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Financial Policy at Apple 2013 A Case Solution

Solution Id Length Case Author Case Publisher
2879 2304 Words (10 Pages) Mihir A. Desai, Elizabeth A. Meyer Harvard Business School : 214085
This solution includes: A Word File A Word File

Apple Inc. is a multinational company headquartered in California that designs, manufactures, and markets consumer electronics and software. Apple’s strategy is linked to building an ecosystem of products with the highest brand value and constantly innovating and launching new product lines. Apple's financial journey from 2000 to 2012 saw remarkable growth, with revenue soaring from $7.98 billion to $156.51 billion. Apple witnessed a drop in share price in 2013, which was influenced by market dynamics, possibly tied to concerns over innovation. Apple's response included dividends and a share repurchase plan, aiming to unlock shareholder value. Einhorn's iPref proposal was considered, introducing a unique financial instrument, but market uncertainties persisted.

Following questions are answered in this case study solution

  1. Who are the players in this Financial Policy at Apple case?

    1. Present an overview of Apple Incorporation’s business, its history, its operating strategy, its growth strategy, and any potential competitive advantages it has.

    2. Present a historical analysis of the company’s financial performance and financial position based on the information in the case.

    3. What is the current situation and issue faced by Apple?

  2. Analysis of Apple’s stock price changes.

    1. 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. What specific attributes of their operational performance account for this stock performance?

    2. Apple’s stock price decreased by 37% from its peak in September 2012 until the end of March 2013, from $702.10 to $442.66. Again, what specific attributes of their operational performance account for this stock performance?

  3. Apple’s excess cash.

    1. Why does Apple Incorporation hold so much cash?

    2. How much “excess” cash do they have as of the last information available in this case?

    3. How much cash would they have after five years if they distributed all of their “excess” cash to shareholders in 2012? Use Exhibit 10 to forecast Apple’s financial status over the next five years.

    4. If Apple chose instead to commit to an annual dividend from 2012-2017, how much do you think they could afford to distribute each year?

  4. Quantitatively compare the results of a share repurchase, dividend, and iPref issuance. Assume that Apple Incorporation will use all excess cash for share repurchases, and dividends, and, in the case of iPref, will issue five per share. For the iPref analysis, assume a constant P/E ratio of 10.0x as Einhorn did. How does this assumption impact the analysis?

  5. What should Cook and Oppenheimer do?

Case Analysis for Financial Policy at Apple 2013 A Case Solution

1. Who are the players in this Financial Policy at Apple case?

1. Present an overview of Apple Incorporation’s business, its history, its operating strategy, its growth strategy, and any potential competitive advantages it has.

Apple is a global technology company headquartered in the USA, and its notable products include iPhone, iPad, Mac, Apple Watch, and various software applications. Apple was founded on April 1st 1976, by Steve Jobs and Steve Wozniak, creating the Apple I in 1976. Over the years, Apple faced financial challenges but experienced a resurgence with the launch of the iMac in 1998. The 2000s marked significant milestones with the introduction of revolutionary products like the iPod, iTunes, iPhone, and iPad. 

Apple's operating strategy centers revolves around seamless integration of hardware and software, offering users a consistent and aesthetically pleasing experience. Apple maintains a closed ecosystem to ensure its products work harmoniously together, contributing to a unique and user-friendly environment.

Apple's growth strategy involves continuous product innovation, global expansion, and product ecosystem development. Apple regularly introduces new and upgraded products to meet evolving consumer demands, such as introducing new and upgraded iPhone models every year, prompting loyal users to upgrade their models every year. Apple's global retail presence, including iconic Apple Stores, enhances brand visibility. Additionally, services like the App Store, Apple Music, iCloud, and Apple Pay contribute to a thriving ecosystem with products linked to each other. This brand loyalty and ecosystem of products gives Apple a competitive advantage over other companies in the market. 

2. Present a historical analysis of the company’s financial performance and financial position based on the information in the case.

Apple's total revenue has shown a consistent upward trend over the years. There has been a significant jump of over 20 times from $7.98 billion in 2000 to $156.51 billion in 2012. The cost of goods sold has also increased in line with revenue as new and advanced products were introduced from 2000 to 2012. Gross profit, the difference between revenue and COGS, has experienced substantial growth, reaching $68.66 billion in 2012 from only $2.17 billion in 2000. 

Net income has grown significantly from $786 million in 2000 to $41.73 billion in 2012. 2001 witnessed a net loss, and from 2002 to 2012, there has been a steady growth in net income. The selling, administrative and general expenses have also grown over the years, albeit the growth rate is not as fast as that of revenue. 

Cash flow from operations of Apple has seen significant growth, reaching $50.86 billion in 2012 which signifies Apple's ability to generate significant cash from its operational activities. The cash and marketable securities position has also witnessed substantial growth, reaching $121.25 billion in 2012. Apple maintains a robust liquidity position; both current assets and current liabilities have increased over the year, but the quick ratio and current ratio have remained well above 1, which shows that current assets are enough to meet accounts payable. The current ratio based on cash as marketable securities as current assets and accounts payable as current liabilities was 3.48 in 2000 and 5.72 in 2012.

3. What is the current situation and issue faced by Apple?

After Steve Jobs’s death, Apple’s stock price has been on a decline as Apple continues to lose share in both phone and tablet industries, and there is a halt in new innovations and product line launches. The shareholders are concerned about the excess cash Apple has accumulated due to its high profitability and why it is not being returned to the shareholders. The top management at Apple is concerned about coming up with a use for this excess cash, which will satisfy Apple’s shareholders while being in the best interests of the corporation.

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