovating faster than other players in the industry.

• Faster growth will come from new product as existing product lines near maturity.

• Taxation on foreign funds

• Approximately 94% ($230.2B) of Apple’s cash is parked outside the US.i

• Apple is expecting a tax reform which will allow it to bring the cash back. If that reform doesn’t fall into place, Apple will need to raise more debt (already near $80B) to fuel growth.

Henry Fund DCF $162.50 Henry Fund DDM $98.56 Relative Multiple $134.59 Price Data Current Price $141.05 52wk Range $89.47 – 1415.56 Consensus 1yr Target $147.61 Key Statistics Market Cap (B) $729.06 Shares Outstanding (B) 5.25 Institutional Ownership 60.20% Five Year Beta 1.31 Dividend Yield 1.7% Est. 5yr Growth(EPS) 7% Price/Earnings (TTM) 16.61 Price/Sales (TTM) 3.46 Price/Book (mrq) 5.50 Profitability Operating Margin 27.15% Profit Margin 22.83% Return on Assets (TTM) 14.52% Return on Equity (TTM) 35.00%

sources: Factset, YCharts, and Fidelity

Earnings Estimates

Year 2014 2015 2016 2017E 2018E 2019E

EPS 6.45 9.22 8.24 8.77 10.83 11.21

growth 11% 30% -12% 6% 19% 3% 12 Month Performance Company Description

As the maker of the iPhone, the iPad, and the

MacBook amongst others, Apple is one of the

most recognized brands in the world. It

differentiates itself on the basis of design, ease of

use, and premium build quality of its products.

Apple also has built up an ecosystem of software

tied into MacOS and OSX – both being operating

systems. Apple is the world’s most valuable

company and is very cash rich with over $246B

(almost $47 per share) in reserves, although most

of it is outside the US.

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APPL Industry Sector

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APPL S&P 500

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EXECUTIVE SUMMARY

To say that Apple makes smartphones and other consumer electronic devices is like saying that its windy during a hurricane. While it is technically correct, it does a huge disservice to what Apple means to the technology world. Apple has been a gamechanger more times than any other company in the world, and it does so by being the best overall package.

While the main revenue driver for Apple has been the iPhone, forming 63% of their total revenues, increased competition and an increasingly saturating smartphone market has driven Apple to diversify into segments like wearables (Apple Watch), Machine Learning (Perception, Turi and Tuplejump acquisitions), Energy (Apple Energy, LLC – wholly owned subsidiary) and mobility ($1Bn investment in Didi Chuxingii) and to increase focus on accessories and services. Robust 1Q2017 results showed strong numbers for iPhones and services and these two segments are expected to be the drivers in 2017 and 2018. Launch of the 10th Anniversary iPhone is generating lot a of hype and is expected to be a strong seller, driving up revenue. Apple’s capital return program continues to be healthy with a moderate dividend yield of 1.7% and a substantial repurchase plan.

With strong fundamentals, a better than expected 1st Quarter, a recovering world economy and diversification efforts, we feel Apple represents great value and recommend a BUY with a target price range of $155-160.

COMPANY DESCRIPTION

The maker of the iPhone, iPad and the Mac computers amongst other product and service lines, Apple Inc is a global technology company founded in 1976 and incorporated in 1977. Founded as Apple Computer Inc., the company changed its name to Apple Inc in 2007 to better reflect its diversified portfolio of products and future ambitions.

Headquartered in California, Apple is the world’s most valuable company with a market cap of over $720B. It is also the world’s largest technology company by revenue and by assets and one of the most profitable companies in the world. The brand value of Apple was estimated to be $107B in 2016, making it the world’s 2nd most valuable brand after Google.iii

The company chiefly operates in the smartphone, tablet and the PC segments and complements these segments with a full suite of software and service offerings which include the App Store, iTunes Store and Apple Music. It also offers an extended product support program under the Apple Care name and owns Beats Electronics which makes premium audio accessories.

Revenue Decomposition

Apple’s revenue and profits are largely driven by its hardware offerings. iPhone occupies the prominent position with 63% of revenue share. For 2017, we expect iPhones to grow 4% YoY and forecast a 5-year revenue CAGR of 3.4% for the product line. Services, Macs, and iPad contributed 11%, 11% and 10% to the top line respectively.

Source: Apple 10K

iPhones

The first iPhone was launched in 2007 with the slogan:

“This is only the beginning. Apple reinvents the phone.”

Launched to a positive reception and a whirlwind marketing campaign, iPhone has since then changed the way the world looks at phones, making true its slogan of reinventing the phone.

Before the advent of the iPhone, smartphones were boxy looking, geek products. They featured resistive touchscreens usable with styluses as the UI was not touch

63%11%

11%

10%

5%

REVENUE DECOMPOSITION (2016)

iPhone Services Mac iPad Other Products

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optimized. They were designed more for information exchange than content creation or consumption. App ecosystem was primitive and service offerings non-existent. The image below shows how smartphones have changed since the iPhone first arrived.

Smartphone Designs: Then and Now

Source: Josh Hefferich (https://twitter.com/Digeratii/status/165324320179109888)

iPhone brought with it an UI designed for touch, did away with most of the hardware buttons and made the touchscreen the primary input for the user. It heralded an era of content consumption with music and video streaming on smartphones becoming commonplace. Today, apps form an integral part of a smartphone user’s experience with most of the interactions done via apps. Apple has since added features like a digital voice assistant – Siri, better cameras, and fingerprint sensors.

Not only has the iPhone garnered strong reviews for most of its iterations since then, it has also been the best-selling smartphone since its inception, selling over a billion units.iv

Source: Statista

The premium pricing, strong sales and relatively lower bill of materials ($224 for iPhone 7 vs $255 for Samsung Galaxy

S7 v vi) means that the iPhone is the most profitable smartphone and makes up about 80% of the global total operating profits made off smartphone sales.vii A huge reason behind it is that iPhone hold their price through their lifecycle. A Samsung Galaxy S7 32GB retailed for $570 for a large part of its lifecycle, before dropping to $480 on the back of the impending launch of the S8 model. The iPhone 7 32GB model is still retailing at $649, giving Apple huge margins.

Apple typically follows a tick-tock launch cycle with a major launch every two years and small refreshments in the intervening years. The refreshes are known as ‘S’ models and started with the iPhone 3GS which was a successor to the iPhone 3G. Since then there have been ‘S’ devices every year after a generation change. In 2014, Apple split its iPhone product line into two with the launch of the iPhone 6 and the iPhone 6 Plus. The plus model featured a bigger display, bigger battery, and better cameras. This allowed Apple to occupy two sub-segments in the premium smartphone tier as the bigger phone enabled Apple to charge more while making the smaller phone available at a lower cost.

The current iteration of the iPhone is known as iPhone 7 and iPhone 7 Plus with iPhone SE being a lower cost product available in developing countries. While the iPhone 7 devices, in a surprising departure from Apple’s past, featured a design similar to the previous model, they added water and dust resistance, a ‘Force Touch’ Home button powered by Apple’s Taptic Engine, and a faster processor. The Plus model gained a dual camera setup, with a telephoto lens added to the standard wide-angle lens. This gave the Plus model the capability to perform lossless 2x zoom and a ‘DSLR-like’ portrait mode with enhanced depth of field (an effect which makes subject stand out by blurring the background).

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While sales started off slow they picked up during the holiday season and Apple reported sales of 78M units with a revenue of $54B in 1Q2017.viii One big trend was the popularity of the Plus model with it accounting for over 40% of total iPhone 7 sales resulting in higher per unit revenue numbers.

Source: The Atlas (https://www.theatlas.com/charts/Hy94PcRwx)

For 2017, we expect the strong numbers to continue and we expect Apple to sell $140B worth of iPhones, which is a 4% YoY growth over 2016. We expect unit sales to be around 215 million units at an average price of $691-$694 per unit. We expect a fall in sales in the last quarter (Q42017) when the new iPhones are expected to launch.

Source: own model

FY2018 will be a strong year for the iPhone with Apple expected to launch, in September, a new redesign on occasion of the 10th anniversary of the iPhone. It is also rumored that Apple will further broaden its product line with a new iPhone X model in addition to the 7s and 7s Plus models. The iPhone X model is expected to be the most premium offering and is expected to feature a complete redesign with a curved OLED screen and more premium build quality.

Services

Apple complements its hardware offerings with an extensive suite of software and an ecosystem of apps and services. Apple’s service revenues of $24B largely consist of revenues from the App Store which is the world’s largest app ecosystem by sales and by downloads. With an average per user per year revenue of $40ix, the app store makes available over 2 million apps to the users of iPhones, iPads, iPods, and the Apple Watch. With over 140 billion downloads, it is the most used app store by a distance. Apple has a 70/30 revenue share policy which means that a developer makes 70 percent of the revenues while Apple gets the remaining 30 percent. The share changes to 85/15 if a user stays subscribed to the developer's app for a year. Google’s Play Store has a similar sharing model. 2016 was a strong year for the services segment, with it seeing a 22% YoY growth. We expect the growth story to continue in 2017, indicators of which are already been seen in the 1st quarter with an 18% YoY growth and revenues of $7B. On January 2017, Apple announced that 1st January 2017 was the busiest day ever in App Store history with $240M in sales in one day.

Source: Apple

The Apple App Store enjoys several key benefits. Apple’s install base exceeds 1B and exhibits unparalleled customer loyalty. Developers generally see greater revenues for their apps from the App Store compared to other competing ecosystems like Google Play, which means that the App Store is often the first to see a new app than other stores. The App Store has also been credited for a better curation policy.

Apart from apps, Apple uses its iTunes platform to distribute Movies, Music, Books, and other multimedia

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2014 2015 2016 2017E 2018E 2019E 2020E 2021E

iPhone Sales (in $Bn)

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content. The Apple Music service launched in 2015 provides a subscription-based music streaming service which competes with rivals like Spotify. It currently has around 22M subscribers, compared to 50M for Spotify. Apple Music has three license types:

• Single User - $9.99/month

• Family - $14.99/month (6 users)

• Student - $4.99/month

Source: Own Model

Apple Music has its roots in the Beats Music service which Apple acquired in 2014 as part of the Beats Electronics acquisition. As of December 2016, Apple Music has 20M paid subscribers. Apple’s target is to double their services revenue by 2021 and our forecasted numbers bear that out. In the years to come, as the install base grows and as Apple looks for other avenues for growth, expect Services to make up 18% of Apple’s revenue in 2021 from the current 11%.

iPad

iPads are Apple’s line of tablet computers. Launched in 2010, the current lineup includes iPad 4, iPad Air, iPad Mini 4, and iPad Pro 9.7inch and 12.9inch models. iPads run on the same operating system as the iPhones i.e. the iOS.

While the iPads command a majority share of the global tablet market, it has been seeing a downward trend in recent years.

This trend is expected to break in 2018 to see a modicum of growth before falling back to a long-term secular decline. The tablet market globally has been shrinking as mobile phone screen sizes grow and PCs become lighter. Another reason is the rate at which consumers replace their current product with a new one which for tablets is much lower than for a smartphone.

Source: Statista

iPad sales fell by 11% YoY in 2016 and saw a 22% YoY decline during the 1st quarter of 2017. We expect a 20% YoY decline over the complete year with projected sales of $17B.

Mac

The Macintosh or the Mac line of notebooks and computers form Apple’s Personal Computer offerings.

Current Lineup. Source: Apple

The PC segment is seeing a decline in sales for the last 5 years with 4Q2016 sales declining by 3.7%. Interestingly, in spite of an overall drop in numbers, four of the top six manufacturers actually saw an increase which points towards a consolidation in the business. Apple saw a 10% decline in 2016 but recovered in 1Q2017 after the launch of the new MacBook models to post a 7% increase in sales.

61%18%

8%

6%7%

REVENUE DECOMPOSITION (2021)

iPhone

Services

Mac

iPad

Other Products

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Increased competition and reduced distinction between tablets and PCs means that Apple will struggle to see historic highs in this segment but Mac will remain a solid offering for the years to come.

Other Products

Apple’s recent push to enter new segments has resulted in products like the Apple Watch which along with iPods form the Other Product category

Apple Watch

Apple Watch is Apple’s entry into the wearable market. Launched in 2015, it currently in its 2nd generation with the current lineup called Apple Watch Series 1 and Series 2. Apple aims to enhance the usability of the iPhone via the use of the Apple Watch while the marketing focuses on the fashion aspect of the watch with it being labeled as a fashion accessory. Apple is a market leader in smartwatches and accounts for nearly 80% of the market by revenue and 50% by units.

The US wearable market is expected to grow to 55 million users by 2020 while the global market is expected to reach $34B in salesx, making Apple’s market leader position an excellent springboard to more profits. We predict that Apple will continue to be the market leader and will have an estimated 30% of the market by units.

Source: Canalys

iPods

iPods are the company’s line of portable digital music and media players and includes the iPod touch, iPod nano and iPod shuffle.

iPod is the product which made Apple popular amongst the mainstream consumer but sales have declined over the years as mobile phones become more adept at playing music, eliminating the need for a separate device for music playback. We expect iPods to be deprecated in a few years with them forming an insignificant part of overall sales.

Accessories

A burgeoning install base of iProducts means that accessory sales make up a lucrative segment for Apple. This includes products like the AirPods, cases, adapter and earphones.

Apple TV

Apple TV is a digital media player that connects and streams data to a compatible TV.

Airport

Airport is Apple’s line of wireless routers.

Company Analysis

Geographic Decomposition

Source: Apple 10K

Apple generates its revenue from six geographies based on the location of its customers. The Americas includes both North and South America. Great China includes China,

41%

24%

21%

7%7%

Revenue by Geography

Americas Europe Greater China

Japan Rest of Asia Pacific

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Hong Kong, and Taiwan. The Rest of Asia Pacific includes Asian countries and Australia. The Europe includes European countries, as well as India, the Middle East and Africa.

RECENT DEVELOPMENTS

Apple sues Qualcomm

In January 2017, US Federal Trade Commission charged Qualcomm with using anti-competitive tactics over licensing. The Federal Trade Commission alleged that Qualcomm received high royalties for patented technologies that are "essential to industry standards." That creates in effect, "a tax" on manufacturers that used competing processors. Immediately after this development, Apple filed a lawsuit against Qualcomm, suing it for $1B saying that Qualcomm was "charging royalties for technologies they have nothing to do with"

Apple also alleged that Qualcomm was “withholding nearly $1B in payments from Apple as retaliation for responding truthfully to law enforcement agencies investigating them.”xi

While the amount sued for is negligible for a company with revenues worth $215B, the larger implications for Apple is the fact that they are no longer tied at the hip with Qualcomm and no longer need to suffer the royalty hegemony of the chip supplier. It will enable Apple to diversify its supply chain. The entire episode seems to have given Apple some pause with them trying to lessen their reliance on suppliers and bringing a lot of component design in-homexii.

Earnings call 1Q2017

Apple reported their 1st Quarter earnings for the FY2017 on January 31st. It was a record quarter for them in many ways. They sold a record number of iPhones at a higher average price than any quarter ever with 78.3M units shipped and $54B in sales. The Apple Watch had its best ever quarter and total revenues of $78.4B is a quarter record as well.

They beat earnings estimates by 15 cents, earning $3.36 per share against a consensus estimate of $3.21. Revenue estimates of $77.25B were also surpassed.

The Q2 fiscal guidance is strong but slightly conservative with revenue guidance between $51.5B to $53.5B against an expected guidance of $53.79B

Manufacturing in India

As growth stabilizes in mature economies like the US and Europe, Apple needs to look at growing economies like India to fuel future growth. One key step in achieving this is local manufacturing. Apple has dabbled with the idea of manufacturing in India since some time now and in Feb 2017, it was finally official that Apple will start manufacturing in India in the state of Karnataka. The manufacturing unit will not only help in lowering costs of the iPhone, particularly the iPhone SE, but will also help Apple open Apple Stores in India. Apple has been hampered by a rule that prevented it from opening its own retail stores in the country. Foreign retailers can only sell products if 30% of the raw materials used to make them are sourced locally.xiii

Source: Statista

Didi opens lab

Apple-backed Chinese ride-hailing giant Didi recently opened an artificial intelligence lab in Mountain View, Calif., where the firm will develop intelligent driving systems and AI-based transportation security. Apple had invested $1B in Didi in 2016 valuing it at $20B.xiv

Buffet bets on Apple

After Jan. 1 and before Apple reported earnings on Jan. 31, Buffett's Berkshire Hathaway added almost 76 million Apple shares to its holdings taking the total value of BH’s

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Apple holding to $18B and making Berkshire Hathaway one of the biggest shareholders of Apple with 2.5% of shares outstanding. xv

This is interesting because Buffet has typically stayed away from technology stocks and his investment has generated massive positive sentiment for the Apple stock.

INDUSTRY TRENDS

IoT and Smart Home Tech

Internet of Things(IoT) is the inter-networking of physical devices also referred to as ("connected devices" and "smart devices"), vehicles, buildings, and other items—embedded with electronics, software, sensors, actuators, and network connectivity that enable these objects to collect and exchange data.

IoT has seen massive growth in recent years and is projected to grow to a massive 75 billion devices by 2025xvi. Apple’s HomeKit (now Home app) aims to make Apple a major player in this space. Apple does not

Source: IHS

manufacture IoT products but enables other manufacturers to create products which can interact with iDevices.

AR and VR.

Augmented reality (AR) is a live direct or indirect view of a physical, real-world environment whose elements are augmented (or supplemented) by computer-generated sensory input such as sound, video, graphics or GPS data. By contrast, virtual reality replaces the real world with a simulated one. Recent consumer technology conferences have seen an overwhelming number of innovations and

product highlights in these categories with big names like Facebook and Google entering the space with products like the Oculus Rift and Google Glass. While Apple does not have an AR/VR product in its lineup, its rumored to be working on one. We do not expect a launch in the next 6-8 months.

Machine Learning and Self Driving Cars

2017 is set to be a breakthrough year in terms of advancements in AI and its use in consumer and commercial applications. Already machine learning is being used to good effect in customer service, smartphone assistants, cyber security, and medical services.

Another aspect of Machine Learning are self-driving cars and 2016 saw big advancements in this category.

Source: Tractica

Apple’s bets on Didi and acquisitions like Turi and Tuplejump mean that Apple is well placed in this new arena.

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MARKETS AND COMPETITION

The technology hardware industry is highly competitive with pricing pressures across the spectrum. Price pressure is highest at the lower priced tier with many companies vying for the same piece of pie. At the higher end in terms of both pricing and cutting-edge, the pressure eases slightly but is still highly contested.

Apple, due to its sheer brand value and innovative Products, is able to command a price premium that translates to a higher gross and net margin. Further, Apple’s strategy to design in the US and manufacture parts in different parts of the world has enabled it to keep costs to a minimal and improve operating margins.

Peer Comparisons

Apple operates across different market segments and as such competes with a lot of companies. Samsung is, by far, Apple’s biggest competitor as it competes with it in the Smartphone, Tablet and PC categories.

A look at the revenue and profit numbers for the competing companies follows.

Company Name Price Market Cap

Revenue

Apple 138.68 727,590.0 217,481.0

HP Inc 17.36 29,397.1 48,658.0

Samsung Electronics

1,735.53 271,430.0 173,994.6

Alphabet 857.84 583,747.0 89,733.0

Microsoft 64.73 500,203.0 85,106.0

Source: Factset

Company Name Current Ratio

Quick Ratio

Cash Ratio

Apple 1.23 1.20 0.72

HP Inc 0.96 0.71 0.34

Samsung Electronics 2.64 2.31 1.61

Alphabet A 6.29 6.27 5.15

Microsoft 2.05 2.02 1.73

Source: Factset

Samsung and Apple compare well when it comes to Gross Margins with 39% and 38% respectively but Apple has a much better Net Margin of 21% compared to 11% for

Samsung due to lower taxation rates and lower R&D spend.

Apple and Samsung have long fought for the crown of the biggest smartphone vendor. In the quarter ending Dec

2016, Apple edged out Samsung and sold 78.3M smartphones compared to 77.5M by Samsung. Samsung was hit hard by the Note 7 withdrawal on safety concerns.

Over the entire year, Samsung still has the lead in terms of units shipped but loses out on revenue due to its portfolio of inexpensive smartphones which sell heavily to give it the huge unit sales numbers. In contrast, Apple’s smartphone sales are made up almost entirely of the higher margin latest generation iPhones. To give perspective, iPhone’s nearest competitor, the Galaxy S7 sold 50M units in the entire year compared to 78.3M iPhones sold in one quarter.

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ECONOMIC OUTLOOK

Consumer Sentiment Index

A stable and high Customer Sentiment Index reflects that people feel good about the state of the economy and their

Source: Thomson Reuters

financial situation. They are more likely to spend on non-essential items giving a fillip to the consumer electronics segment.

US and Global GDP Growth Rate

Source: The IMF

As the Global and the US economy return to growth after a sluggish 2016, consumer goods including consumer electronics are expected to see tailwinds.

Interest Rates

After almost a decade of flat rates, the Fed finally raised the rate to .5% in December 2015. The current rate stands at .75% after another 25bps hike in January 2017. With the Federal Reserve making it clear that it’s looking to take the rate to 1-1.25% range, the cost of debt will increase for all companies, as businesses find themselves in an environment of reduced liquidity.

CATALYSTS FOR GROWTH

As iPhones form a major chunk of Apple’s revenue and profits, the new iPhones launching in September are expected to catalyze growth with a corresponding increase in services segment.

A favorable tax repatriation scheme will enable Apple to strengthen its non-core competencies by acquisitions or capital expenditures. Such a scheme can act as a catalyst.

INVESTMENT POSITIVES

• Brand Value. Apple can command a premium on pricing due to its pre-eminent position in customer’s psyche.

• Industry leading net margins of 21% means that Apple generates massive profits on its equally massive sales.

INVESTMENT NEGATIVES

• Failure of the iPhone. Apple and iPhone’s destinies are so closely tied that a failure for the iPhone can spell trouble for Apple and send its price spiraling down.

• Ireland Tax Ruling, if it goes against Apple will result in reduced cash reserves and negative sentiment. The European Economic Commission has ordered the Irish government to collect $14.6B (about $2.7 per share) in back taxes from Apple. Apple and the Irish government have appealed the decision.

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Valuation

We valued Apple’s stock in the $155-160 range using DCF and DDM models. We feel that DCF gives the most accurate valuation considering the stable cashflow of Apple and is based on revenue decomposition of different sales categories.

The relative P/E models values the stock at 139.34. As Apple’s peer group, we chose Alphabet Inc., Microsoft, Cisco, Intel Corp, IBM, Hewlett Packard Inc., and Hewlett Packard Enterprises. Considering Apple makes most its money from the iPhone, its most direct peer company would have been Samsung but since it’s not listed on the US markets, the above-mentioned group gives a good approximation of the value of the stock.

We are issuing a strong BUY rating for Apple on the basis of its growing install base, enviable customer retention rates, and high Free Cash Flow generation. Additionally, Apple is likely to benefit from a lower tax rate on foreign cash repatriation under the Trump administration.

At the current price, we see an upside potential of 10-11% on Apple. While Apple’s stock has seen a recent spurt of growth, we believe it still has some ways to go. We believe that the market has yet not priced in the expected growth number for the upcoming iPhone and it’s just beginning to wake up to Apple’s massive growth in the Services and New Products categories.

Recent sentiment has been overwhelmingly positive, driven by strong Q1 results and increased positions by influencer buyers like Warren Buffet.

Key Drivers/Risks

The new iPhones

Apple makes 2/3rd of its revenue from smartphone sales

which primarily consists of two variants, namely the

iPhone and the iPhone Plus. The current generation is

named iPhone 7 and iPhone 7 Plus while the upcoming

iteration is expected to be called iPhone 7s/7s Plus and

iPhone X (expected Sep 2017) in honor of the iPhone’s

10th anniversary. Both are expected to be high sellers and

chart toppers in their class with a 7-8% growth in net sales

over the current iteration.

While the current iPhones have been strong sellers and

Apple sold 78.3 million units in last quarter – a recordxvii;

anticipation for the new devices will cause slowdown in

iPhone 7/7 Plus sales which will be compensated by the

new launch sales numbers.

Another noteworthy trend is the gravitation of users

towards the more expensive Plus model resulting is

better revenue numbers.

After a sluggish 2016, the global economy is projected to

grow at 3% in 2017 creating tailwinds for Apple as

consumer buying activity picks up.xviii

Explosion of growth in ‘stealth’ segments

Services was a big growth driver for Apple in FY16 and

grew at 22%. The growth story will continue on the back

of increased iPhone/iPad user base as major chunk of

services revenue is the App Store which is tightly linked

to the ‘i’ devices. The iTunes store continues to be the

largest music vendor in the world and Apple Music hit the

20M subscriber mark recently. Such numbers bode well

for the future and the services category is expected to

grow to $45B by 2021.

Another success story are the new products like Apple

Watch, Apple TV, and Airport. Apple Watch sold 4.6M

units in the last quarter for a 13% YoY growth and is now

the largest selling smartwatch in the market.xix The other

products category is poised to grow at 12.67% AAGR for

the next 3 years.

Why we call them the ‘stealth’ segments is because these

segments typically fly under the radar. Expect these to

fuel new growth for Apple.

High Capital Returns

Apple’s stock is increasingly attractive to buyers due to

the company’s proclivity for returning capital to

shareholders. Since mid-2012, Apple has returned $250B

in value to shareholders by dividend payouts and share

repurchases.

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Apple’s dividends are expected to continue growing at a

10% growth rate with a payout ratio between 26-30%

The company expects to spend $42B in stock repurchase

over the coming years. v

Penetration in Emerging Markets

Except China, where it continues to show strong numbers, Apple has overall struggled to get a foothold in emerging markets like India and Southeast Asia. Even in China, Apple remains vulnerable and was toppled from being the best seller to the no. 2 slot. Unit sales in China stood at 45M in 2016, netting Apple $48B in sales – a 17% drop from 2015.

Nonetheless, a renewed push to crack these markets by the company is expected to show results in the coming years. A new manufacturing tie-up in India with Wistron will see Apple making iPhones locally in India for the first time. This will help Apple lower costs of its iPhones in a very price sensitive market with high growth potential. Apple currently loses out to other vendors in India primarily due to pricing with iPhone costs at launch being 40% more than in the US.xx

Innovation Slowdown

Apple operates in the highly competitive technology sector which thrives on constant innovation with a regular production line of new products. Already we saw Apple being pushed down to 5th in China in terms of overall units shipped, by newer rivals like Oppo and Huawei.xxi

Apple also faced criticism over iPhone 7/7Plus, which many tech reviewers considered to be unimaginative with no game changing features as is expected of a full cycle iPhone. Many believed that the iPhone 7 is just a stop gap as Apple prepares itself for a massive overhaul with the next gen of iPhone rumored to be named iPhone X. iPhone 7/7s, despite the criticism is selling in good numbers and saw a 5% YoY growth in sales in the 1Q17.

We believe that Apple is well prepared and is going to pull out all stops with iPhone X. The Apple innovation DNA is still strong, glimpses of which could be seen in feature like Dual Camera Portrait and Zoom modes, AirPods, and the Taptic engine.

Debt Levels

While Apple has a lot of cash on its balance sheets, most of it is parked outside the US. Hence Apple has needed to raise debt in order to bolster domestic cash position and to fund the share repurchase program. Apple’s debt is now upwards of $80B.

While its interest income from investments helps cover the interest payments for its debt, Apple will be hopeful for a repatriation tax waiver under the new administration. If Apple is able to bring back the cash, it can not only fund share repurchases more aggressively but also use the cash to increase acquisition activity. Apple needs to stay wary of increasing debt too high.

Key Valuation Estimates and Assumptions

Revenue and Growth

Apple’s revenue saw a 7.7% fall in 2016 from 2015 levels. Total revenue stood at $215B, down from $233B in 2015. This was the first annual decline for Apple since 2001. The decline was closely connected to declining iPhone sales and softness in the Chinese market. Apple broke off this streak in 1Q17 by selling a record number of iPhones.

Apple recorded overall revenues of $78B in 1Q17 and is poised to end the year about 5% up over 2016 with $226Bn in total revenues with strong showing across all categories except iPad which are expected to decline by 20% in 2017 but will return to growth in 2018 on the back of new models.

Services and Other Products will see 25% and 11% growth respectively while Macs will see a respectable 8% growth.

Effects of Beta

Beta is a measure of market volatility and based on data provided by Yahoo Finance, the 5yr Beta for Apple is kept at 1.31. We did a sensitivity analysis on our valuation model by varying Beta and we can see that Apple’s stock value is reasonably resilient to market volatility with even a 15% increase in Beta resulting in an upside of almost 5%. We find that Apple is less cyclical than other peer companies due to its strong brand name and high customer loyalty amongst the current install base.

Page 13

Net PPE growth

As a company, which does little manufacturing of its own, Apple’s net PPE spends are less than an OEM (original equipment manufacturer) but as Apple enters new markets, its PPE spend will continue to grow with an estimated spend of $27B in 2017 and almost $30B in 2018.

Recent big tickets items include the Apple Park – the new HQ for Apple in the US, built at a cost of $5B and the new UK HQ at Battersea, expected to cost over a billion USD.

KEYS TO MONITOR

iPhone X reception: The rumored iPhone X represents a paradigm shift for Apple in terms of design as well as pricing for 2018 and beyond. It would be key to monitor how the X and iPhone 7s/7s Plus are received.

Cash Repatriation: Apple’s cash reserves are legendary but most of it is parked outside the US. A repatriation deal can be the difference raising debt or reducing it.

Ireland Tax Ruling: Ireland has been kind to Apple in terms of taxation which means Apple’s effective tax rate is way lower than other companies. A ruling against Apple can spell an end to this arrangement.

REFERENCES

1) CNN Money http://money.cnn.com/2017/02/01/investing/apple-cash-overseas/

2) Reuters http://www.reuters.com/article/us-apple-china-idUSKCN0Y404W

3) Adage http://adage.com/article/digital/apple-s-brand-tanks-google-recaptures-1-spot/307788/

4) Apple http://www.apple.com/newsroom/2016/07/apple-celebrates-one-billion-iphones.html

5) IHS http://news.ihsmarkit.com/press-release/technology/iphone-7-materials-costs-higher-previous-versions-ihs-markit-teardown-revea

6) IHS http://news.ihsmarkit.com/press-release/technology/samsung-galaxy-s7-teardown-reveals-ho-hum-refresh-0

7) GSMARENA http://www.gsmarena.com/apple_overwhelms_competitors_in_smartphone_profits_for_2016-news-23851.php

8) Apple http://images.apple.com/newsroom/pdfs/Q1FY17DataSummary.pdf

9) Sensor Tower https://sensortower.com/blog/revenue-per-iphone-2016

10) Forbes https://www.forbes.com/sites/paullamkin/2016/02/17/wearable-tech-market-to-be-worth-34-billion-by-2020/#2bb776343cb5

11) CNBC http://www.cnbc.com/2017/01/20/apple-sues-qualcomm-for-1-billion.html

12) Financial Times https://www.ft.com/content/14a192f8-170f-387d-898a-7b6a1cb486fe

13) CNN http://money.cnn.com/2017/02/03/technology/apple-india-manufacturing-bangalore/

14) AppleInsider.com http://appleinsider.com/articles/17/03/08/didi-opens-self-driving-car-lab-near-apple-in-california

15) CNBC http://www.cnbc.com/2017/02/27/billionaire-warren-buffett-more-than-doubled-his-holdings-in-apple-in-2017.html

16) IHS 17) Apple 10-Q

http://investor.apple.com/secfiling.cfm?filingID=1628280-17-717&CIK=320193

18) IMF https://www.imf.org/external/pubs/ft/weo/2017/update/01/

19) IDC http://www.idc.com/getdoc.jsp?containerId=prUS42342317

20) Business Today http://www.businesstoday.in/technology/news/why-iphone-7-is-40-per-cent-more-expensive-in-india-than-us/story/237149.html

21) TechCrunch https://techcrunch.com/2017/02/05/oppo-topped-chinas-smartphone-market-in-2016/

Page 14

IMPORTANT DISCLAIMER

Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially

i CNN Money money.cnn.com/2017/02/01/investing/apple-cash-overseas/

ii http://www.reuters.com/article/us-apple-china-idUSKCN0Y404W

iii http://adage.com/article/digital/apple-s-brand-tanks-google-recaptures-1-spot/307788/

iv http://www.apple.com/newsroom/2016/07/apple-celebrates-one-billion-iphones.html

v http://news.ihsmarkit.com/press-release/technology/iphone-7-materials-costs-higher-previous-

versions-ihs-markit-teardown-revea

vihttp://news.ihsmarkit.com/press-release/technology/samsung-galaxy-s7-teardown-reveals-ho-hum-

refresh-0

vii http://www.gsmarena.com/apple_overwhelms_competitors_in_smartphone_profits_for_2016-news-

23851.php

viiihttp://images.apple.com/newsroom/pdfs/Q1FY17DataSummary.pdf

ix https://sensortower.com/blog/revenue-per-iphone-2016

x https://www.forbes.com/sites/paullamkin/2016/02/17/wearable-tech-market-to-be-worth-34-billion-

by-2020/#2bb776343cb5

licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

xi http://www.cnbc.com/2017/01/20/apple-sues-qualcomm-for-1-billion.html

xii https://www.ft.com/content/14a192f8-170f-387d-898a-7b6a1cb486fe xiii http://money.cnn.com/2017/02/03/technology/apple-india-manufacturing-bangalore/

xiv http://appleinsider.com/articles/17/03/08/didi-opens-self-driving-car-lab-near-apple-in-california

xv http://www.cnbc.com/2017/02/27/billionaire-warren-buffett-more-than-doubled-his-holdings-in-

apple-in-2017.html

xvi IHS

xvii Apple 10-Q http://investor.apple.com/secfiling.cfm?filingID=1628280-17-717&CIK=320193

xviii https://www.imf.org/external/pubs/ft/weo/2017/update/01/

xix IDC http://www.idc.com/getdoc.jsp?containerId=prUS42342317

xxBusiness Today http://www.businesstoday.in/technology/news/why-iphone-7-is-40-per-cent-more-

expensive-in-india-than-us/story/237149.html

xxi Techcrunch https://techcrunch.com/2017/02/05/oppo-topped-chinas-smartphone-market-in-2016/

Apple Inc.Revenue Decomposition

Fiscal Years Ending Sep. 26 2014 2015 2016 2017E 2018E 2019E 2020E 2021ETotal Revenue 182.80 233.72 215.64 226.12 245.25 256.72 263.04 266.34YoY %change 6.95% 27.86% -7.73% 4.86% 8.46% 4.68% 2.46% 1.25%

Net Sales by ProductiPhone 101.99 155.04 136.70 142.17 151.41 155.95 159.85 163.05YoY %change 11.74% 52.01% -11.83% 4.00% 6.50% 3.00% 2.50% 2.00%% of total revenue 55.80% 66.34% 63.39% 62.87% 61.74% 60.75% 60.77% 61.22%

Services 18.06 19.91 24.35 30.44 35.91 41.30 45.02 47.27YoY %change 12.54% 10.22% 22.30% 25.00% 18.00% 15.00% 9.00% 5.00%% of total revenue 9.88% 8.52% 11.29% 13.46% 14.64% 16.09% 17.11% 17.75%

Mac 24.08 25.47 22.83 24.66 25.89 25.37 24.10 22.42YoY %change 12.08% 5.78% -10.36% 8.00% 5.00% -2.00% -5.00% -7.00%% of total revenue 13.17% 10.90% 10.59% 10.90% 10.56% 9.88% 9.16% 8.42%

iPad 30.28 23.23 20.63 16.50 17.82 18.18 16.72 15.22YoY %change -5.31% -23.30% -11.19% -20.00% 8.00% 2.00% -8.00% -9.00%% of total revenue 16.57% 9.94% 9.57% 7.30% 7.27% 7.08% 6.36% 5.71%

Other Products -- 10.07 11.13 12.36 14.21 15.92 17.35 18.39YoY %change 10.58% 11.00% 15.00% 12.00% 9.00% 6.00%% of total revenue 4.31% 5.16% 5.46% 5.79% 6.20% 6.59% 6.90%

Historical Segments 8.38 -- --

Unit Sales by ProductiPhone 169,219 231,218 211,884YoY %change 12.62% 36.64% -8.36%iPad 67,977 54,856 45,590YoY %change -4.30% -19.30% -16.89%Mac 18,906 20,587 18,484YoY %change 13.57% 8.17% -11.38%

Net Sales by GeographyAmericas 80.09 93.87 86.62Europe 44.29 50.33 49.95Greater China 31.87 58.71 48.5Japan 15.33 15.71 16.92Rest of Asia Pacific 11.25 15.09 13.66

Apple Inc.Sensitivity Analysis

DCF Target Price162.49$

1.110 1.160 1.210 1.260 1.310 1.360 1.410 1.460 1.510 2.37% 2.62% 2.87% 3.12% 3.37% 3.62% 3.87% 4.12% 4.37%2.15% 196.54 190.86 185.56 180.62 175.99 171.64 167.56 163.72 160.09 1.00% 164.13 163.85 163.58 163.31 163.04 162.77 162.50 162.24 161.97 2.35% 191.78 186.42 181.42 176.74 172.35 168.23 164.34 160.68 157.23 1.25% 163.99 163.72 163.44 163.17 162.90 162.63 162.37 162.10 161.83 2.55% 187.29 182.23 177.50 173.06 168.90 164.97 161.28 157.79 154.49 1.50% 163.85 163.58 163.31 163.03 162.76 162.50 162.23 161.96 161.69 2.75% 183.05 178.26 173.78 169.57 165.61 161.88 158.36 155.03 151.87 1.75% 163.71 163.44 163.17 162.90 162.63 162.36 162.09 161.82 161.55 2.95% 179.04 174.51 170.26 166.26 162.49 158.93 155.57 152.39 149.37 2.00% 163.57 163.30 163.03 162.76 162.49 162.22 161.95 161.68 161.42

3.15% 175.24 170.95 166.91 163.10 159.51 156.12 152.91 149.86 146.98 2.25% 163.43 163.16 162.89 162.62 162.35 162.08 161.81 161.54 161.28 3.35% 171.64 167.56 163.72 160.09 156.67 153.43 150.36 147.45 144.68 2.50% 163.29 163.02 162.75 162.48 162.21 161.94 161.67 161.40 161.14 3.55% 168.23 164.34 160.68 157.23 153.96 150.86 147.92 145.13 142.48 2.75% 163.16 162.88 162.61 162.34 162.07 161.80 161.53 161.27 161.00 3.75% 164.97 161.28 157.79 154.49 151.37 148.40 145.59 142.91 140.37 3.00% 163.02 162.74 162.47 162.20 161.93 161.66 161.39 161.13 160.86

22.00% 23.00% 24.00% 25.00% 26.00% 27.00% 28.00% 29.00% 30.00% 3.30% 3.50% 3.70% 3.90% 4.10% 4.30% 4.50% 4.70% 4.90%4.00% 189.81 187.55 185.29 183.04 180.78 178.52 176.26 174.00 171.74 0.60% 158.50 158.26 158.01 157.77 157.53 157.28 157.04 156.80 156.55 4.25% 183.18 181.01 178.85 176.68 174.52 172.35 170.19 168.02 165.86 0.70% 159.70 159.46 159.21 158.96 158.72 158.47 158.23 157.98 157.73 4.50% 177.09 175.01 172.93 170.86 168.78 166.70 164.62 162.54 160.47 0.80% 160.94 160.69 160.44 160.19 159.94 159.69 159.44 159.20 158.95 4.75% 171.48 169.49 167.49 165.49 163.49 161.50 159.50 157.50 155.50 0.90% 162.20 161.95 161.70 161.45 161.20 160.95 160.69 160.44 160.19 5.00% 166.31 164.39 162.46 160.54 158.61 156.69 154.77 152.84 150.92 1.00% 163.50 163.25 163.00 162.74 162.49 162.23 161.98 161.72 161.47

5.25% 161.52 159.66 157.81 155.95 154.10 152.24 150.39 148.53 146.67 1.10% 164.84 164.58 164.33 164.07 163.81 163.55 163.30 163.04 162.78 5.50% 157.07 155.28 153.49 151.69 149.90 148.11 146.32 144.53 142.73 1.20% 166.21 165.95 165.69 165.43 165.17 164.91 164.65 164.39 164.13 5.75% 152.93 151.19 149.46 147.73 146.00 144.26 142.53 140.80 139.07 1.30% 167.62 167.36 167.10 166.83 166.57 166.31 166.05 165.78 165.52 6.00% 149.06 147.38 145.71 144.03 142.35 140.67 139.00 137.32 135.64 1.40% 169.07 168.81 168.54 168.28 168.01 167.74 167.48 167.21 166.95

Market Risk Rate

NOPLAT CV

Growth

Beta Pre-Tax Cost of Debt

Risk Free Rate

Normal Cash %

Tax Rate Net Intagibles/Revenue

Apple Inc.Income Statement

Fiscal Years Ending Sep. 26 2014 2015 2016 2017E 2018E 2019E 2020E 2021ESales 183.24 231.28 214.23 226.12 245.25 256.72 263.04 266.34

COGS excluding D&A 104.61 131.00 121.00 131.15 134.88 141.20 144.67 146.49Depreciation 6.86 10.01 9.03 10.80 10.85 11.77 12.32 12.63Amortization of Intangibles 1.08 1.25 1.47 1.41 1.52 1.65 1.73 1.77Gross Income 70.69 89.03 82.72 82.75 97.99 102.10 104.32 105.46SG&A Expense 18.03 22.40 24.24 22.61 24.52 25.67 26.30 26.63EBIT (Operating Income) 52.66 66.63 58.48 60.14 73.46 76.43 78.02 78.82Nonoperating Income - Net 1.21 6.62 3.80 3.98 4.32 4.52 4.63 4.69Interest Expense 0.38 0.73 1.46 1.46 1.58 1.71 1.88 2.05Unusual Expense - Net 0.00 0.00 -0.55 0 0 0 0 0Pretax Income 53.48 72.52 61.37 62.67 76.20 79.24 80.77 81.47Income Taxes 13.97 19.12 15.69 16.29 19.81 20.60 21.00 21.18Consolidated Net Income 39.51 53.39 45.69 46.37 56.39 58.64 59.77 60.29Net Income available to Common 39.51 53.39 45.69 46.37 56.39 58.64 59.77 60.29

Per ShareEPS 6.45 9.22 8.24 8.77 10.75 11.24 11.49 11.62EPS Growth 11% 30% -12% 6% 18% 4% 2% 1%Total Shares Outstanding 5.87 5.58 5.34 5.29 5.24 5.22 5.20 5.19Dividends per Share 1.81 1.98 2.18 2.40 2.64 2.90 3.19 3.51Payout Ratio 28% 21% 26% 27% 25% 26% 28% 30%Dividend Growth 11% 9% 10% 10% 10% 10% 10% 10%

Apple Inc.Balance Sheet

Fiscal Years Ending Sep. 26 2014 2015 2016 2017E 2018E 2019E 2020E 2021EAssets

Cash & Short-Term Investments 25.08 41.60 67.16 73.25 92.66 107.21 124.13 139.06Short-Term Receivables 27.22 30.34 29.30 30.53 33.11 34.66 35.51 35.96Inventories 2.11 2.35 2.13 2.26 2.45 2.57 2.63 2.66Other Current Assets 14.12 15.09 8.28 11.31 12.26 12.84 13.15 13.32Total Current Assets 68.53 89.38 106.87 117.35 140.48 157.27 175.43 191.00

Net Property, Plant & Equipment 20.62 22.47 27.01 27.13 29.43 30.81 31.57 31.96Total Investments and Advances 130.16 164.07 170.43 188.74 204.93 230.14 256.07 282.65Intangible Assets 8.76 9.01 8.62 9.27 10.06 10.53 10.78 10.92Other Assets 3.76 5.56 8.76 6.78 7.36 7.70 7.89 7.99Total Assets 231.84 290.48 321.69 349.28 392.25 436.44 481.74 524.51

Liabilities & Shareholders' Equity

ST Debt & Curr. Portion LT Debt 6.31 11.00 11.61 3.5 6.5 6.83 6.45 7.75Accounts Payable 30.20 35.49 37.29 38.44 41.69 43.64 44.72 45.28Income Tax Payable 1.21 0.00 0.00 0 0 0 0 0Other Current Liabilities 25.74 34.12 30.11 31.66 34.33 35.94 36.83 37.29Total Current Liabilities 63.45 80.61 79.01 73.60 82.53 86.41 87.99 90.32

Long-Term Debt 28.99 53.46 75.43 83.53 87.88 95.61 106.13 114.53Unrecognized Tax Benefits 4.00 8.20 8.70 6.96 5.22 3.48 1.74 0Deferred Tax Liabilities 20.26 24.06 26.02 20.82 15.61 10.41 5.20 0.00Other Liabilities 3.60 4.79 4.29 4.52 4.90 5.13 5.26 5.33Total Liabilities 120.29 171.12 193.44 189.43 196.14 201.04 206.32 210.17

Common Equity 23.31 27.42 31.25 29.15 22.85 18.65 15.50 12.35Retained Earnings 87.15 92.28 96.36 130.06 172.62 216.12 259.28 301.36Cumulative Translation Adjustment/Unrealized For. Exch. Gain-0.24 -0.65 -0.58 -0.58 -0.58 -0.58 -0.58 -0.58Unrealized Gain/Loss Marketable Securities -0.04 -0.46 1.17 1.17 1.17 1.17 1.17 1.17Other Appropriated Reserves 1.36 0.77 0.04 0.04 0.04 0.04 0.04 0.04Total Shareholders' Equity 111.55 119.36 128.25 159.85 196.11 235.40 275.42 314.35

Minority Interest

Total Equity 111.55 119.36 128.25 159.85 196.11 235.40 275.42 314.35

Total Liabilities & Shareholders' Equity 231.84 290.48 321.69 349.28 392.25 436.44 481.74 524.51

Apple Inc.Cash Flow Statement

Fiscal Years Ending Sep. 26 2012 2013 2014 2015 2016Operating Activities

Net Income / Starting Line 41.73 37.04 39.51 53.39 45.69

Depreciation, Depletion & Amortization 3.28 6.76 7.95 11.26 10.51

Deferred Taxes & Investment Tax Credit 4.41 1.14 2.35 1.38 4.94

Other Funds 1.74 2.25 2.86 3.59 4.21

Funds from Operations 51.16 47.19 52.67 69.62 65.34

Changes in Working Capital -0.30 6.48 7.05 11.65 0.48

Receivables -6.97 -1.95 -6.45 -3.12 1.04

Inventories -0.02 -0.97 -0.08 -0.24 0.22

Accounts Payable 4.47 2.34 5.94 5.40 1.79

Other Assets/Liabilities 2.21 7.06 7.64 9.61 -2.57

Net Operating Cash Flow 50.86 53.67 59.71 81.27 65.82

Investing Activities

Capital Expenditures -9.40 -9.08 -9.81 -11.49 -13.55

Capital Expenditures (Fixed Assets) -8.30 -8.17 -9.57 -11.25 -12.73

Capital Expenditures (Other Assets) -1.11 -0.91 -0.24 -0.24 -0.81

Net Assets from Acquisitions -0.35 -0.50 -3.77 -0.34 -0.30

Purchase/Sale of Investments -38.43 -24.04 -9.02 -44.42 -30.63

Purchase of Investments 151.23 148.49 217.13 166.40 142.43

Sale/Maturity of Investments 112.81 124.45 208.11 121.99 111.79

Other Funds -0.05 -0.16 0.02 -0.03 -1.50

Other Uses -0.05 -0.16 0.00 -0.03 -1.50

Other Sources 0.00 0.00 0.02 0.00 0.00

Net Investing Cash Flow -48.23 -33.77 -22.58 -56.27 -45.98

Financing Activities

Cash Dividends Paid -2.49 -10.56 -11.13 -11.56 -12.15

Change in Capital Stock 0.67 -22.33 -44.27 -34.71 -29.23

Repurchase of Common & Preferred Stk. 0.00 -22.86 -45.00 -35.25 -29.72

Sale of Common & Preferred Stock 0.67 0.53 0.73 0.54 0.50

Issuance/Reduction of Debt, Net 0.00 16.90 18.27 29.31 22.06

Change in Current Debt 0.00 0.00 6.31 2.19 -0.40

Change in Long-Term Debt 0.00 16.90 11.96 27.11 22.45

Issuance of Long-Term Debt 0.00 16.90 11.96 27.11 24.95

Reduction in Long-Term Debt 0.00 0.00 0.00 0.00 -2.50

Other Funds 0.13 -0.38 -0.42 -0.75 -1.16

Other Uses -1.23 -1.08 -1.16 -1.50 -1.57

Other Sources 1.35 0.70 0.74 0.75 0.41

Net Financing Cash Flow -1.70 -16.38 -37.55 -17.72 -20.48

Net Change in Cash 0.93 3.51 -0.42 7.28 -0.64

Fiscal Years Ending AAPL 2017E 2018E 2019E 2020E 2021E

Net Income 46.37 56.39 58.64 59.77 60.29Depreciation 10.80 10.85 11.77 12.32 12.63Amortization 1.41 1.52 1.65 1.73 1.77OperationsShort-Term Receivables -1.23 -2.58 -1.55 -0.85 -0.44Inventories -0.13 -0.19 -0.11 -0.06 -0.03Other Current Assets -3.02 -0.96 -0.57 -0.32 -0.16Other Assets 1.97 -0.57 -0.34 -0.19 -0.10Accounts Payable 1.15 3.25 1.95 1.08 0.56Income Tax Payable 0 0 0 0 0Other Current Liabilities 1.55 2.68 1.61 0.89 0.46Unrecognized Tax Benefits -1.74 -1.74 -1.74 -1.74 -1.74Deferred Tax Liabilities -5.2038 -5.2038 -5.2038 -5.2038 -5.2038Other Liabilities 0.24 0.38 0.23 0.13 0.07Cash from Operation 52.18 63.83 66.32 67.54 68.09

Investing Intangible Assets -2.06 -2.30 -2.12 -1.99 -1.90Gross PPE -10.93 -13.15 -13.15 -13.08 -13.02Total Investments and Advances -18.31 -16.19 -25.21 -25.93 -26.57Cash from Investing -31.30 -31.64 -40.48 -41.00 -41.50

Financing ST Debt & Curr. Portion LT Debt -8.105 3 0.33 -0.38 1.3Long-Term Debt 8.11 4.35 7.73 10.52 8.40Common Equity -2.1 -6.3 -4.2 -3.15 -3.15Cumulative Translation Adjustment/Unrealized For. Exch. Gain 0 0 0 0 0Unrealized Gain/Loss Marketable Securities 0 0 0 0 0Other Appropriated Reserves 0 0 0 0 0Dividends -12.67 -13.83 -15.14 -16.60 -18.21Cash from Financing -14.77 -12.78 -11.28 -9.62 -11.66

Net Cash Change 6.10 19.40 14.55 16.92 14.93

Cash at the Beginning 67.155 73.25 92.66 107.21 124.13Cash at the end 73.25 92.66 107.21 124.13 139.06

Cash at the B/S 73.25 92.66 107.21 124.13 139.06

Apple Inc.Common Size Income Statement

Fiscal Years Ending Sep. 26 2014 2015 2016 2017E 2018E 2019E 2020E 2021ESales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

COGS excluding D&A 57.09% 56.64% 56.48% 58.00% 55.00% 55.00% 55.00% 55.00%

Depreciation 3.75% 4.33% 4.22% 4.78% 4.43% 4.59% 4.68% 4.74%

Amortization of Intangibles 0.59% 0.54% 0.69% 0.63% 0.62% 0.64% 0.66% 0.66%

Gross Income 38.58% 38.49% 38.61% 36.60% 39.95% 39.77% 39.66% 39.60%

SG&A Expense 9.84% 9.68% 11.31% 10.00% 10.00% 10.00% 10.00% 10.00%

EBIT (Operating Income) 28.74% 28.81% 27.30% 26.60% 29.95% 29.77% 29.66% 29.60%

Nonoperating Income - Net 0.66% 2.86% 1.77% 1.76% 1.76% 1.76% 1.76% 1.76%

Interest Expense 0.21% 0.32% 0.68% 0.64% 0.64% 0.67% 0.72% 0.77%

Unusual Expense - Net 0.00% 0.00% -0.26% 0.00% 0.00% 0.00% 0.00% 0.00%

Pretax Income 29.19% 31.35% 28.65% 27.71% 31.07% 30.87% 30.70% 30.59%

Income Taxes 7.63% 8.27% 7.32% 7.21% 8.08% 8.03% 7.98% 7.95%

Consolidated Net Income 21.56% 23.09% 21.33% 20.51% 22.99% 22.84% 22.72% 22.64%

Net Income available to Common 21.56% 23.09% 21.33% 20.51% 22.99% 22.84% 22.72% 22.64%

Apple Inc.Common Size Balance Sheet

Fiscal Years Ending Sep. 26 2014 2015 2016 2017E 2018E 2019E 2020E 2021EAssets

Cash & Short-Term Investments 13.69% 17.99% 31.35% 32.40% 37.78% 41.76% 47.19% 52.21%

Short-Term Receivables 14.85% 13.12% 13.68% 13.50% 13.50% 13.50% 13.50% 13.50%

Inventories 1.15% 1.02% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%

Other Current Assets 7.71% 6.52% 3.87% 5.00% 5.00% 5.00% 5.00% 5.00%

Total Current Assets 37.40% 38.64% 49.89% 51.90% 57.28% 61.26% 66.69% 71.71%

Net Property, Plant & Equipment 11.25% 9.72% 12.61% 12.00% 12.00% 12.00% 12.00% 12.00%

Total Investments and Advances 71.03% 70.94% 79.56% 83.47% 83.56% 89.65% 97.35% 106.12%

Intangible Assets 4.78% 3.90% 4.02% 4.10% 4.10% 4.10% 4.10% 4.10%

Deferred Tax Assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Other Assets 2.05% 2.40% 4.09% 3.00% 3.00% 3.00% 3.00% 3.00%

Total Assets 126.52% 125.59% 150.16% 154.47% 159.94% 170.01% 183.14% 196.93%

Liabilities & Shareholders' Equity

ST Debt & Curr. Portion LT Debt 3.44% 4.76% 5.42% 1.55% 2.65% 2.66% 2.45% 2.91%

Accounts Payable 16.48% 15.34% 17.41% 17.00% 17.00% 17.00% 17.00% 17.00%

Income Tax Payable 0.66% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Other Current Liabilities 14.04% 14.75% 14.05% 14.00% 14.00% 14.00% 14.00% 14.00%

Total Current Liabilities 34.62% 34.85% 36.88% 32.55% 33.65% 33.66% 33.45% 33.91%

Long-Term Debt 15.82% 23.12% 35.21% 36.94% 35.83% 37.24% 40.35% 43.00%

Unrecognized Tax Benefits 2.18% 3.55% 4.06% 3.08% 2.13% 1.36% 0.66% 0.00%

Deferred Tax Liabilities 11.06% 10.40% 12.15% 9.21% 6.37% 4.05% 1.98% 0.00%

Other Liabilities 1.96% 2.07% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%

Total Liabilities 65.65% 73.99% 90.30% 83.77% 79.98% 78.31% 78.44% 78.91%

Common Equity 12.72% 11.85% 14.59% 12.89% 9.32% 7.27% 5.89% 4.64%

Retained Earnings 47.56% 39.90% 44.98% 57.52% 70.39% 84.18% 98.57% 113.15%

Cumulative Translation Adjustment/Unrealized For. Exch. Gain-0.13% -0.28% -0.27% -0.26% -0.24% -0.23% -0.22% -0.22%

Unrealized Gain/Loss Marketable Securities -0.02% -0.20% 0.55% 0.52% 0.48% 0.46% 0.45% 0.44%

Other Appropriated Reserves 0.74% 0.33% 0.02% 0.02% 0.02% 0.01% 0.01% 0.01%

Total Shareholders' Equity 60.87% 51.61% 59.87% 70.69% 79.96% 91.70% 104.70% 118.02%

Total Equity 60.87% 51.61% 59.87% 70.69% 79.96% 91.70% 104.70% 118.02%

Total Liabilities & Shareholders' Equity 126.52% 125.59% 150.16% 154.47% 159.94% 170.01% 183.14% 196.93%

Apple Inc.Key Management Ratios

Fiscal Years Ending Sep. 26 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Liquidity RatiosCurrent Ratio (Current Assets/ Current Liabilities) 1.08 1.11 1.35 1.59 1.70 1.82 1.99 2.11Quick Ratio (Cash + Other Liquid Assets) / current liabilities 0.82 0.89 1.22 1.41 1.52 1.64 1.81 1.94Operating Cash Flow Ratio = Cash Flow From Operations/Current Liabilities 0.94 1.01 0.83 0.71 0.77 0.77 0.77 0.75

Activity or Asset-Management RatiosAsset Turnover Ratio (Sales/Total Assets) 79.04% 79.62% 66.59% 64.74% 62.52% 58.82% 54.60% 50.78%Total Assets Turnover ex Cash 88.63% 92.93% 84.16% 81.92% 81.86% 77.97% 73.56% 69.10%

Financial Leverage RatiosDebt Ratio = Total Liab/Total Assets 51.89% 58.91% 60.13% 54.23% 50.00% 46.06% 42.83% 40.07%Equity Ratio (Total Equity/ Total Assets) 48.11% 41.09% 39.87% 45.77% 50.00% 53.94% 57.17% 59.93%

Profitability RatiosGross Margin Ratio= (Sales-COGS-SG&A)/Sales 33.07% 33.68% 32.20% 32.00% 35.00% 35.00% 35.00% 35.00%Profit Margin Ratio = Net Income/Sales 21.56% 23.09% 21.33% 20.51% 22.99% 22.84% 22.72% 22.64%ROA = Net Income/Avg Total Assets 18.01% 20.45% 14.93% 13.82% 15.21% 14.15% 13.02% 11.98%ROE= Net Income/Shareholder Equity 35.42% 44.74% 35.62% 29.01% 28.75% 24.91% 21.70% 19.18%

Payout Policy RatiosTotal Payout Ratio (Div + Repurchase)/Net Income 140.79% 86.71% 90.52% 31.86% 35.70% 32.99% 33.05% 35.43%Dividend Payout Ratio 28.07% 21.48% 26.47% 27.33% 24.53% 25.83% 27.78% 30.20%

Apple Inc.Value Driver Estimation

Fiscal Years Ending Sep. 26 2014 2015 2016 2017E 2018E 2019E 2020E 2021ENOPLAT Calculation

Sales 183.24 231.28 214.23 226.12 245.25 256.72 263.04 266.34

-COGS excluding D&A 104.61 131.00 121.00 131.15 134.88 141.20 144.67 146.49

-Depreciation 6.86 10.01 9.03 10.80 10.85 11.77 12.32 12.63

-Amortization of Intangibles 1.08 1.25 1.47 1.41 1.52 1.65 1.73 1.77

-SG&A 18.03 22.40 24.24 22.61 24.52 25.67 26.30 26.63

+PV of Interest on Operating Leases 0.14 0.15 0.18 0.22 0.25 0.28 0.31 0.35EBITA 52.79 66.78 58.66 60.36 73.71 76.71 78.33 79.17

Pre Tax Income 53.48 72.52 61.37 62.67 76.20 79.24 80.77 81.47Total Income Tax Provision (inc. tax) 13.97 19.12 15.69 16.29 19.81 20.60 21.00 21.18

Tax Rate = Total Inc. Provision/Pre Tax 0.26 0.26 0.26 0.26 0.26 0.26 0.26 0.26Plus Tax Shield on Interest Expense 0.10 0.19 0.37 0.38 0.41 0.45 0.49 0.53Plus Tax on Lease Interest 0.04 0.04 0.05 0.06 0.06 0.07 0.08 0.09Plus Tax Shield on Unusual Expenses 0.00 0.00 -0.14 0.00 0.00 0.00 0.00 0.00Minus Tax on Non-Operating Income (Plus in this formula) (Nonop Int. Income+Other Inc) 0.32 1.75 0.97 1.04 1.12 1.18 1.20 1.22Less Adjusted Taxes 13.79 17.61 15.13 15.69 19.16 19.94 20.36 20.58Plus Change in Deferred Taxes 3.77 3.80 1.96 0.00 -5.20 -5.20 -5.20 -5.20Equals NOPLAT 42.77 52.97 45.49 44.67 49.34 51.56 52.76 53.38NOPLAT Growth % 0.11 0.24 -0.14 0.10 0.04 0.02 0.01Normal Cash % of Sales 2% 2% 2% 2% 2% 2% 2% 2%

Normal Cash (2% * Sales) 3.66 4.63 4.28 4.52 4.90 5.13 5.26 5.33Short-Term Receivables 27.22 30.34 29.30 30.53 33.11 34.66 35.51 35.96Inventory 2.11 2.35 2.13 2.26 2.45 2.57 2.63 2.66Other Current Assets 14.12 15.09 8.28 11.31 12.26 12.84 13.15 13.32Operating Current Assets 47.12 52.40 44.00 48.62 52.73 55.19 56.55 57.26Accounts Payable 30.20 35.49 37.29 38.44 41.69 43.64 44.72 45.28Income Tax Payable 1.21 0.00 0.00 0.00 0.00 0.00 0.00 0.00Non Interest-Bearing Current Liabilities(Accounts Payable + Income Tax Payable + Deferred Tax Liablities) 51.66 59.55 63.31 59.26 57.30 54.05 49.92 45.28Net Operating Working Capital -4.55 -7.15 -19.31 -10.64 -4.58 1.14 6.63 11.99Plus Net PPE 20.62 22.47 27.01 27.13 29.43 30.81 31.57 31.96PV of Operating Leases 4.31 5.37 6.53 7.32 8.20 9.18 10.28 11.51Net Other Intangibles 8.76 9.01 8.62 9.27 10.06 10.53 10.78 10.92Other Assets 3.76 5.56 8.76 6.78 7.36 7.70 7.89 7.99Plus Net Other Operating Assets 16.83 19.94 23.91 23.37 25.61 27.41 28.96 30.42Less other Liab. (BS line items) 25.74 34.12 30.11 31.66 34.33 35.94 36.83 37.29

Invested Capital 7.17 1.14 1.50 8.21 16.13 23.42 30.33 37.08

WACC 8.46% 8.46% 8.46% 8.46% 8.46% 8.46% 8.46% 8.46%

NOPLAT 42.77 52.97 45.49 44.67 49.34 51.56 52.76 53.38Beg Invested Capital 7.57 7.17 1.14 1.50 8.21 16.13 23.42 30.33Change in IC -0.40 -6.04 0.36 6.71 7.92 7.29 6.91 6.75End Invested Capital 7.17 1.14 1.50 8.21 16.13 23.42 30.33 37.08ROIC (NOPLAT/Beg IC) 564.97% 738.66% 4005.21% 2979.41% 600.98% 319.69% 225.30% 176.01%FCF (NOPLAT - Change in IC) 43.17 59.01 45.12 37.96 41.42 44.27 45.84 46.63EP (Beg IC * (ROIC-WACC)) 42.13 52.36 45.39 44.54 48.65 50.20 50.78 50.82

Marginal Tax Rate CalculationFederal Statuatory rate 35% 35% 35%State income taxes, net of federal tax benefit 1% 1% 1%Foreign rate differential -3% -4% -3%Marginal Tax Rate 33% 32% 33%

Apple Inc.Weighted Average Cost of Capital (WACC) EstimationWeighted Average Cost of Capital (WACC) EstimationMarginal Tax Rate 33%Cost of equity CalculationRisk Free Rate 2.95%+Beta 1.31Market Risk Premium 4.80%= Cost of Equity 9.24%

WACC CalculationShares outstanding 5.25MV of share $141.20=Total MV of Equity [E] $741.30

MV of debt [D] 94Cost of Debt 3.37%

MV of equity $741.30+MV of debt 94= MV of the firm [V] $834.87

Cost of Equity * 9.24%(E/V) 0.888+Cost of Debt * 3.37%(1-Marginal tax Rate) 67%(D/V) 0.112= WACC 8.46%

Apple Inc.Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 1.00% CV ROIC 176.01% WACC 8.46% Cost of Equity 9.24%

Fiscal Years Ending Sep. 26 2017E 2018E 2019E 2020E 2021E

DCF ModelDiscount period 1 2 3 4 5NOPLAT 44.67 49.34 51.56 52.76 53.38Continuing Value 712Free Cash Flow 38 41 44 46 47Net FCF 38 41 44 758PV of free cash flows 35 35 35 548Value of Operations 653

Non Operating AssetsExcess Cash 63ST Instruments 29LT Instruments 170Value of Non Operating Assets 263

Non Operating LiabilitiesPV of Operating Leases 7Total Debt 87PV of employee stock options 0Value of Non Operating Liabilities 94

Equity Value 822Shares outstanding 5Intrinsic Share Price $156.50Current Share Price 141.20Upside Potential 11%

EP ModelPeriods to discount 1 2 3 4 5Economic Profit 45 49 50 51 51Continuing Value 682Net EP 45 49 50 732PV of Economic Profit 41 41 39 529Initial Invested Capital 1Value of Operations 653

Non Operating AssetsExcess Cash 63ST Instruments 29LT Instruments 170Value of Non Operating Assets 263

Non Operating LiabilitiesPV of Operating Leases 7Total Debt 87PV of employee stock options 0Value of Non Operating Liabilities 94

Equity Value 822Shares outstanding 5Intrinsic Share Price $156.50Current Share Price 141.20Upside Potential 11%

Today 4/19/2017Next FYE 9/26/2017Last FYE 9/26/2016Days in FY 365 Days to FYE 205 Elapsed Fraction 0.562Intrinsic Value Today $162.49Current Share Price 141.20Upside Potential 13.10%

Apple Inc.Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Sep. 26 2017E 2018E 2019E 2020E 2021E

1 2 3 4 5EPS 8.77$ 10.75$ 11.24$ 11.49$ 11.62$

Key Assumptions CV growth 1.00% CV ROE 19.18% Cost of Equity 9.24%

Future Cash Flows P/E Multiple (CV Year) 11.51 EPS (CV Year) 11.62$ Future Stock Price 133.76$ Dividends Per Share 2.40 2.64 2.90 3.19 3.51 Future Cash Flows 2.40 2.64 2.90 3.19 137.27$

Discounted Cash Flows 2.20 2.21 2.23 2.24 88.25

Intrinsic Value $94.92Current Share Price 141.20

Today 4/19/2017Next FYE 9/26/2017Last FYE 9/26/2016Days in FY 365Days to FYE 205Elapsed Fraction 0.56Intrinsic Value Today $98.56Upside Potential -43.27%

Apple Inc.Relative Valuation Models

EPS EPSTicker Company Price 2017E 2018E P/E 17 P/E 18GOOGL Alphabet Inc. $853.99 $32.87 $37.86 26.0 22.6 MSFT Microsoft $65.39 $2.97 $3.28 22.0 19.9 CSCO Cisco $32.67 $2.18 $2.27 15.0 14.4 INTC Intel Corp $35.77 $2.79 $2.93 12.8 12.2 IBM IBM $170.05 $13.80 $14.25 12.3 11.9 HPQ Hewlett Packard Inc. $18.22 $1.60 $1.65 11.4 11.0 HPE Hewlett Packard Enterprise$18.13 $2.05 $2.15 8.8 8.4

Average 15.5 14.4

APPL Apple Inc. $141.20 $8.77 $10.75 16.1 13.1

Implied Value: Relative P/E (EPS17) $ 135.83 Relative P/E (EPS18) 154.38$

Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)

Operating Operating Operating Operating OperatingFiscal Years Ending Sep. 26 Leases Fiscal Years Ending Sep. 26 Leases Fiscal Years Ending Leases Fiscal Years Ending 186.419966953594 Leases Fiscal Years Ending 164.343441181845 Leases2017 0.929 2016 0.772 2015 0.662 2014 0.61 2013 0.5162018 0.919 2017 0.774 2016 0.676 2015 0.613 2014 0.5562019 0.915 2018 0.744 2017 0.645 2016 0.587 2015 0.5422020 0.889 2019 0.715 2018 0.593 2017 0.551 2016 0.5132021 0.836 2020 0.674 2019 0.534 2018 0.505 2017 0.486Thereafter 3.139 Thereafter 2.592 Thereafter 1.877 Thereafter 1.855 Thereafter 1.801Total Minimum Payments 7.627 Total Minimum Payments 6.271 Total Minimum Payments 4.987 Total Minimum Payments 4.721 Total Minimum Payments 4.414Less: Interest 1 Less: Interest 1 Less: Interest 1 Less: Interest 1 Less: Interest 1PV of Minimum Payments 6.53 PV of Minimum Payments 5.37 PV of Minimum Payments 4.31 PV of Minimum Payments 4.06 PV of Minimum Payments 4

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 3.37% Pre-Tax Cost of Debt 3.37% Pre-Tax Cost of Debt 3.37% Pre-Tax Cost of Debt 3.37% Pre-Tax Cost of Debt 3.37%Number Years Implied by Year 6 Payment 3.8 Number Years Implied by Year 6 Payment 3.8 Number Years Implied by Year 6 Payment 3.5 Number Years Implied by Year 6 Payment 3.7 Number Years Implied by Year 6 Payment 3.7

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 0.929 0.9 1 0.772 0.7 1 0.662 0.6 1 0.61 0.6 1 0.516 0.52 0.919 0.9 2 0.774 0.7 2 0.676 0.6 2 0.613 0.6 2 0.556 0.53 0.915 0.8 3 0.744 0.7 3 0.645 0.6 3 0.587 0.5 3 0.542 0.54 0.889 0.8 4 0.715 0.6 4 0.593 0.5 4 0.551 0.5 4 0.513 0.45 0.836 0.7 5 0.674 0.6 5 0.534 0.5 5 0.505 0.4 5 0.486 0.46 & beyond 0.836 2.5 6 & beyond 0.674 2.0 6 & beyond 0.534 1.5 6 & beyond 0.505 1.5 6 & beyond 0.486 1.4PV of Minimum Payments 6.5 PV of Minimum Payments 5.4 PV of Minimum Payments 4.3 PV of Minimum Payments 4.1 PV of Minimum Payments 3.8

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 0Average Time to Maturity (years): 0.00Expected Annual Number of Options Exercised: 0

Current Average Strike Price: -$ Cost of Equity: 9.00%Current Stock Price: $141.20

2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Increase in Shares Outstanding: 0 0 0 0 0 0 0 0 0 0Average Strike Price: -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ Increase in Common Stock Account: - - - - - - - - - -

Change in Treasury Stock 2.10 6.30 4.20 3.15 3.15 0 0 0 0 0Expected Price of Repurchased Shares: 141.20$ 153.91$ 167.76$ 182.86$ 199.32$ 217.25$ 236.81$ 258.12$ 281.35$ 306.67$ Number of Shares Repurchased: 0.015 0.041 0.025 0.017 0.016 - - - - -

Shares Outstanding (beginning of the year) 5.300 5.29 5.24 5.22 5.20 5 5 5 5 5Plus: Shares Issued Through ESOP 0 0 0 0 0 0 0 0 0 0Less: Shares Repurchased in Treasury 0 0 0 0 0 - - - - - Shares Outstanding (end of the year) 5.285 5.244 5.219 5.202 5.186 5 5 5 5 5

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol AAPLCurrent Stock Price $141.20Risk Free Rate 2.95%Current Dividend Yield 1.54%Annualized St. Dev. of Stock Returns 25.48%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 0 0.00 0.00 -$ -$ Range 2Range 3Range 4Range 5Range 6Range 7Range 8Range 9Range 10Range 11Range 12Range 13Range 14Total