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Apple Case

Apple's stock price increased over 25 times from 2000 to 2012 due to introducing innovative products like the iPod, iTunes, iPhone, and iPad. However, from 2012 to 2013 the stock price dropped 37% as Apple struggled to introduce new innovative ideas after Steve Jobs' death and had excess cash with no clear investment opportunities. Apple held over $101 billion in excess cash due to high profits and retained earnings. If this excess cash was distributed to shareholders in 2012, by 2017 Apple would have around $270 billion in cash, even after distributing dividends of around $50-70 per share annually from 2012-2017. Cook and Oppenheimer should invest excess cash into innovative new products and reduce the cash surplus to increase shareholder value

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Bell Yao
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2K views

Apple Case

Apple's stock price increased over 25 times from 2000 to 2012 due to introducing innovative products like the iPod, iTunes, iPhone, and iPad. However, from 2012 to 2013 the stock price dropped 37% as Apple struggled to introduce new innovative ideas after Steve Jobs' death and had excess cash with no clear investment opportunities. Apple held over $101 billion in excess cash due to high profits and retained earnings. If this excess cash was distributed to shareholders in 2012, by 2017 Apple would have around $270 billion in cash, even after distributing dividends of around $50-70 per share annually from 2012-2017. Cook and Oppenheimer should invest excess cash into innovative new products and reduce the cash surplus to increase shareholder value

Uploaded by

Bell Yao
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Financial Policy at Apple, 2013 (A) MEM403 Jiandong Yao

1. From the beginning of 2000 until its peak in 2012, Apple's stock 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?

The company keeps introducing innovative products: Apple introduced innovative products iPod
and iTunes (in 2001) which are very user friendly, iTunes store (in 2003), iTunes, and iPhone
with multi-touch (in 2007), iPad (in January 2010), which all are huge successes.

Apple enhanced their operation efficiencies - shortened the inventory from one month’s worth to
six days worth, and cutted the production time in half.

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

The company was not able to keep introducing innovative ideas and products after Steve Jobs
passed away in 2011. Also the company was not able to discover investment opportunities which
makes the big amount of cash sitting in the bank account. This excess cash raised the concerns of
shareholders as to why this cash is not used to investment or distributing dividends to
shareholders. Therefore the future prospects of Apple would not be as profitable and innovative
as before, which results in the stock prices decreasing.

3. Why does Apple hold so much cash? How much excess cash do they have? How much
cash would the 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.

Q1 Apple holds so much case due to several reasons:

1) Apple enhanced the operation efficiencies - shortened the inventory from one month’s worth
to six days worth, cutted the production time in half.
2) Apple’s products are welcomed internationally and with high profit margin. The operations
efficiencies are enhanced.
3) The high increased net income results in an increased retained earnings which are not paid out
to shareholders;
4) Apple internally were not able to find innovative opportunity to invest the cash

Q2 How much excess cash do they have:


101,171 million dollar (calculated Total Cash 121,252 minus Required Cash. Here we use 2 x
SG&A as Required Cash. 121,251 - 2 * 10,040 = 101,171).

Q3 How much cash would the have after five years if they distributed all of their excess
cash to shareholders in 2012:

If they distribute all their excess cash to shareholders in 2012, by the end of 2017 they would
have 269.959 billion dollars. This is calculated by the total cash in year 2017 minus 2 x SG&A
of year 2017, which is 302,298 - 2 * 16,170 = 269,959).

We use the equity of previous year + the net income of this year to calculate this year’s equity.
With this new equity, we can get the total assets. On the balance sheet, we use total assets and all
other known assets, we can get the Total Cash using subtractions.

Take an example of Year 2013: its total Equity will be: $17,039 (Equity in Year 2012) +
45,906(Net Income of Year 2013), which equals $62,945 million dollar. This will make the total
assets as $126,625 million. Using the reversed way from bottom up, we get the Total Cash of
Year 2013 as $66,358 million.

4. If Apple chose instead to commit to an annual dividend from 2012- 2017, how much do
you think they can afford to distribute each year?
In 2012, the excess cash is 101.171 billion, dividing the 939.2 million shares, it can pay dividends of 107$
Year 2012 2013 2014 2015 2016 2017
Excess Cash (billion$) 101.71 44.270 92.899 146.392 205.233 269.959
Excess Cash pear year 101.71 44.270 48.629 53.493 58.841 64.726
Annual Dividends 101.71 44.270 48.629 53.493 58.841 64.726
Dividends per share* 107 44 51 57 62 69
*Note: assume the total shares are 939.2 million units.

5. What should Cook and and Oppenheimer do?

The goal of Cook and Oppenheimer should be trying to increase the value of the company and
the shareholders and also reduce the excess of cash to a certain level. The top priority for them is
to create an investment plan to invest the excess cash and generate an innovative product plan to
spend this money on future product innovations. Keeping the new products are researched and
developed to meet the high expectations of the customers, just like Steve Jobs did before he
passed away. This way can keep the products competitive, increase the value of the company,
and also can release the burden of the excess cash.

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