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FINM4000 Finance, Kaplan Business School, Australia

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Part 1: Company Perspective

a) Evaluate the working capital efficiency of Apple in 2017 as compared to 2018. In your analysis consider the working capital efficiency of competitors.

Answer: The working capital efficiency of the company is checked by analyzing the time taken to receive amount from the debtors, time taken to sell the inventory of the company and time taken to make payment to the suppliers.

Days of inventory outstanding: It is a type of ratio that analyses the efficiency in relation to the number of days for which the company needs to hold the inventory before selling it. The formula for computing the days of inventory outstanding= Average inventory/Cost of goods sold x Number of days in the concerned period.

Days of sales outstanding: This efficiency ratio provides information in relation to the average number of days that are taken in order to convert the sales into cash. The formula for computing the Days of sales outstanding is Average receivables/Net credit sales multiplied by Number of days in concerned period

Days of payable outstanding: This efficiency ratio provides information in relation to the time taken by the company to make payment the creditors in relation to purchases. The formula for computing days of payable outstanding is Average payable/ Cost of goods sold multiplied byNumber of days.

Particulars

2018

2017

Cost of goods sold

163756

141048

Average inventory

= 3956+4855/2

= 4405.5

=4855+2132/2

= 3493.5

Days inventory outstanding

= 4405.5/163756 x 365

= 9.82 days

= 3493.5 x 365/141048

= 9.04 days

Sales

265595

229234

Average receivables

= 23186+17874/2

= 20530

= 17874+15754/2

= 16814

Days receivables outstanding

= 20530 x 365/265595

= 28.21 days

= 16814 x 365/229234

= 26.77 days

Average payables

=55888+49049/2 = 52468.5

 

= 49049+37294/2

= 43171.5

Days payables outstanding

= 52468.5 x 365/163756= 116.9days

= 43171.5 x 365/141048

= 111.72 days

Cash conversion cycle

= 9.82+28.21-116.9

 (78.87)

= 9.04+26.77-111.72

= (75.91)

 

 

 

Ratios of Samsung   

Particulars

2018

2017

Days inventory outstanding

74.39

61.17

Days receivables outstanding

46.09

39.59

Days payables outstanding

24.21

21.98

Cash conversion cycle

96.27 days

78.78 days

Ratios of Microsoft

Particulars

2018

2017

Days inventory outstanding

23.05

23.61

Days receivables outstanding

76.52

77.24

Days payables outstanding

76.17

76.11

Cash conversion cycle

23.4

24.74

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The cash conversion cycle is negative which shows that the company is getting enough time to pay off its creditors. The cash conversion cycle shows that the level of efficiency with which the working capital is managed by the company and ability to generate the cash flows. The negative cash conversion cycle of Apple shows that company is running its chain of supply with the credit that is being extended by the suppliers. The value of cash conversion cycle had decreased in the year 2018 in comparison to 2017 which show that large numbers of days are available in 2018 for the credit in order to operate the supply chain. 

The days of sales outstanding had increased in the year 2018 in comparison to 2017. The ratio of Apple is less in comparison to the competitors, Samsung and Microsoft. The average sales outstanding is less in Apple due to the reason the company is having payment via cash and credit cards. Thus the amount of time taken by debtors to make payment is reduced. On the other hand, Samsung and Microsoft are selling the products to distributors which require high credit period. The company was more efficient in 2017 in comparison to 2018 hence there were credit policies in 2017.

The days of inventory outstanding had increased in year 2018 in comparison to 2017. The ratio of competitors is high which show that company is managing its inventory in an efficient manner. The turnover of apple is fast as it is having high planning and standardized products. But on the other hand the competitors are having large amount of products due to which the amount is tied in inventory for large number of days.

The days of payable outstanding had increased in the year 2018 in comparison to 2017 which shows that the company had become more efficient in managing its operations with suppliers. The ratio of apple is high in comparison to competitors. The reason for difference is that apple is having good credit terms due to huge volume transactions as the products are almost similar. On the other hand the competitors are having various number of products thus the transactions with suppliers are small; hence the credit period is also small.
Thus the overall analysis show that the working capital efficiency in 2018 had improved in comparison to the year 2017 and it is also better in comparison to the competitors.

b) See Apple's Annual Report. What are three of the major risks discussed? Are these risks systematic or unsystematic? Why?

Answer: The three major risks in the Apple's annual report are:

1. The regional and the global economic conditions can create adverse affect on business of the Company; it can have material impact on the results of the operations of the company in an adverse manner. The company is carrying on various operations outside United States. Hence the operations of the company are affected by the economic conditions at global level. It is a systematic risk as this risk is applicable to all the industries which are having global operations and it cannot be controlled. It is the threat and risk that is associated with the market at large.

2. The business of the company is affected by the risk of operations in the international market. The company is deriving large amount of revenue from countries outside US and thus the changes in the laws and regulations in foreign market may have an adverse impact on the financial position of the company. It is a systematic risk as the changes in foreign regulations and laws cannot be controlled and it will affect the entire market.

3. There is high competition in the industry to which company belongs; hence the company needs to introduce new and innovative products to get increased demand of the products. This is unsystematic risk as this risk is applicable only to a particular industry. This risk can be controlled by timely introduction of new products and services in the market. The production of the new products is to be done in accordance with the demand of the public.

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c) Apple Shares and Debt:

i. How has Apple share price preformed over the last three years relative to the market? Based on your research what are the reasons for this performance?

Answer: The share price of Apple had performed better in comparison to the market in the last three years. The share price of stock had increased in the last three years. The price of share is more than the market index at every point of time in the past three years. It is thus performing in a better way in comparison to the market index and other competitors. The reasons of the performance of company are large amount of revenue generated from the sale of iPhone sales, iPad and Mac sales. The revenue from these products gives large contribution to the revenue and thus the increased demand is leading to high profits thereby stock prices. Apple is also providing various services which is also generating high revenue thereby increasing the stock prices. The company is launching new and innovative products to capture the market hence leading to increasing prices of stock.

ii. From 2014 to 2018 has Apple taken on more or less long-term debt? See Source 3 and justify your answer.

Answer: The long term debt had increased from 2014 to 2017. The long term debt had increased by 84% in the year 2015 in comparison to 2014, increase by 41% in 2016 in comparison to 2015 and increase by 29% in 2017 in comparison to 2016. The long term debt had decreased in the year 2018 by 0.04% in comparison to 2017.

iii. Imagine you purchased an Apple $1000 face value bond at the end of 2008 when its yield to maturity was 4%. This bond was issued in 2007 and has a fixed annual coupon rate of 4.5% and matures at the end of 2020. Currently it is the end of 2019 and it has a yield to maturity of 5% and you want to sell this bond. What price did you buy the bond at and what price will you sell it at today? What would be your holding period return?

Answer: Price= 45 x ((1-(1/(1.04)^12))/.04+1000/((1.04)^12)

Price= 1046.93 (price at which bond is purchased)

Price at which we will sell it today= 45 x ((1-(1/(1.05)^1))/.04+1000/((1.05)^1)

Price at which we will sell it today= 995.24

Holding period return= 995.24-1046.93+45 x 11/1046.93= 42.34%

Part 2: Capital Budgeting

a) Why does the analysis not consider the price of the land? Explain with reference to theory.

Answer: The analysis will not consider the price of land as it is irrelevant from the point of view of decision making. The land had already been purchased and the decision in relation to accepting and rejecting the project will not affect the cost of land. Hence the cost will not be included in the cash flow analysis of the project.

b) Based on the above information and sources what are the free cash flows generated by Apple's new store over the 20 years (Refer to your excel spreadsheet)?

Answer: The free cash flow will be calculated taking into account the earnings before interest and taxes, tax expense, non cash expense and the capital expenditures. The computation had been done in the excel sheet.

c) Calculate the NPV for new Apple store using the below costs of capital and recommend whether they should accept the project for each cost of capital.

i. A WACC (cost of capital) of 5.94%?

Answer: Calculation of NPV had been done in the attached excel sheet

WACC of 5.94% gives the NPV of $13.968 million which is positive hence the project should be accepted and it will give positive returns in the future period and will improve the liquidity position.

ii. A WACC (cost of capital) of 8%?

Answer: WACC of 8% gives NPV of (0.40.237 millions) which is negative and hence the project should not be accepted as it will not improve liquidity position of the company.

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d) What is the IRR for new Apple store with a cost of capital of 5.94% and 8%? Should they accept the project at a 5.94% cost of capital? Should they accept it at an 8% cost of capital? Why?

Answer: The IRR for the new store is 6.42%. The calculation had been done in the attached excel sheet. The project should be accepted at 5.94% cost of capital as IRR is higher than cost of capital and it will give higher amount of cash inflows to the company.
The project should not be accepted at 8% cost of capital as IRR is less than the cost of capital and the project will render low amount of cash inflows in the future period leading to high cash outflows.

e) Based in your analysis in a-d should Apple build the new store if we assume the cost of capital is 5.94%? Consider the NPV and IRR calculation in your answer, but also discuss the validity of some of the assumptions made.

Answer: Apple should build up new store if the cost of capital is 5.94% as the NPV is positive and IRR is higher than cost of capital.

The assumptions of IRR and NPV are:

1. IRR assumes that the cash flows of every year are reinvested at the rate of IRR

2. The discount rate is taken keeping in view the interest rates in the market.

3. It is assumed that the level of inflation will not change

4. It is assumed that the ratio between cost and revenue will remain

5. Tax rate will remain same for 20 years.

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