Corporate Finance (FIN203) - Apple Inc. Analysis and Decision Making

This report presents a comprehensive financial analysis of Apple Inc., evaluating its performance from a corporate finance perspective. The analysis begins with an assessment of Apple's cash conversion cycle, examining inventory, receivables, and payables turnover ratios to gauge its working capital efficiency. It then identifies key risks outlined in Apple's annual report, including market, technological, supply chain, foreign exchange, and interest rate risks. The report also assesses Apple's stock performance relative to market indices and analyzes its debt levels. Furthermore, the report delves into an investment decision scenario, evaluating the feasibility of a new store project using the Net Present Value (NPV) method, including free cash flow calculations and Internal Rate of Return (IRR) analysis. The findings suggest that the project is viable and aligns with Apple's financial objectives. The report concludes with a recommendation for Apple to proceed with the project based on the positive NPV and IRR results.

Corporate Finance- APPLE
Part 1: Company Perspective
Answer a
The report involves analysis of Apple Inc. a US based entity. The first answer involves
computation of cash conversion cycle which is based on three factors mainly Inventory
Turnover ratio in days, Receivable Turnover Ratio in days and Payable Turnover Ratio in
days. The cash conversion cycle is a measure of efficiency of the company to convert its sales
into cash and complete a cycle within a time frame. The lower the cash conversion cycle, the
better the company is managing its working capital. The computation of cash conversion
cycle has been presented here-in-below:
(a) In Days Receivable Turnover Ratio: The ratio is an important in analysing the efficiency
of the company in converting its credit sales. The ratio shows that how many days it
takes for a company to covert its sale into cash considering all the sales are on credit. The
lower the time taken in collection, the more efficient the company is. The formula used
for determining the in days receivable turnover ratio of the company has been detailed
here in under:
Receivable Turnover Ratio: 365/ (Revenue/ (Opening Receivables + Closing
Receivables)/2))
(b) In Days Payable Turnover Ratio: The ratio is an important working capital management
tool. It shows the average time taken by the company to settle the credit purchases made
from the suppliers of the company. If the time taken is large, company is able to
effectively manage its capital. However, time delays of a very large period shall
symbolise liquidity crunch with the company. In short, the ratio measures how many
times in a year a company pays off its account payable during a period of time. The
formula used for determining the in days payable turnover ratio of the company has been
detailed here in under:
Receivable Turnover Ratio: 365/ (Cost of Revenue+ Closing Inventory- Opening
Inventory)/ (Opening Payables+ Closing Payables)/2))
(c) Inventory Turnover Ratio (days): The ratio is an important working capital management
tool. It shows the efficiency of the company in managing its inventory also its show how
efficiently the company generates sales from its assets. The lower the time taken for
generating sales, the more efficient the company is. The formula used for determining
the in days inventory turnover ratio of the company has been detailed here in under:
Inventory Turnover Ratio: 365/ (Cost of Revenue/ (Opening Inventory + Closing
Inventory)/2))

On the basis of above discussion, the determination of Cash conversion Cycle for Apple
Inc. is presented as under:
Cash Conversion Cycle: Inventory Turnover Ratio (in days) + Receivable Turnover
Ratio (in days) – Payable Turnover Ratio (in days)
Sl
NO
Particular
s
Receivable
Turnover Ratio
(In days)
Payable
Turnover
Ratio (In
days)
Inventory Turnover
Ratio (In days)
Cash Conversion
Cycle in Days
1 2018 58 112 10 -44
2 2017 67 104 9 -27
Based on the above analysis, it can be seen that cash conversion cycle of the company is
negative implying that the company is able to manage its working capital very
efficiently. Further, it can also be seen that the efficiency of the company has increased
on year on year basis and major contribution to such growth has been receivable turnover
ratio and payable turnover ratio.
Further, inference can be drawn that Apple Inc. has been making very slow payments to
its creditors, considering the large purchases the company makes.
In addition to above analysis, competitor analysis has also been carried out to understand
the cash conversion cycle of competitors
The computation of cash conversion cycle has been presented here-in-below:
(a) In Days Receivable Turnover Ratio: The ratio is an important in analysing the
efficiency of the company in converting its credit sales. The ratio shows that how
many days it takes for a company to covert its sale into cash considering all the sales
are on credit. The lower the time taken in collection, the more efficient the company
is. The formula used for determining the in days receivable turnover ratio of the
company has been detailed here in under:
Receivable Turnover Ratio: 365/ (Revenue/ (Opening Receivables + Closing
Receivables)/2))
(b) In Days Payable Turnover Ratio: The ratio is an important working capital
management tool. It shows the average time taken by the company to settle the credit
purchases made from the suppliers of the company. If the time taken is large,
company is able to effectively manage its capital. However, time delays of a very
large period shall symbolise liquidity crunch with the company. In short, the ratio
measures how many times in a year a company pays off its account payable during a

period of time. The formula used for determining the in days payable turnover ratio of
the company has been detailed here in under:
Receivable Turnover Ratio: 365/ (Cost of Revenue+ Closing Inventory- Opening
Inventory)/ (Opening Payables+ Closing Payables)/2))
(c) Inventory Turnover Ratio (days): The ratio is an important working capital
management tool. It shows the efficiency of the company in managing its inventory
also its show how efficiently the company generates sales from its assets. The lower
the time taken for generating sales, the more efficient the company is. The formula
used for determining the in days inventory turnover ratio of the company has been
detailed here in under:
Inventory Turnover Ratio: 365/ (Cost of Revenue/ (Opening Inventory + Closing
Inventory)/2))
On the basis of above discussion, the determination of Cash conversion Cycle for
Samsung is presented as under:
Cash Conversion Cycle: Inventory Turnover Ratio (in days) + Receivable Turnover
Ratio (in days) – Payable Turnover Ratio (in days)
Sl NO Particula
rs
Receivable
Turnover
Ratio (In
days)
Payable Turnover
Ratio (In days)
Inventory Turnover
Ratio (In days)
Cash Conversion
Cycle in Days
1 2018 51 24 74 102
2 2017 45 21 61 86
Bases on above, a view may be held that Apple Inc has been performing better compared
to peers as the cash conversion cycle of Samsung is high. In addition, the same has
shown a bad performance compared to previous year.
Answer b
Risk identified in the annual report has been presented as under:
Sl. No Risk Description
1. Market Risk-
Systematic
Market Risk refers to the risk that arises for a business
due to the uncertainty in the structure of the market,
demand patterns and needs of customers, costs, pricing,
etc. Market risk represents standard risk borne by any
enterprise in market driven transactions.
2. Technological Risk- Changing Technology and Apple is a technology giant

Sl. No Risk Description
Systematic
3. Supply Chain Risk-
Unsystematic
Dependency on middlemen
4. Foreign Exchange
Fluctuation Risk-
Systematic
Currency Fluctuation
5. Interest Rate Risk-
Systematic
Changing bond yields
Answer c
Part (i)
On the basis of analysis we can conclude that the performance of share is good in terms of
comparison to market source .As according to the graph the share is providing a positive
return and an upward trend in terms of comparison with the market indices like Standard and
Poor 500 Index, Standard and Poor Information Technology Index and Dow Jones U.S
Technology Super Sector Index.Thus we can say on the basis of graph that the company is
showing a very positive return on the basis of market indices.
Part (ii)
As seen from the year 2014 to 2018 the company debt value has increased significantly
compared to the previous year balance in the financial statement of the company. We can also
conclude that in terms of total assets of the company the percentage of debt of the company is
also very much high as compared to the previous financial year. Thus, the level of debt has
comparatively increased from the previous year level.
Part (iii)
After assuming that interest has been paid and no outstanding interest is left to be paid than
the price of the bond will be $ 995.24. However, if the interest has not been paid than the
price of the bond will be $1040.24.
PART 2
Decision on the basis of Net Present Value method. The decision on the basis of such method
has been presented below:
Answer (i)
The cost of land has not been taken into account as such cost has already been incurred and
should not be considered also as this cost is not relevant for decision making purpose and it is
an additional cost and has already been incurred whether the project is undertaken or not.
Thus, the expenditure incurred on land is not important for the purpose of decision making
Answer (ii)
Free cash flow has been forming part in Appendix-1.
Answer (iii)

The project shall be undertaken and accepted on the basis of feasibility analysis and annexed
as Appendix-1.
Answer (iv)
The IRR of the project shall be 8%, then the project is viable and shall be undertaken as the
IRR is greater than the cost of capital.
Answer (v)
Apple should continue in his project to build a new store as the IRR and NPV is greater.

Appendix-1
year
Sly NO Particular 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
1 Revenue 40000000 40000000 40000000 40000000 40000000 40000000 40000000 40000000 40000000 40000000 40000000 40000000 40000000 40000000 40000000 40000000 40000000 40000000 40000000 40000000
2 Loss of Existing Rental Income -1000000 -1000000 -1000000 -1000000 -1000000 -1000000 -1000000 -1000000 -1000000 -1000000 -1000000 -1000000 -1000000 -1000000 -1000000 -1000000 -1000000 -1000000 -1000000 -1000000
3 Cost of Generating Revenue -4800000
4 Outlay on project -300000000
5 Depreciation -15000000 -15000000 -15000000 -15000000 -15000000 -15000000 -15000000 -15000000 -15000000 -15000000 -15000000 -15000000 -15000000 -15000000 -15000000 -15000000 -15000000 -15000000 -15000000 -15000000
6 Profit Before Tax -300000000 19200000 24000000 24000000 24000000 24000000 24000000 24000000 24000000 24000000 24000000 24000000 24000000 24000000 24000000 24000000 24000000 24000000 24000000 24000000 24000000
7 Tax -5760000 -7200000 -7200000 -7200000 -7200000 -7200000 -7200000 -7200000 -7200000 -7200000 -7200000 -7200000 -7200000 -7200000 -7200000 -7200000 -7200000 -7200000 -7200000 -7200000
8 Profit after Tax -300000000 13440000 16800000 16800000 16800000 16800000 16800000 16800000 16800000 16800000 16800000 16800000 16800000 16800000 16800000 16800000 16800000 16800000 16800000 16800000 16800000
9 Depreciation 15000000 15000000 15000000 15000000 15000000 15000000 15000000 15000000 15000000 15000000 15000000 15000000 15000000 15000000 15000000 15000000 15000000 15000000 15000000 15000000
10 Cash Flow -300000000 28440000 31800000 31800000 31800000 31800000 31800000 31800000 31800000 31800000 31800000 31800000 31800000 31800000 31800000 31800000 31800000 31800000 31800000 31800000 31800000
11 Cost of Capital (Factor) 1 0.9439305 0.8910048 0.8410467 0.7938896 0.7493767 0.7073595 0.6676982 0.6302607 0.5949223 0.5615654 0.5300787 0.5003575 0.4723027 0.4458209 0.420824 0.3972286 0.3749562 0.3539326 0.3340878 0.3153557
12 Present Value of Cash Flow -300000000 26845384 28333954 26745284 25245690 23830177 22494032 21232803 20042291 18918531 17857779 16856502 15911367 15019225 14177105 13382202 12631869 11923607 11255057 10623992 10028310
13 Net Present Value 63355162.1
14 Irr 8%