FINM4000 Finance Project Report: Apple Inc. Financial Analysis

This report provides a comprehensive financial analysis of Apple Inc., examining its working capital efficiency, major risks, and stock performance over a five-year period. It calculates the cash conversion cycle, compares Apple's performance to competitors, and assesses the impact of economic and technological factors. The report then delves into a capital budgeting case study involving a new Apple store, evaluating the price of land, free cash flow, net present value (NPV), and internal rate of return (IRR) to determine the project's feasibility. The analysis considers sunk costs, opportunity costs, and various scenarios based on the cost of capital, offering insights into the investment's potential profitability. Finally, bond valuation is calculated to determine the holding period return.

Running Head: Finance
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Project Report: Finance

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Contents
Part 1.................................................................................................................................3
Company perspective....................................................................................................3
Major risk......................................................................................................................3
Apple shares and debt...................................................................................................4
Part 2.................................................................................................................................6
Price of land consideration...........................................................................................6
Free cash flow of new Apple store...............................................................................6
PV of new Apple store..................................................................................................7
IRR of new Apple store................................................................................................7
Project consideration....................................................................................................8
References.........................................................................................................................9

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Part 1:
Company perspective:
Apple Inc is an American company which operates its functions at worldwide.
Company mainly designs, develops and sells the computer software, consumer electronics
and online services. It has been founded 43 years ago (Annual report, 2018). In the section of
paper, working capital efficiency of the company has been measured. Working capital
efficiency is basically known as cash conversion cycle. It is a process in which it is observed
that how much amount is needed by the company in a year to run the operations of the
company efficiently. It is basically a metric which expresses the time in which the working
capital of the company would be convert into cash.
in the case of apple inc, working capital efficiency of the company of last 2 years
have been calculated in order to measure the total time in which the inventory and other
current obligations of the company would be convert into cash. In case of 2018, it has been
found that cash conversion cycle of the company is -39.50 days. It explains that company is
required to invest no money in its working capital (Attached spreadsheet). Company could
easily manage the operations through the amount from creditors. Further, it has been found
that in the year of 2017, CCC of the company was -34.25 days. It explains that CCC level of
the company has been improved (Annual report, 2018).
Further, the CCC level of the company has been compared with the Samsung, the
main competitor of the company and found that CCC level of the Apple Inc is quite improved
then Samsung because of the high value maintained from creditors and lower value from
inventory and debtors of the company (Forbes, 2019).
Major risk:
Annual report (2018)) of Apple Inc explains that there are various risks involved with
the operations and market performance of the company. Few of them are as follows:
Economical condition:
Apple Inc is operating its business overseas. The main economical factors of the
business are inflation rate, fiscal policies, tighter credit, currency fluctuations and high
unemployment. The economical performance could impact over company through adverse
macro economical conditions, manufacturing and assembly activities, supply chain process

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etc. Hence, it is important for the business to prepare a better mitigation plan to improve and
manage the performance of the business.
Technology changes:
Apple Inc is offering its products and services in highly competitive market. Hence, it
becomes important for the business to changes into the products and services timely and offer
various new variant to the customers in order to cop up with the technology. Technology
changes could impact over the overall operations and profitability level of the company.
Hence, it is recommended to the business to evaluate the entire factor and make better
decision accordingly (Annual report, 2018).
Need and demand of customers:
It is important for every business to offer the new products and advanced products to
its customers on the basis of their demand. Apple Inc is required to study the market in
advance and identify the demand of the market so that the same products could be supplied in
the market (Moles, Parrino and Kidwekk, 2011). It is a major risk for the companies like
Apple Inc to cope up with the needs of the customers.
Apple shares and debt:
Stock performance:
Last 5 years stock performance of the company has been collected and measured to
identify the fluctuations in the stock price and overall market performance of Apple inc. On
the basis of study, it has been measured that there is high growth in the stock price of Apple
in last 5 years. Further, the performance of the company has been compared with the S&P
500 index, S&P information technology index and Dow Jones US technology superstore
index and found that the improvement in each of the stock is similar. However the stock price
of apple Inc is higher in the market (Nobes and Parker, 2009). It further explains that the
overall performance of the company is quite better in the market.
The main reason behind the improvement in the market performance of the company
is its constable growth in market shares, improvement in the customer base, profitability of
the business, management of operations and innovative products.
Long term debt:

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The study over last 5 year data of Apple Inc explains that total long term debt of the
company has been improved at great extent. From last 5 years, the growth rate in long term
debt of the company is 1495%. It explains that huge long term debt has been taken from the
company but along with the improvement in long term debt, equity level of the company has
also been improved (Annual report, 2018). It explains that the overall capital structure level
of the company is in control and the solvency and financial risk of the company is average.
Bond valuation:
Further, the bond valuation study has been done and found that the bond would be
bought at the price of $ 590.03 in the year of 2008 by the holder. Further, in the year of 2019,
it would be sold in $ 567.38 (Damodaran, 2011). It further explains that the holding period
return of the business would be 80.06% (Refer to spreadsheet).

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Part 2:
The case briefs new project of Apple named by global store. In the case, it has been
studied that how much the investment would be done by the company for this project and
what will be the cash inflows and cash outflows. Capital budgeting study has been applied on
the case in order to measure whether the projects is accepted by the company or not.
Price of land consideration:
Capital budgeting is a process in which the management evaluates various projects
available in the market in order to maximize the stockholder worth of the business. In order
to do so, it becomes important for the business to measure the correct cash flows as poor
capital budgeting could even lead the business towards the bankruptcy. Mainly, a sunk cost
must not be added in the capital budgeting cash flows. Sunk cost is the cost which has already
been incurred and it is not possible for the business to recover it (Davies and Crawford,
2011). A sunk cost is always excluded while making the decision because of the fact that cost
of the business would be same regardless of the decision’s outcome.
In the case, cost of land is sunk cost as it has already been purchased by the business
and it would not impact over the cash flows of the company now. Hence, the land amount has
not been included while making the decision about the project acceptance or rejection
process. This helps the management to make better decision. Also, it makes it easier for the
business to improve the overall performance.
Free cash flow of new Apple store:
Free cash inflow indicates about the total cash which is produced by the company
through its operations in a particular time period. Free cash flows are called to the total cash
which has left after payment of all the company’s capital expenditure, operating expenditure
etc. It is important for an organization to use the proper formula of free cash flow so that a
reliable outcome could be got and it becomes easier for the business to make decision.
Formulas of free cash flow of the company are as follows:
EBIT - Taxes + Depreciation & Amortization - Capex – Change in Working Capital
(Birman, 2010)

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In case of Global stores of Apple Inc, it has been found that the initial cash outflows
of the company would be -$ 300 million. Along with that, it has been realized that there
would be fixed cash inflow of $ 32 million for the next 20 years through Global store. The
study explains that because of the opening of global store, media market of the company
would be hampered and it would incur -0.4 million losses in the business. Also the
opportunity cost of the business would be $ 1 million. It explains that the EBT level of the
company would be positive in each of the year. Further on the basis of overall calculations, it
has been measures that the total cash outflow of the global store would be -398.8 and the cash
inflow of the business is $ 840. On the basis of overall study and calculations (Excel), it has
been measured that EBT level of project is $ 741.2. And the net cash outflow of the business
is $ 309.01. All the calculations are given in excel.
PV of new Apple store:
Net present value is most used capital budgeting method. It is basically defines about
the difference between the cash inflow’s present value and cash outflow’s present value over
a period of time. This process is used in the capital budgeting methods and investment
planning processes to evaluate the profitability level of a projected investment or the project
of the business. NPV analysis is used by the management or the financial analysts to
determine how much profits could be made by business through investing into a particular
project (Besley and Brigham, 2009).
In the case of Global store, it has been measured that net present value of the project
would be $ 14.11 in case of WACC of 5.94%. It explains that if the cost of capital of the
business is 5.94% then the total profit of the business from the investment would be $ 14.11
which is quite good and explains hat project must be accepted by the business.
On the other hand, it has been measured that net present value of the project would be
-$ 40.10 in case of WACC of 8%. It explains that if the cost of capital of the business is 8%
then the total loss of the business from the investment would be -$ 40.10 which is quite bad
and explains hat project must not be accepted by the business (Refer to excel sheet).
IRR of new Apple store:
IRR basically defines about the total internal rate of return which could be generated
by the business through investing in a particular project. This process is used in the capital
budgeting methods and investment planning processes to evaluate the total return and

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investment opportunity in the particular investment proposal. IRR analysis is used by the
management or the financial analysts to determine the return level where NPV of the business
would be 0 (Arnold, 2013).
In the case of Global store, it has been measured that internal rate of return of the
project would be 6.42%. Further, the case explains that the cost of capital of the business is
5.94% and 8%. It explains that if the cost of capital of the business is 5.94% then the project
must be accepted by the business as in this case, the cost level of the company is lower than
the internal rate of return. Further, if the cost of capital of the business is 8% then the project
must be accepted by the business as in this case, the cost level of the company is higher than
the internal rate of return. If this investment would be done then the company would suffer
losses (Refer to excel spreadsheet).
Project consideration:
If it is assumed that the cost of capital of Apple Inc is 5.94% then the project must be
accepted by the business. As if the cost of capital of the business is 5.94% then the NPV of
the project would be $ 14.11 which is quite positive and brief about better position of the
business. Further, in case of IRR, it has been found that the IRR level of the investment
proposal is 6.42% and the cost level of the project is 5.94% which is lower and hence,
explains that the project must be accepted. In both the cases, it has been determined that
investment into the project would be profitable by the company. Hence, the project must be
accepted.

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References:
Annual report. 2018. Apple inc. (online). available at:
https://s22.q4cdn.com/396847794/files/doc_financials/quarterly/2018/Q4/10-K-2018-(As-
Filed).pdf (accessed on 23/5/19).
Arnold, G., 2013. Corporate financial management. Pearson Higher Ed.
Besley, S. and Brigham, E.F., 2009. Essentials of managerial finance. Thomson South-
Western.
Bierman, H., 2010. An introduction to accounting and managerial finance: a merger of
equals. World Scientific.
Damodaran, A, 2011. Applied corporate finance. 3rd edition, John Wiley & sons, USA.
Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.
Forbes. 2019. Why Is Apple's Cash Conversion Cycle Significantly Shorter Than Samsung's?.
(online). available at: https://www.forbes.com/sites/greatspeculations/2016/06/07/why-is-
apples-cash-conversion-cycle-significantly-shorter-than-samsungs/#591cf65458eb (accessed
on 23/5/19).
Moles, P. Parrino, R and Kidwekk, D. 2011. Corporate finance. European edition, John
Wiley &sons, United Kingdom.
Nobes, C. and Parker, R.H., 2009. Comparative international accounting. Pearson Education.