Today's Apple (NASDAQ:AAPL) is priced as if it were the next Microsoft (NASDAQ:MSFT). Not the Mr. Softy of the mid-90s, but the Microsoft of today, the one that just finished with what might be the worst quarter in its history.

Really?
Yes, really. My math shows that investors price the iEmpire as if it were on track to grow free cash flow by roughly 6% annually till 2014, and 3% thereafter. Here are all the numbers as I entered them into the DCF calculator we offer to Motley Fool Hidden Gems subscribers:

Metric

Value

Discount rate

12%

Free cash flow

$10.3 billion

Assumed FCF growth for next 5 years

6%

Assumed FCF growth for years 6-10

3%

Assumed FCF growth after 10 years

3%

Shares outstanding

896 million

Excess cash and equivalents

$24.2 billion

All debt

$0

Debt equivalent value of operating leases

$1.7 billion

Estimated value of outstanding stock options

$1.5 billion

FAIR VALUE OF APPLE SHARES

$171.65 per share

Source: Capital IQ, SEC filings, and author's estimates.

There are a lot of assumptions cooked into each of these data points. Let's tackle the most important ones.

Discount rate . Sometimes also known as the required rate of return to hold a stock, the discount rate is the rate at which future cash flows are discounted to their present value. The higher the rate, the riskier the stock.

To some, 12% might seem more appropriate for small caps such as TASER (NASDAQ:TASR) or Palm (NASDAQ:PALM) than a $150 billion company such as Apple. Fair point. There's little risk of bankruptcy. Plus, we've seen the iEmpire survive just fine for six months without its iconic and once-believed-to-be-indispensable CEO Steve Jobs. I've set it this high merely to be conservative, to reflect the company's relatively volatile stock price movements, and because Apple's board hasn't exactly proven to be trustworthy.

Free cash flow . I've opted for the classic formula here. Why not be more conservative and take a three-year average? I think doing so would understate the impact of the iPhone and the huge subsidies AT&T (NYSE:T) provides.

What's more, we're now in year three of iPhone sales and are still seeing growing sales, even as Research In Motion (NASDAQ:RIMM) and Palm introduce new handsets. I suspect Apple's days of producing $10 billion or more in FCF annually are just beginning.

Debt equivalent value of operating leases. This number is calculated by the good folks at Capital IQ and is current as of Dec. 31, so it may very well be low. I include it in this calculation because Apple is more than just a seller of hardware and software, it's also an upscale retailer that, like Tiffany & Co. (NYSE:TIF), leases a bounty of well-placed properties at fixed rates, much like interest on debt.

Estimated value of outstanding employee stock options. According to its latest 10-Q quarterly report, Apple had $1.5 billion in unrealized compensation expense related to stock options and restricted stock units. Exercises of these derivatives would have a dilutive impact on us as shareholders and, therefore, ought to be accounted for in the valuation equation.

Foolish final thoughts
The key drivers in this equation are free cash flow (FCF) and cash and equivalents. Reduce growth to zero -- that's right, zilch -- but preserve the FCF and cash numbers, and intrinsic value falls to $118.90 per share. The implication? Apple's existing FCF and cash assets account for over 70% of its market value at today's prices.

That's why I say Apple is still cheap. So do many of our Motley Fool Stock Advisor subscribers. But we could be wrong, which is why we want to hear from you. Please take a moment to vote in the poll below, and then leave a comment explaining your rationale.

Apple is a Stock Advisor selection. Microsoft is an Inside Value pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers had stock and options positions in Apple at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy buys its apples by the bushel.