Financial Policy at Apple


This is a group project, to be completed in groups of four students. Each student will be assigned to a group at the beginning of the course. As we progress through the course, you will develop the knowledge and skills that you will use to complete the project. The project will be due at the end of the course. You will be required to:

  • Address only Part A of the project requirements as outlined below. See the above link to the Harvard Business Case: “Financial Policy at Apple, 2013”
  • Submit one written report (8 – 12 pages) per group. Your report should contain your detailed analysis of Apple’s financials, using only the data from the ‘Annual Summary’ and Quarterly Summary’ tabs in the spreadsheet supplement (see link above).
    • To help with your analysis, I have provided an Excel data template (posted on Moodle)
    • I have also provided a discussion forum to help facilitate and answer any questions that you might have regarding the case

Topics: Financial Statements Analysis, Capital Structure, Forecasting and Corporate Valuation Part A:

In 2013, according to the case (see link above), Apple’s shareholders had become increasingly concerned about the amount that it held in cash and marketable securities, which had reached

$137 billion in December 2012, based on its first quarter filing. Apple’s cash pile had grown over the prior decade as a result of the successes of the iPod (launched in 2001), the iPhone (launched in 2007), and the iPad (launched in 2010). By late 2012, shareholders were growing restless due to the fact that no new groundbreaking devices had been launched since the iPad in 2010 as Apple’s market share in both the phone and tablet industries was steadily decreasing, mostly due to Android-powered devices. Apple was not using its cash hoard or returning it to shareholders. Apple’s shareholders had also seen the firm’s stock price decline from its high of over $700 in September 2012 to around $420 in April 2013. Using the information provided in the case, and your remarkable financial analysis skills, address the following:

  1. How did Apple amass so much cash in the first place? From the beginning of 2000 until its peak in 2012, Apple’s stock price rose from $27.97 to $702.10, an increase of over 25 times. Conduct an analysis of Apple’s annual financial data from 2000 to 2012 and determine what

specific attributes of its operational performance account for its cash generation and stock performance. Consider the following:

  • Growth rates in sales
    • How do the growth rates in accounts receivable compare to the growth rates in sales?
    • How did Apple finance its growth?
    • Gross profit margin, operating profit margin, net profit margin and cash flow margin
    • How does the net profit margin compare to the cash flow margin?
    • DuPont analysis of ROE
    • How does Apple’s ROE compare to its growth rate? Is the growth rate sustainable?
    • How would Apple’s ROE be impacted if it didn’t carry so much cash?
  • Apple’s stock price decreased by 37% from its peak in September 2012 through the end of March 2013, from $702.10 to $442.66. Examine Apple’s operational performance using its quarterly financial data from the quarter ended June 2011 to the quarter ended December 2012. Is the decline in Apple’s stock price performance supported by its operational performance over this period? How does Apple’s operational performance over this period compare to its long-run operational performance? Consider the following:
    • Growth rates in sales (sequential and year over year)
    • Gross profit margin, operating profit margin, net profit margin and cash flow margin
  • Apple’s cash pile had reached $137 billion in December 2012. Major shareholders, such as David Einhorn of Greenlight Capital, began to demand that Apple return some of its cash to its shareholders. Why might Apple have needed to hold on to so much cash in excess of what it needed to operate? Would you have recommended that Apple respond to and satisfy shareholders’ demands by distributing significant amounts of its cash? If so, what method(s) of returning cash would you have recommended, and why? Consider the following:
    • Apple’s industry and its place in it
    • What are the critical ingredients for success in this industry?
    • Apple’s opportunities for growth
    • What would a return of cash to shareholders signal about Apple’s opportunities for growth?
    • Apple’s tax situation
    • Dividends versus share repurchase

Part B:

On April 23rd, 2013, Apple held its second-quarter press conference. At this press conference, Apple announced two developments: 1) an updated share repurchase program, increased by five times to $60 billion, authorized until the end of 2015; 2) an updated quarterly dividend, increased by 15% to $3.05 per share. Taken together, Apple planned to distribute approximately $100 billion in cash by the end of 2015. This program expansion was seen as insufficient to some major shareholders such as Carl Icahn, who urged Apple to authorize $150 billion of repurchases, saying that this could raise Apple’s stock price to $625. In the same month, in addition to the dividend

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