Please ensure Javascript is enabled for purposes of website accessibility

This Is How Much Apple's Debt Will Cost

By Evan Niu, CFA – May 1, 2013 at 7:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Apple just tapped the debt markets to take advantage of remarkably low interest rates. How much will the Mac maker's paper cost every year, and how much will it benefit Apple?

Yesterday, Apple (AAPL 0.23%) tapped the debt markets for the first time in its history. The bold move comes as part of the company's ambitious capital return program, where it plans to return $100 billion in cash to shareholders through 2015.

Now that the bond offering has been completed, investors can sift through the figures to contemplate how much that paper will cost the iPhone maker from here on out.

Type

Due

Principal

Yield

3-year fixed

May 2016

$1.5 billion

0.51%

3-year floating

May 2016

$1 billion

0.33%

5-year fixed

May 2018

$4 billion

1.08%

5-year floating

May 2018

$2 billion

0.53%

10-year fixed

May 2023

$5.5 billion

2.42%

30-year fixed

May 2043

$3 billion

3.88%

       

 

Total

$17 billion

1.85%*

Source: SEC filings. *Weighted average.

The floaters are tied to three-month LIBOR, which is currently around 0.28%, and will reset quarterly. The three-year floaters carry a 5 basis point spread relative to that benchmark, while the five-year floaters offer 25 basis points above it.

That 1.85% weighted average cost of debt that Apple is facing is far less than the cost of equity it's implicitly on the hook for right now. That also translates into a little over $300 million in annual interest expense, which shouldn't hurt the bottom line much since Apple's net income over the past year has been nearly $40 billion. When including the tax deduction, Apple's after-tax interest expense is more like $195 million -- chump change for the Mac maker.

It seems appropriate to revisit some of the recent calculations I've made now that we have finalized digits. Using the capital asset pricing model, I now peg Apple's cost of equity at 8.9%. Before yesterday, Apple's weighted average cost of capital, or WACC, was exactly its cost of equity since it was debt free.

Apple's market cap has increased since I last addressed this, and now sits at $415 billion. Adding in the $17 billion in debt and using the above rates, Apple's WACC is now 8.6%. That's just a 30 basis point reduction in the company's WACC, which is in line with the relatively modest amount of debt Apple raised relative to what it could have offered. The order book for Apple bonds reportedly reached as high as $50 billion, so it could have easily raised more if it wanted to, which would have further reduced its WACC.

That's not to say that $17 billion is a paltry amount. In fact, it represents the largest non-financial corporate bond offering ever. Good thing it came cheap.

Fool contributor Evan Niu, CFA, owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$150.77 (0.23%) $0.34

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.