Applied Managerial Finance: Apple Inc. Strategy Analysis Report

This report provides a comprehensive analysis of Apple Inc.'s financial strategies aimed at enhancing shareholder value. It begins with an overview of the company's background and objectives, followed by a detailed financial analysis, including ratio analysis comparing Apple to Microsoft. The report evaluates profitability, liquidity, solvency, dividend yield, price-earnings ratio, and market-to-book ratio. Furthermore, it explores various potential financial strategies such as capital expenditure, mergers and acquisitions, stock repurchases, dividend policy adjustments, debt reduction, and geographic/product expansion. The study recommends product or service expansion (specifically, Apple-manufactured televisions) as the optimal strategy for increasing revenue and shareholder value, considering the associated financing and risks. The report also calculates and discusses the impact of the proposed strategy on the company's Weighted Average Cost of Capital (WACC), shareholder value, and overall company impact. The analysis underscores the importance of strategic financial decision-making in maximizing stakeholder returns and driving sustainable growth. The report is a student submission for Desklib, a platform offering study resources.

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Contents
Background......................................................................................................................................2
Financial Analysis...........................................................................................................................2
Ratio Analysis..............................................................................................................................2
Summary of Ratios......................................................................................................................3
Illustration of Potential Financial Strategies Employed..................................................................4
Capital Expenditure.....................................................................................................................4
Merger and Acquisition...............................................................................................................5
Stock Repurchase.........................................................................................................................5
Dividend Policy Adjustment........................................................................................................5
Debt Reduction............................................................................................................................6
Geographic Expansion.................................................................................................................6
Product or Service Expansion......................................................................................................6
Strategy Selection............................................................................................................................6
Financing and Risks.........................................................................................................................7
WACC.............................................................................................................................................7
Impact on Company.........................................................................................................................8
Impact on Interest of Shareholders..................................................................................................8
References......................................................................................................................................10

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Shareholder Value Initiative
Background
The purpose of the report is to enlighten the reader with the details about the company
Apple Inc. The scope of the project is to analyse the ways in which the organization should
implement strategies so as to increase the value of the stakeholders of the company. The
financial risks and analysis of several strategies is analysed in the paper so as to choose best
strategy for the company. Further, financial ratio analysis of the company Apple is performed in
the paper in comparison to the financial analysis of the company Microsoft in the business
environment (Minnis, & Sutherland, 2017). The proposal does not seek to examine all the factors
present in the environment that can increase the stockholder value or the impact of combining
multiple strategies in the environment. More details of the functioning of the company are
mentioned below:
Financial Analysis
Ratio Analysis
Ratio analysis refers to the analysis that judge the performance of the company on the
basis of several factors in the environment. The ratio analysis of Apple evaluates the financial
performance of the company in different segments like risk, profitability, efficiency, solvency
etc. It helps in comparing the trend of two or more companies. The ratio of Apple is conducted in
comparison to the Microsoft on the basis of recent financial details of both the companies present
in the market. Ratios evaluated in the paper are profitability, liquidity, solvency, dividend yield,
price earning and market book ratio. Profitability ratio helps the investors in analysing the ability
of the business to generate profits in the market (Williams, & Dobelman, 2017).
This ratio helps in analysing that how well Apple makes use of investor’s income to
attain profits in environment. Liquidity ratio explain that how well the company can pay its short
term loans and obligations in the environment. Operating cycle of 12 months is considered to
analyse the liquidity statement of the company. The solvency ratio of the company examines the
ability of the organization to meet the long term requirement of the business. The liquidity ratio

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consider short term liability and solvency ratio analyse the non-current liability of the company.
Dividend yield ratio analyse the percentage of the market price of the share that the company
annually pays to its stockholders in the form of dividend. This ratio compares the dividend
distributed by the company against the share price. Price earnings ratio evaluate the current share
price of the company against the per share earnings (Robinson, Henry, Pirie, & Broihahn, 2015).
Market to book ratio analyse the market value of the company relative to its actual worth
in the market. This ratio analyse that whether the stock of the company is overvalued or
undervalued.
Summary of Ratios
Profitability
Net margin Net profit/revenues 21.09% 22.41% 23.57% 15.02%
Return on equity Net profit/Equity 36.07% 55.56% 29.29% 20.03%
(Morningstar, 2019)
The profitability ratio explains that the company Apple enjoys better level of profitability
in the environment. This ratio is increasing from the year 2017 to 2018 that means that the
company is growing and increasing profits for stakeholders in the environment. While the
profitability of the company Microsoft is low in the environment (Edwards, Schwab, & Shevlin,
2015).
Current ratio
Current
assets/current
liabilities 1.28 1.12 1.58 4.24
Quick Ratio
Current assets-
Inventory/current
liabilities 1.23 1.09 1.56 4.18
(Morningstar, 2019)
Liquidity ratio of the company Apple is optimum as it is close to 2, however, increase in
the assets of the company would definitely strengthen the financial position of the organization.
The company holds adequate capacity to pay its short term expenses in the environment.
However, in the case of Microsoft, it should be noted that the company’s liquidity ratio was
adequate in 2017 but it increased in 2018 due to increase in the liabilities of the company.

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Therefore, it is important for Microsoft to reduce the current liabilities to become effective in the
environment (Khan, & Jain, 2018).
Solvency
Debt to Equity Ratio Debt/ Equity 1.80 2.41 2.33 2.13
Debt to assets Debt/ Total assets 0.64 0.71 0.70 0.68
The solvency ratio of the company is also adequate that denotes that the company has
distributed the equity, debts and assets appropriately in the environment. Resulting in which the
organization can take strong financial decision in the environment while paying its debts as well.
Dividend Yield DPS/MPS 0.0135271 0.013069048
Price Earning Ratio Share Price/EPS 18.57555178 27.21936759
Market Book Ratio Market Cap./ Total Book Value 9.229255135 1.028046516
The dividend yield of Apple and Microsoft is also same which states that the company
has great scope of increasing the profitability of the stakeholders in the environment. Increasing
dividend yield would increase the satisfaction of stockholders from business. Apple has average
PE ratio while Microsoft has high PE ratio that means that the investors expect high earning in
the environment, while Apple provide average income to the investors and they do not expect
high profitability from the organization. The investors of Apple have undervalued the stock of
the company while stocks of Microsoft are also optimally valued (Apple Inc., 2018).
Illustration of Potential Financial Strategies Employed
Capital Expenditure
The company can increase the value of the stockholders of the company by increasing the
value of company’s assets and increasing its efficiency to work in the environment. Increasing
the value of the assets would increase the efficiency of the business to work more due to which
productivity of the company would subsequently increase. Once the productivity of the company
is increased, the organization will earn more revenue in the target market. However, this activity
initially provides negative impact to the stockholders of the company as it requires heavy costing
maintenance as well (Shaukat, Qiu, & Trojanowski, 2016).

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Merger and Acquisition
Under this process, the organization aligns with another organization to seek increment in
the stock value of the company Merger and acquisition would increase the market share of the
company and the service offering as well. This activity increases the volatility of the shares of
the company due to which the stakeholder might get disinterested but, it will provide profitability
to the investors in long run. This activity increases the market share but increases the value of the
stock many times. This activity provides cost efficiency options to the company but takes time to
provide benefits to the stakeholders in the environment (Boyson, Gantchev, & Shivdasani, 2017).
Stock Repurchase
The stock repurchase activity reduces the availability of cash present with thee company
due to which total value of assets would reduce. The buyback of shares activity will also reduce
the stakeholder segment of the company. Further, it should be noted that earning per share of the
company increases as the shareholder segment of the organization reduces in the environment
due to which profit shared to those investors is attained by the company and supplied to
prevailing stockholders of the company. However, one problem with this type of strategy is that
it develops the artificial value inflation of the stock of the company due to which corporate value
also increases where in actual it has not happened with the organization (Sastry, & Balakrishnan,
2018).
Dividend Policy Adjustment
It is important for the companies to make use of effective dividend policies in the
environment if they aim to satisfy the stakeholders in the business environment. Effective
dividend policy would itself increase the profitability of the company while poor dividend policy
has hinder the profitability of the stakeholder as it can stop them from getting adequate share of
profits of the company. However, the drawback of this type of strategy is that it creates and
applies while considering the perfect market that does not exist. Change in dividend policy might
satisfy one type of stakeholder but it might reduce the satisfaction of other stakeholders of the
company (Asquith, & Weiss, 2019).

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Debt Reduction
This strategy provides positive impact to the positive impact to the stakeholders of the
company. The EPS of the investors increases with this process because it saves the cost of
interest from the profits and circulates it to the people in the environment. However, in practical
life it is not possible to reduce the value of stock than optimum just to increase the profitability
of the stakeholders. Also, if the company reduces the value of debts then they need to increase
the equity as well due to which there is no substantial impact on the profitability of stakeholders
of the company. Reducing the debt with the available cash reduce the interest of investors in the
company (Shad, & Lai, 2015).
Geographic Expansion
This strategy refers to the process of expanding the scope of business in different
directions of the world. Expanding the business in different parts of the world would help the
organization to attain more revenue in the business environment. The problem with
implementation of this type of strategy is that it would initially acquire high costing for the
organization to expand in new geographical boundaries. Further, high expenses reduces the
profitability of the company and increases the debts a well. The company might take time to
recover from such expenditure that might show negative impact on the interest of the
stakeholders (De Beule, and Sels 2016).
Product or Service Expansion
It requires the business to expand a new product or service line in the business that would
help the management to attain more profits in the environment. The revenue of the company with
such expansion would surely increase but the company would have to incur heavy cost in the
environment for this expansion.
Strategy Selection
The company Apple should aim to make use or ‘product or service expansion’ financial
strategy in the business environment. The company should introduce Televisions manufactured
by apple in the environment. This activity would help the organization to increase the revenue of
the company by supplying new products to the customers in the environment. However, the cost
incurred by the organization for the new project would increase but the new product would

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definitely bring more profitability to the company in the business environment. Increasing
revenue would ultimately provide more profits to the company that would increase the amount of
dividend shared to the investors in the market. The benefit of this strategy is that it would
increase the interest of the investors in the organization and will attain the interest of prospective
investors as well (Gubbi, & Elango, 2016).
Financing and Risks
Heavy expenditure or acquiring raw material and low sale of the product would decrease
the profitability of the company in the business environment. Introduction of new product in the
environment is always risky because changing external environment might decrease the
effectiveness of the new product in the environment. The company have to raise more equity in
the environment to attain finance for the new project in the environment.
WACC
WACC (weighted average cost of capital) refers to the cost of capital of the company in
proportion to their weight. Different sources of capital like common stock, preference stock and
debt are taken into account while calculating WACC. The calculation of WACC explains the
level of risk attained by the company in response to the valuation of the stock. Reducing WACC
is always beneficial for the organization. The proposed strategy for the company Apple reduces
the WACC from current WACC that means that the new project would increase the profitability
of the stakeholders in the business environment (Magni, 2015).
Current WACC:
B) Weighted Average Cost of Capital
WACC E/(E+D)* cost of equity+ D / (E + D) * Cost of Debt * (1 - Tax Rate)
Proportion of equity in capital structure 0.293 107147/(107147+258578)
Proportion of debt in capital structure 0.707 258578/(107147+258578)
1.000
Calculation of WACC
(0.293*15.3996)+(0.707*15.3996)
"WACC" 6.66%

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(Appendices 1)
(Stock Analysis on Net, 2019)
Proposed WACC:
It is expected to issue more share capital by USD 10 billion as the financial strategy to increase stakeholder value
WACC E/(E+D)* cost of equity+ D / (E + D) * Cost of Debt * (1 - Tax Rate)
Proportion of equity in capital structure 0.298 (Notes1)
Proportion of debt in capital structure 0.707
WACC 2.20
Through the projections, it is clear that the new product line will help the organization to
increase its profitability in the business environment. Issuance of new shares will help in
allocating resources for the project. Also, the net income of the company will increase with new
product sales.
Impact on Company
This strategy would help the organization to expand the scope of business in different
directions and increase the number of customers and investors for the organisation as well. This
activity would increase the assets of the company as increment in revenue would increase cash
and other resources of the company. Further, the company would finance the project by issuing
capital in the environment due to which the number stakeholder of the business would also
increase (Yahoo Finance, 2019). The sales of the company will drastically increase in the initial
year only because of the brand value of the company. The customers will purchase the TV
introduced by Apple because of its differentiated brand and features in the business environment.

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NOTE: It is expected that the assets of the organization also increases with the increment in the capital of the company.
Apple Inc. 2017 2018
Total Assets 375,319,000,000 375725000000.
Total Liabilities 241,272,000,000 258,578,000,000
Total Equity 134047000000. 117147000000.
Equity Attributable to Parent Stockholders 134047000000. 107,147,000,000
Paid in Capital 35,867,000,000 40,201,000,000
Capital Stock 35,867,000,000 40,201,000,000
Common Stock
Common Stock, without Par Value
Additional Paid in Capital/Share Premium
Retained Earnings/Accumulated Deficit 98,330,000,000 70,400,000,000
Reserves/Accumulated Comprehensive Income/Losses -150,000,000 -3,454,000,000
Common Shares Issued 5126201000. 14754986000.
Common Shares Outstanding 5,126,201,000 4,754,986,000
Common Shares Treasury 0 0
The below mentioned ratios shows variation because it is expected that the new project is will
grow with in stagnant speed in the business environment.
EPS 1
P/E Ratio 392.2248913
ROA 18.63064741
ROE 59.75398431
Impact on Interest of Shareholders
The profitability of shareholders would increase with the increment in the revenue of the
company. Initially the company serve several products to the customers in the market. Issuing
one more product would add value to revenue of the company and will attract more investors as
well. Thus, in this way the interest of stakeholders would increase. Subsequent increase in the
sales of the organization will help the shareholders to attain more value from the company in the
environment.

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References
Apple Inc., (2018). Retrieved from <
http://www.annualreports.com/HostedData/AnnualReports/PDF/NASDAQ_AAPL_2018.pdf>
Asquith, P., & Weiss, L. A. (2019). Lessons in corporate finance: A case studies approach to
financial tools, financial policies, and valuation. John Wiley & Sons.
Boyson, N. M., Gantchev, N., & Shivdasani, A. (2017). Activism mergers. Journal of Financial
Economics, 126(1), 54-73.
De Beule, F. and Sels, A., 2016. Do innovative emerging market cross-border acquirers create
more shareholder value? Evidence from India. International Business Review, 25(2),
pp.604-617.
Edwards, A., Schwab, C., & Shevlin, T. (2015). Financial constraints and cash tax savings. The
Accounting Review, 91(3), 859-881.
Gubbi, S. R., & Elango, B. (2016). Resource deepening vs. resource extension: Impact on asset-
seeking acquisition performance. Management international review, 56(3), 353-384.
Khan, M. Y., & Jain, P. K. (2018). Financial Management: Text, Problems and Cases, 8e.
McGraw-Hill Education.
Magni, C. A. (2015). Investment, financing and the role of ROA and WACC in value
creation. European Journal of Operational Research, 244(3), 855-866.
Minnis, M., & Sutherland, A. (2017). Financial statements as monitoring mechanisms: Evidence
from small commercial loans. Journal of Accounting Research, 55(1), 197-233.
Morningstar, (2019). Apple Inc AAPL. Retrieved from <
https://www.morningstar.com/stocks/xnas/aapl/financials>
Morningstar, (2019). Microsoft Corp MSFT. Retrieved from
<http://financials.morningstar.com/income-statement/is.html?t=MSFT&region=usa>

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Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial
statement analysis. John Wiley & Sons.
Sastry, S. V. N., & Balakrishnan, J. (2018, October). Share Re-Purchase, a form of Dividend.
In ICRTEMMS Conference Proceedings (Vol. 630, No. 633, pp. 630-633). Swarna
Bharathi lnstitute of Science and Technology.
Shad, M. K., & Lai, F. W. (2015). Enterprise risk management and firm performance validated
through economic value added factors. International journal of economics and statistics.
Shaukat, A., Qiu, Y., & Trojanowski, G. (2016). Board attributes, corporate social responsibility
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Ethics, 135(3), 569-585.
Stock Analysis on Net., (2019). Apple Inc. (AAPL). Retrieved from < https://www.stock-
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Williams, E. E., & Dobelman, J. A. (2017). Financial statement analysis. World Scientific Book
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Yahoo Finance., (2019). Apple Inc. (AAPL). Retrieved from <
https://finance.yahoo.com/quote/AAPL/>