Exhibit III (E) 3a – Part 1: Apple’s valuation using Scenario Analysis

1. Apple achieves a realistic goal of meeting 1% of market share (10 million units) and corresponding iTunes sales go up and high end iPod sales are cannibalized

WACC		Estimated price per share (in $)	Equity Value (in $ Billion)
15%		102.30	96.93
7%		810.83	688.57
8%		518.27	444.27
9%		373.19	323.13
10%		287.05	251.20
11%		230.31	203.82
12%		190.33	170.44
13%		160.79	145.77
14%		138.19	126.90
15%		120.41	112.05
16%		106.13	100.13
17%		94.45	90.37
18%		84.76	82.28
19%		76.62	75.49
20%		69.71	69.72
21%		63.79	64.77
Terminal year sales growth
2%		93.36	89.46
4%		105.42	99.54
6%		122.59	113.87
8%		148.96	135.89
10%		194.61	174.01
12%		292.78	255.99
14%		656.41	559.63
This years sales growth			11.51
20%		65.61	66.29
25%		75.27	74.36
30%		86.95	84.11
35%		101.01	95.85
40%		117.86	109.92
45%		137.97	126.72
50%		161.90	146.70
55%		190.26	170.38
60%		223.74	198.34
65%		262.15	230.41
70%		309.37	269.84
Terminal Year's ROE			11.51
5%		0.72	12.11
10%		16.52	25.30
15%		32.32	38.50
20%		48.12	51.69
25%		63.92	64.88
30%		79.71	78.07
35%		95.91	91.60
40%		111.31	104.46
45%		127.11	117.65
50%		142.91	130.84
55%		158.70	144.03
60%		174.50	157.22
65%		190.30	170.42
70%		206.10	183.61
This years ROE			0.00
10%		103.29	97.76
60%		152.09	138.51
			11.51
COGS (next year to terminal year)			11.51
71% to 30%		530.79	454.74
71-40%		412.79	356.21
71-50%		294.79	257.67
71-60%		176.67	159.04
71-70%		58.63	60.47
71-80%		-59.41	-38.10
			11.51
SG&A (next yr - terminal yr)			11.51
40-15%		34.31	40.16
35-15%		35.13	40.84
30-15%		50.46	53.64
25-15%		62.55	63.74
20-15%		82.00	79.98
15-15%		96.44	92.04
30-10%		107.59	101.35
25-10%		117.12	109.31
15-10%		153.58	139.76
R&D/Sales			11.51
20-10%		-7.58	5.18
15-10%		6.13	16.63
10-10%		19.85	28.08
20-5%		51.17	54.24
15-5%		64.88	65.69
10-5%		78.60	77.14
10-15%		-38.90	-20.98
15-20%		-111.36	-81.49

2. Apple does not introduce iPhone - Here we have assumed a scenario where Apple does not introduce iPhone and iPod sales are cannibalized since cell phones are coming up with integrated MP3 players.

WACC		Estimated price per share (in $)	Equity Value (in $ Billion)
15.48%		34.56	40.37
7.00%		335.40	291.57
15.00%		37.85	43.11
21.00%		11.50	21.11
Terminal year sales growth			0.00
2.00%		28.37	35.20
8.00%		45.72	49.68
14.00%		203.77	181.66
This years sales growth			11.51
20.00%		29.36	36.02
25.00%		37.17	42.55
40.00%		71.36	71.10
60.00%		155.11	141.03
70.00%		133.97	123.38
COGS (next yr - terminal yr))
71% to 30%		156.92	142.54
71-40%		123.21	114.39
71-50%		89.50	86.24
71-60%		55.80	58.10
71-70%		22.09	29.95
71-80%		-11.62	1.80
SG&A (next yr - terminal yr)
40-15%		-4.27	7.94
35-15%		1.98	13.16
30-15%		8.23	18.38
25-15%		14.48	23.60
20-15%		20.73	28.82
15-15%		26.98	34.04
30-10%		24.88	32.28
25-10%		31.13	37.50
15-10%		43.62	47.93
R&D/Sales (next yr - terminal yr)
20-10%		-6.18	6.35
15-10%		0.07	11.57
10-10%		6.32	16.78
20-5%		10.47	20.25
15-5%		16.72	25.47
10-5%		22.97	30.69
10-15%		-10.32	2.89
15-20%		-33.22	-16.23

3. Apple introduces iPhone and it is an exceptional success - In this scenario we assumed that Apple is successful in creating the niche market for consumer smartphones and that Apple can realize market share of 2% by 2008 and 14% by 2015

WACC		Estimated price per share (in $)	Equity Value (in $ Billion)
15.48%		317.34	276.49
7.00%		3936.38	3298.46
8.00%		2398.92	11.51
12.00%		699.32	11.51
15.00%		352.21	305.61
16.00%		283.59	11.51
21.00%		90.03	86.68
Terminal year sales growth
2.00%		238.58	210.73
8.00%		459.27	395.01
14.00%		2469.35	2073.49
This years sales growth			11.51
20.00%		5.66	16.23
25.00%		13.74	22.98
40.00%		45.66	49.63
60.00%		81.79	79.80
70.00%		127.02	117.57
COGS			11.51
71% to 30%		1398.57	1179.38
71-40%		1100.66	930.61
71-50%		802.82	681.90
71-60%		504.98	433.19
71-70%		207.14	184.48
71-80%		-90.70	-64.23
SG&A (next yr - terminal yr)
40-15%		176.48	158.88
35-15%		205.92	183.46
30-15%		198.49	177.26
25-15%		213.18	189.53
20-15%		257.37	226.43
15-15%		286.81	251.01
30-10%		367.01	317.98
25-10%		396.45	342.57
15-10%		455.33	391.74
R&D/Sales
20-10%		115.74	108.16
15-10%		121.11	112.64
10-10%		126.47	117.12
20-5%		115.74	108.16
15-5%		121.11	112.64
10-5%		279.49	244.90
10-15%		-26.54	-10.66
15-20%		-184.92	-142.92

4. Apple introduces iPhone but fails to add content to iTunes - Although iTunes incurs significant cost for Apple with majority of revenues going to music companies and credit card processing, iTunes will be profitable if there are large number of users on iTunes. Currently Apple’s revenues from iTunes are increasing in the order of 100%. If Apple fails to add content to iTunes, not only will it lose revenues (since scale drives revenues) but number of users of iPod and iPhone will reduce thereby failing to add new subscribers. For simplicity of the model, we have left the market share assumption as 1% by 2008 and 7% by 2015.

WACC		Estimated price per share (in $)	Equity Value (in $ Billion)
15.48%		33.31	39.32
7.00%		462.62	397.80
12.00%		81.89	79.89
15.00%		37.90	43.15
18.00%		15.15	24.16
21.00%		1.63	12.87
Terminal year sales growth
2.00%		24.51	31.97
4.00%		29.87	36.45
6.00%		37.48	42.80
8.00%		49.17	52.57
10.00%		69.38	69.44
12.00%		112.84	105.73
14.00%		273.73	240.08
This years sales growth
20.00%		23.36	31.01
25.00%		25.45	32.76
50.00%		86.26	83.54
70.00%		250.93	221.04
COGS
71% to 30%		214.70	190.79
71-40%		164.73	149.06
71-50%		114.76	107.34
71-60%		64.79	65.61
71-70%		14.83	23.89
71-80%		-35.14	-17.84
			11.51
SG&A (next yr - terminal yr)
40-15%		-29.12	-12.81
35-15%		-11.89	1.58
30-15%		5.34	15.97
25-15%		15.35	24.33
20-15%		25.36	32.68
15-15%		35.37	41.04
30-10%		29.09	35.80
25-10%		39.10	44.16
15-10%		59.12	60.88
R&D/Sales
20-10%		-15.75	-1.65
15-10%		-12.97	0.68
10-10%		-2.96	9.04
20-5%		0.77	12.15
15-5%		10.78	20.51
10-5%		20.79	28.87
10-15%		-25.05	-9.41
15-20%		-60.47	-38.99

5. Apple introduces iPhone but iPhone is commoditized - Apple commoditizes iPhone from 2008 onwards and the average selling price with 2 year contract with Cingular is $299. This is a scenario if Cingular is successful in negotiating with Apple to reduce the price for new subscribers in order to gain more subscribers from rivals such as Verizon and T-Mobile.

WACC		Estimated price per share (in $)	Equity Value (in $ Billion)
15.48%		101.91	96.60
7.00%		1186.87	1002.57
8.00%		730.70	11.51
12.00%		220.63	11.51
15.00%		112.95	105.82
16.00%		91.16	11.51
21.00%		27.61	34.56
Terminal year sales growth
2.00%		79.31	77.73
8.00%		142.63	130.61
14.00%		719.39	612.22
This years sales growth
20.00%		11.72	21.29
25.00%		20.62	28.73
40.00%		55.06	57.48
60.00%		96.43	92.03
70.00%		144.28	131.99
COGS
71% to 30%		527.62	452.10
71-40%		410.32	354.15
71-50%		293.07	256.24
71-60%		175.79	158.30
71-70%		58.51	60.37
71-80%		-58.71	-37.52
SG&A (next yr - terminal yr)
40-15%		62.14	63.40
35-15%		69.24	69.33
30-15%		76.34	75.26
25-15%		83.44	81.18
20-15%		89.37	86.14
15-15%		95.29	91.08
30-10%		124.05	115.10
25-10%		131.15	121.03
15-10%		143.59	131.41
R&D/Sales
20-10%		29.22	35.91
15-10%		33.69	39.64
10-10%		38.70	43.82
20-5%		79.45	77.85
15-5%		83.92	81.59
10-5%		88.40	85.33
10-15%		-12.06	1.44
15-20%		-66.76	-44.24

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