Apple faced shareholder concerns in 2013 over its $137 billion in cash. Shareholders wanted the cash returned rather than sitting unused. Apple analyzed various options, including issuing dividends or preferred stock. It also created a five-year financial forecast to determine how much cash it would accumulate if all was returned in 2012. This would help Apple decide whether and how much to return to shareholders.

1. FINANCIAL POLICY AT APPLE Inc. (A), 2013
MID EXAM FINANCE MANAGEMENT
By :
Fadila Pratika HS Alimuddin
29318445
MASTER OF BUSINESS ADMINISTRATION PROGRAM
SCHOOL OF BUSINESS AND MANAGEMENT
INSTITUT TEKNOLOGI BANDUNG
AGUSTUS 2019

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1. Case Analysis
In 2013, the CEO Tim Cook and CFO Peter Oppenheimer of Apple came together at a
meeting to confront shareholder concerns over the level of cash that Apple was holding.
They were particularly concerned about the amount of cash, which amounted to $137
billion, since Apple’s stock price had plummeted from a high of just over $700 to around
$420. Shareholder, David Einhorn of Greenlight Capital, voiced his belief that Apple
should return most of its $137 billion in excess cash to the shareholders rather than
letting it sit unused. The problem that Apple faces is how to deal with the concerns of
shareholders and plummeting stock prices. Various methods that they could use are
issuing a dividend, issuing preferred stock as suggested by David Einhorn, or keeping the
cash and further investing in new technology. Complicating their situation, however, is
the fact that most of their cash is held overseas. Depending on the method they choose,
Apple could face up to 35% of repatriation tax. Before making a decision, a financial
forecast is created to see how much cash Apple would accumulate in five years if they
had returned it all in 2012. By creating the financial forecast, Cook and Oppenheimer
will be able to determine whether to return any money to shareholders, and if so, how
much.
2. About Apple Inc.
Apple Inc. is an American multinational technology company headquartered in
Cupertino, California. It’s engaged in designing, manufacturing dan marketing mobile
communication and media devices, personal computers and portable digital music
players. Apple launched its initial public offering (IPO) on 12th
December 1980, with the
price of 22$ per share.
Though once the world leader, Apple Incorporated (AAPL) is currently the world's
second largest company by market capitalization, boasting a value of $991.24 billion on
June 28, 2019. But nothing can take away the fact that the global tech giant and
smartphone manufacturer holds the distinction of becoming the first company ever to
reach a market cap of $1 trillion, hitting a record high of $1,129.37 trillion, on August 27,
2018.

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3. Financial Ratio Analysis
Data is taken from Harvard Business School Passage, Financial Policy at Apple, 2013
(A), calculated using methodology by Gitman.
Analysis :
a) Liquidity Ratio
Apple’s Inc current ratio is decreasing over time during 2010 – 2012, due to
significant increment in Account Payable. But, Current Ratio calculated above
indicates ability of Apple Inc. to meet its short-term obligation since it’s
presented great degree of liquidity after compared its asset to its liabilities.
Quick Ratio is also indicates a great liquidity since after factoring its inventory,
the ratio is still positive and shown great degree of liquidity.
b) Solvency Ratio
According to data from Apple Inc’s Balance Sheet 2010 – 2012 shown in Exhibit
7B, Apple Inc doesn’t have long term debt. It resulted its liabilities to asset ratio
Apple Inc. Financial Data Sep-10 Sep-11 Sep-12
Total Current Asset 41,678.00 44,988.00 57,653.00
Total Current Liabilities 20,722.00 27,970.00 38,542.00
Total Assets 75,183.00 116,371.00 176,064.00
Total Liabilities 27,392.00 39,756.00 57,854.00
Long Term Debt - - -
Total Shareholder's Equity 47,791.00 76,615.00 118,210.00
Inventory 1,051.00 776.00 791.00
Net Income 14,013.00 25,922.00 41,733.00
Net Revenue 65,225.00 108,249.00 156,508.00
2010 2011 2012
Liquidity Ratio Current Ratio 2.011 1.608 1.496
Quick Ratio 1.961 1.581 1.475
Solvency Ratio Long-Term Debt to Equity 0.000 0.000 0.000
Liabilities to Asset 0.364 0.342 0.329
Profitability Ratio Profit Margin 0.215 0.239 0.267
Return on Asset (ROA) 18.64% 22.28% 23.70%
Return on Equity (ROE) 29.32% 33.83% 35.30%
Ratio

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is quite stable over time during 2010 – 2012 even total shareholder’s equity is
significantly increasing.
c) Profitability Ratio
Return on Asset (ROA) measured the effectiveness of Apple Inc Management in
generating profits with its assets. Data presented in the table has been increased
over time during 2010 – 2012, it’s indicated that Apple Inc. generate 18,64 cents
on each dollar of asset investment in 2010, increase to 22,28 cents in 2011 and
23,70 cents in 2012.
Return on Equity (ROE) measured the return earned from investment. Data in the
table indicated that Apple Inc. earned 29,32 cents on each dollar of common
stock equity in 2010, and increasing to 33,83 cents in 2011 and 35,30 cents in
2012.
4. Optimal Capital Structure Analysis
Data is taken from Harvard Business School Passage, Financial Policy at Apple, 2013
(A), calculated using Optimal Capital Structure spreadsheet by Damodaran.
▪ EBITDA taken from Income Statement Apple Inc. 29th
Sept 2012 : $58,518.00
▪ Depreciation and Amortization taken from Cash Flow Apple Inc. 29th
Sept 2012 :
$2,672.00
▪ Capital Spending taken from Cash Flows Apple Inc. 29th
Sept 2012 in Capital
Expenditure. The number is actually in negative number, but as Damodaran said it
should be calculated as positive number : $8,295.00
▪ Marginal Income Tax Rates 35% for 2012 taken from :
https://www.taxpolicycenter.org/statistics/historical-highest-marginal-income-tax-
rates
▪ Marginal Tax to use for pre-tax cost of debt is 24% taken from Damodaran’s sheet –
Marginal Tax Rate by country :
United States 24.00%
▪ Current Bond Rating on Debt Apple Inc is AAA, taken from
https://markets.businessinsider.com/bonds/apple_incdl-notes_201313-23-bond-2023-
us037833ak68

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▪ Pre-Tax Cost of Debt : 1.72 %
[RFR (1.65%) + Spread Data (0.75%)]*[1-35%] = 1.56%
Risk Free Rate Data on 28th
Sept 2012, for 10 years is 1.65%.
https://www.treasury.gov/resource-center/data-chart-center/interest-
rates/Pages/TextView.aspx?data=yieldYear&year=2012
Spread Data taken from Damodaran Default Spread and Ratio, since Credit Rating is
AAA, the spread data will be 0.75%.
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ratings.htm
▪ Number of Shares Outstanding, taken from Income Statement 29th
Sep 2012 : 939.20
▪ Market Price per Share taken from Income taken from Income Statement 29th
Sep
2012 : 595.32
▪ Beta of the Stock : 1.26 , taken from :
(https://www.zacks.com/stock/chart/AAPL/fundamental/beta)
▪ Cash and marketable securities taken from Quarterly Summary Financial (Exhibit 6)
on 29th
Sept 2012 : 121,251
▪ Risk Premium is 5.96%, taken from
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html
▪ Operating leases commitment number for Default Spread and Ratios Spreadsheet
Damodaran taken from Annual Report AAPL-Nasdaq 2012, page 70 :

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Inputs
Please enter the name of the company you are analyzing: Apple Inc
Please enter the date that you are doing this analysis Aug-19
Financial Information
Earnings before interest expenses, depreciation & amortization (EBITDA) $58,518.00
Depreciation and Amortization: $2,672.00
Capital Spending: $8,295.00
Interest expense on debt: 35%
Marginal tax rate to use for pre-tax cost of debt 24.00%
Current Bond Rating on debt (if available): Aaa/AAA
Enter the current pre-tax cost of debt for your company 1.56%
Market Information & information on debt
Number of shares outstanding: 939.2
Market price per share: $595.32
Beta of the stock: 1.2160
Cash and marketable securities = $121,251.00
Book value of debt: -$
Can you estimate the market value of the interest bearing debt? No
If so, enter the market value of "interest bearing" debt: $0.00
Do you want me to try and estimate market value of debt? No
If yes, enter the weighted average maturity of outstanding debt? 0.00
Do you have any operating leases? Yes
Interest deduction constraints
Are there any restrictions on interest deductions for tax purposes? No
If yes, what earnings or operating measure is the restriction tied to? EBITDA
Enter the maximum percentage of that measure that is deductible 35.00%
Indirect bankruptcy costs & ratings constraints (if any)
Do you want to incorporate indirect bankruptcy costs into your optimal? No
If yes, specify the magnitude of your indirect bankruptcy costs Low
General Market Data
Current riskfree rate in the currency of analysis = 1.65%
Risk premium (for use in the CAPM) 5.96%
Country Default spread (for cost of debt) 0.75%
General Data
Which spread/ratio table would you like to use for your anlaysis? 1
Do you want to assume that existing debt is refinanced at the 'new' rate? Yes
Do you want the firm's current rating & cost of debt to be adjusted to the synthetic rating?Yes

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Analysis :
✓ Debt to Equity Ratio indicates that Apple Inc. that currently using only 0.68% of Debt to
finance its assets. This situation indicates that Apple Inc. is having a lot of excess cash.
To be able to be optimal, Apple Inc. should increase its Debt to 40% to finance its assets,
since theoretically cost of having excess in equity is higher than cost of debt.
✓ Beta for the stocks indicates sensitivity of AAPL compared to Nasdaq currently is 1.216,
it means AAPL stocks of volatility is greater than market. In order to optimize its stock
performance, Beta should be increased to 1.82
✓ Cost of Equity is currently 8.90% reflected the compensation given to the shareholders
for investing their fund in AAPL, it should be increased to 12.51% to be optimal. It’s
recommended to Apple Inc. to pay more dividends to its shareholders.
✓ After Tax Cost Debt is currently 2.39%, need to be optimized to 2.58%.
✓ Weighted Average Cost of Capital (WACC) is currently 8.85% which reflected the
expected average future cost of capital over the long run. Apple Inc is slightly overrun
from its optimal cost of capital which should be 8.54%.
Capital Structure Financial Market Income Statement
Current MV of Equity = $559,125 Current Beta for Stock = 1.22 Current EBITDA = $59,006
Market Value of interest-bearing debt = $0 Current Bond Rating = Aaa/AAA Current Depreciation = $3,151
# of Shares Outstanding = 939.2 Current Tax Rate = 24.00%
Debt Value of Operating leases = $3,836 Long Term Government Bond Rate = 1.65% Current Capital Spending= $8,295
Equity Risk Premium = 5.96% Pre-tax cost of debt = 1.56% Current Interest Expense = $121
Summary of Inputs
Apple Inc
August-19
Current Optimal Change
D/(D+E) Ratio = 0.68% 40.00% 39.32%
Beta for the Stock = 1.216 1.82 0.61
Cost of Equity = 8.90% 12.51% 3.62%
Rating on Debt Aaa/AAA
After-tax cost of Debt = 2.39% 2.58% 0.19%
WACC 8.85% 8.54% -0.31%
Implied Growth Rate = 0.38%
Enterprise value $441,710 $458,577 $16,867
Value/share (Perpetual Growth) = $595.32 $613.28 $17.96
RESULTS FROM ANALYSIS

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✓ Enterprise Value is reflected market capitalization of Apple Inc which is currently
$441,710 which is required to be increased by $16,867 to $458,577 in order to achieve its
optimum value of market capitalization.
✓ Perpetual Growth or share price (value per share) is currently 595.32 which could be
613.28 if it’s in the optimum capital structure.
5. Summary
According to Damodaran using this Optimum Framework based on financial data that
has been analyzed, Apple Inc is currently Underlevered, which is the situation when
actual financial indicators is less that optimal target.
6. Recommendation
Based on Financial Indicators that has been analyzed and considering high growth life
cycle of Apple Inc., here’s recommendations to management on how to do financial
decision :
a) Investment Decision : internal funds start to catch up with investment choice
✓ Stock split
Apple Inc can do stock split as corporate action to diminishes its price. This action
will automatically increase its outstanding shares. In reality, in 9th
June 2014, Apple
do stock split with 1:7 ratio as corporate action.

9. Fadila Pratika HS Alimuddin - 29318445 Page 8
✓ Share Buyback
After stock split action that diminished stock price, management could increase the
pace of buyback without negatively impacting Apple's share price with excessive
buying pressure, due to increasing of outstanding shares as impact of stock split.
Apple could also rely on accelerated share repurchase (ASR) programs to handle
additional buyback activity.
✓ Merger & Acquisition
Management can use excess cash to alter its Merger & Acquisition strategy and begin
buying additional companies, targets with larger price tags, or a combination of the
two trends. According to data from
https://en.wikipedia.org/wiki/List_of_mergers_and_acquisitions_by_Apple , Apple
has done several merger & acquisition as their corporate action.
✓ Research and Development
Apple can use excess cash to expand its Research & Development spending in terms
of both breadth (i.e. new industries) and depth (i.e. greater number of bets in existing
industries).

10. Fadila Pratika HS Alimuddin - 29318445 Page 9
b) Financing Decision : some debt capacity open up
✓ Financing new projects using the debt.
Result from analysis on Debt to Equity Ratio indicates that Apple is currently using
only 0.68% of Debt to finance its assets. This situation indicates that Apple Inc. is
having a lot of excess cash. To be able to be optimal, Apple should increase its Debt
to 40% to finance its assets, since theoretically cost of having excess in equity is
higher than cost of debt. Financing its future projects using debts should be an option
to get an optimal capital structure.
c) Dividend Decision : need for new equity subsides and cash start building up
✓ Giving Dividends to its shareholders.
Currently Apple has already giving away quarterly dividends to its shareholders.
Having this huge excess cash, Apple could use the money to give a larger increase to
this quarterly dividend and in additional to quickly get rid of the cash easily, Apple
could issue a special one time dividends to the shareholders. This action is to avoid
lagging profit margins that might occurred to investor while company being in High
Growth stage.
✓ Issue I-Pref Stocks
Apple should distribute its cash in preferred stock to fixed-income investors. The I-
Pref shares would issue additional cents in dividends indefinitely so the investors can
get higher yields out of Apple stocks.