Corporate Finance Assessment 2 (FIN203): Apple and Project Analysis

This assignment analyzes Apple's financial performance, addressing key aspects of corporate finance. It begins by examining Apple's cash conversion cycle, comparing it to Samsung's and highlighting Apple's superior liquidity. The assignment then delves into Apple's risk factors, categorizing them as structured and unstructured, encompassing global economic conditions, technological changes, and competitive pressures. The analysis extends to Apple's share price and long-term debt trends, followed by a bond valuation calculation. Finally, the assignment evaluates a hypothetical project, calculating free cash flows, net present value, and internal rate of return, ultimately recommending project rejection due to negative financial outcomes. The analysis is supported by references to Apple's annual reports and other financial sources.

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Part 1:
Part a:
The following table shows the cash conversion days of the 2 companies:
Apple Samsung
Particulars 2018 2017 2018 2017
(In millions in $) (In KRW)
Days inventory outstanding: 0.02690283 0.02476816 0.203815473 0.167594696
Average inventory
4,405.5
0
3,493.5
0
269,84,029.5
0
216,68,429.0
0
Cost of goods sold
1,63,756.0
0
1,41,048.0
0
1323,94,411.0
0
1292,90,661.0
0
Days sales outstanding: 0.07729814 0.07331984 0.126273476 0.108474503
Average accounts receivable
20,530.0
0
16,814.0
0
307,81,864.0
0
259,87,603.0
0
Total credit sales
2,65,595.0
0
2,29,324.0
0
2437,71,415.0
0
2395,73,376.0
0
Days payable outstanding: 0.30572926 0.30607665 0.066331437 0.06020909
Average accounts payable
50,065.0
0
43,171.5
0
87,81,911.5
0
77,84,473.0
0
Cost of goods sold 1,63,756.0 1,41,048.0 1323,94,411.0 1292,90,661.0

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0 0 0 0
Cash conversion cycle
-
0.20152828
-
0.20798865 0.263757513 0.21586011
The cash conversion cycle s used for the purpose or the assessment of the efficiency of the
company when it comes to the management of the working capital. With regard to the
calculations pertaining with the cash flows, it is assumed that the lower the number of days of
this conversion cycle, the better it is for the company since it merely means that the company
is better off when it comes to the selling of inventories and recovering cash from the
customers (Corporate finance institute, 2019).
In the given case, the cash conversion cycle of Apple is less than that of Samsung. Hence, it
could be said that Apple is better in terms of liquidity of cash.
Part b:
The following are the risk factors:
 Global and the regional economic conditions. The business operations off the
company are highly affected by the global and the economic conditions that exists in
the outside market. There is an increased amount of uncertainty about the global and
the regional economic conditions in that it’s in the market. This exposes the
consumers and the business to an increased amount of risks and due to this the
customers could postpone their spending due to a tighter credit etc. There could be a
higher unemployment, increased volatility in the market etc. Factors like these have
an effect on all of the products across the world and this in turn affects the demand for

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the products of the company. The demand could be so different that it could differ
from the expectations being made by the company that would go on to raise the prices
of the goods and the services that are involved. The country of the United States seeks
for states says to increase the strength of the dollar but this affects the other costs as
well. These risks are applicable on all of the products and the services for all brands
and affect the industry as a hole. Therefore, this would be considered to be a
structured risk for the company.
 Thee products and the services if the company are very much open to the foreign
competition and is also subject to the changes in the technologies. The company
would not be in a position to compete in the market. The company faces many
aggressive competition and the services that are highly competitive in nature. This
results in a decrease in the amount of the gross margins. The company makes and
launches new products at regular intervals and these products have a shirt life cycle.
This results in a rapid change in the use if the technology and there are many products
advancements due to which the products of the company are sensitive to price. This
affects the ability of the company to compete in the outside for its products and the
services and this is dependent upon the ability of the company to continue and
introduce the new products and the services. The company is of an opinion that it
needs to introduce new and unique products so that the customers are willing to pay
more. It is due to this that the company has been investing an increased amount of
money in research and development activities. It leads to the development of the
venture solution with regard to the products, which goes on to include the software,
hardware etc. It is due to this reason that the company holds some major patents,
trademarks etc. This shall also be classified as a structured risk since this is a type of

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the risk that each company is exposed to and hence each company would be facing
the similar issues.
 So as to remain competitive and to improve the demand from the customers for the
various products and the services, the company under review has been successful
when it comes to the management of the product introduction and transitions. Mainly
due to the high volatility and also due to the competitive nature of the companies that
the company under review completed with, the company is bound to introduce many
new products, services along with technologies so as to enhance the products and the
services that the company has been offering. The success of the product depends
mainly upon the development of the products, its timeliness and also on the fact if
acceptance of it in the market. The company manages these risks with the help of the
product production and also with the availability of the application of these new
software’s. There is some effective management of the purchase commitment along
with the different demands of the products. The company is not in a position to
estimate the advance if the effect on the introduction and the transition off this new
product. Since these are company specific risks, these would be considered to be
unstructured risks (Annual report, 2017).
Part c:
Part i:
The following table shows the share price of the company for last 3 years:
2018 2017 2016
Share
price 223.14 150.7 108.17

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(Yahoo finance, 2019).
The price of the share of the company has undergone a major change when compared over
the period of 3 years.
Part ii:
The following table shows the long term debt taken by the company:
2018 2017 2016 2015 2014
Share price 223.14 150.7 108.17
Long term debt 93,735 97207 75427 53,463 28987
(Apple annual reports, 2019).
From the above table, it could be said that the amount of the long term debt has only
increased when compared over the period of 5 years.
Part iii:
The following table shows the relevant calculations:
Coupon to be received in 2020 - $ 45
Maturity of the bond in 2020 - $ 1,000
Total amount to be received in 2020 on maturity = $ 1,045
Yield to Maturity is 5%

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Current Price of the bond (ex Coupon) = $ 1,045/(1+5%) = $995.24
Current Price of the bond (cum Coupon) = $995.24 + $45(coupon for 2019) I. E. $ 1,040.24
From the above table, it could be said that the current price of the bond should be $995.24
excluding the coupon interest and $ 1040.24 in the case when the bond price includes the
coupon interest.
Part 2:
The following table shows the relevant calculations:
Particulars 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Cash inflow:
Revenue 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00
Less: annual costs 4.80 4.80 4.80 4.80 4.80 4.80 4.80 4.80 4.80 4.80 4.80 4.80 4.80 4.80 4.80 4.80 4.80 4.80 4.80 4.80
Net revenue 35.20 35.20 35.20 35.20 35.20 35.20 35.20 35.20 35.20 35.20 35.20 35.20 35.20 35.20 35.20 35.20 35.20 35.20 35.20 35.20
Less: taxes @30% 10.56 10.56 10.56 10.56 10.56 10.56 10.56 10.56 10.56 10.56 10.56 10.56 10.56 10.56 10.56 10.56 10.56 10.56 10.56 10.56
Earnings after taxes 24.64 24.64 24.64 24.64 24.64 24.64 24.64 24.64 24.64 24.64 24.64 24.64 24.64 24.64 24.64 24.64 24.64 24.64 24.64 24.64
Cash outflow:
Opportunity cost:
Rental income 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70
Initial outlay 300
Total cash outflow -300 -0.70 -0.70 -0.70 -0.70 -0.70 -0.70 -0.70 -0.70 -0.70 -0.70 -0.70 -0.70 -0.70 -0.70 -0.70 -0.70 -0.70 -0.70 -0.70 -0.70
Total net flow -300 23.94 23.94 23.94 23.94 23.94 23.94 23.94 23.94 23.94 23.94 23.94 23.94 23.94 23.94 23.94 23.94 23.94 23.94 23.94 23.94
Net present value at 5.94% -22.72
IRR 4.93%
Free cash flow
Operating cash flow-capital expenditure792.80
Part a:
The company is not considering the value of the land since it’s considered to be sunk cost, the
obligation of which has already been decided by the company. This means that the company
has already bought it, hence, whichever investment it chooses, the value of the land shall not
be included in it.
Part b:
The amount of the free cash flows $792.8 million.
Part c, d and e:

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The above calculations show that the company would have a negative net present value if it
goes for the project under consideration. At least at the cost of capital of 5.94% the company
would only incur losses and no profits. The IRR calculated is also 5% which means that if the
company employs this amount of the initial outlay, it would be able to get 5% return on its
investment. Hence rejection of this project is recommended for the company.

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References
Corporate Finance Institute. (2019). Cash Conversion Cycle - Overview, Example, Cash
Conversion Cycle Formula. [online] Available at:
https://corporatefinanceinstitute.com/resources/knowledge/accounting/cash-conversion-cycle/
[Accessed 22 May 2019].
Finance.yahoo.com. (2019). Yahoo is now part of Oath. [online] Available at:
https://finance.yahoo.com/quote/AAPL/history?
period1=1463769000&period2=1558377000&interval=1d&filter=history&frequency=1d
[Accessed 22 May 2019].
Investor.apple.com. (2019). Apple - Investor Relations. [online] Available at:
https://investor.apple.com/investor-relations/default.aspx [Accessed 22 May 2019].
S2.q4cdn.com. (2019). Annual report 2017. [online] Available at:
https://s2.q4cdn.com/470004039/files/doc_financials/2017/q4/10K_Q4FY17.pdf [Accessed
22 May 2019].