"Financial Policy at Apple, 2013 (A)" case study discovers how Apple generated $137 billion dollars in cash and marketable securities. It deals with the financial policy at Apple Incorporation and discusses if such amount should be distributed to shareholders amidst the latter's pressure on the company.
Mihir A. Desai; Elizabeth A. Meyer
Harvard Business Review (214085-PDF-ENG)
June 19, 2014
Case questions answered:
- Who are the players in this Financial Policy at Apple case?
1.1. Present an overview of Apple Incorporation’s business, its history, its operating strategy, its growth strategy, and any potential competitive advantages it has.
1.2. Present a historical analysis of the company’s financial performance and financial position based on the information in the case.
1.3. What is the current situation and issue faced by Apple?
- Analysis of Apple’s stock price changes.
2.1. From the beginning of 2000 until its peak in 2012, Apple’s stock price 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?
2.2. Apple’s stock price decreased by 37% from its peak in September 2012 until the end of March 2013, from $702.10 to $442.66. Again, what specific attributes of their operational performance account for this stock performance?
- Apple’s excess cash.
3.1. Why does Apple Incorporation hold so much cash?
3.2. How much “excess” cash do they have as of the last information available in this case?
3.3. How much cash would they 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.
3.4. If Apple chose instead to commit to an annual dividend from 2012-2017, how much do you think they could afford to distribute each year?
- Quantitatively compare the results of a share repurchase, dividend, and iPref issuance.
Assume that Apple Incorporation will use all excess cash for share repurchases, dividends, and, in the case of iPref, will issue five per share. For the iPref analysis, assume a constant P/E ratio of 10.0x as Einhorn did. How does this assumption impact the analysis?
- What should Cook and Oppenheimer do?
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Case answers for Financial Policy at Apple, 2013 (A)
This case solution includes an Excel file with calculations.
1. Apple Incorporation
1.1. Apple Incorporation’s Overview of History, Operating Strategy, Growth Strategy, and Competitive Advantage
Overview of History
Apple Incorporation was founded by Steve Jobs and his brother Steve Wozniak on 1st April 1976 in a small garage. The idea was to provide an apple computer to the local computer stores, which eventually results in the inception of Apple Incorporation.
Moreover, in the whole process of developing Apple’s first computer, Steve Wozniak played the role of engineer, and Steve Jobs worked as a businessman by selling and spreading awareness about the first product launched by Apple.
Apple Incorporation became profitable in their first thirty days and later realized that their first product, which is the personal computer, is outdated compared to other computers in the market.
Therefore, the work on Apple 2 started to innovate the product by introducing advanced design and features that they plan to incorporate in the new product, which resulted in the sales of about six million apple 2 computers within the span of sixteen years.
Moreover, the dispute starts to begin within the company as Wozniak thinks that he is the creator of such an acceptable product by the customer, and later on, Steve Jobs left Apple Incorporation in 1985.
Evidently, after the company faced a cumbersome situation, Steve Jobs was again appointed as the CEO in 1997, which led Apple Incorporation to cope with the success by introducing innovative ideas for products and eliminating several products in which the company is engaged in producing.
Hence, this resulted in the company’s profit, and the company had initiated to recover from loss which occurred in the previous year before Steve Jobs had appointed as CEO.
Thus, Apple Incorporation enjoyed enormous success under Steve Jobs’s supervision but later faced difficulties after Steve Jobs passed away in 2011.
The operating strategy adopted by the Apple Incorporation is to enhance their production capacity to reduce the cost of product and regularly come up with innovative products and ideas to develop and enhance the value creation for the customers.
The several innovative products introduced by Apple Incorporation include iMac, iPad, iTunes application, iPod, and the most accepted product among the customers iPhone. Hence, these innovative and value creation products are widely accepted by customers worldwide who contributed to the enormous success of the Apple Incorporation.
Therefore, it can be seen that the operating strategy adopted by the Apple Incorporation is to regularly come up with innovative products and ideas while maintaining the production efficiency to reducing the production cost to its minimum.
Growth Strategy and Competitive Advantage
The growth strategy adopted by Apple Incorporation is to consistently come up with innovative and value creation products for the customers, which enable the company to acquire the market share.
When Apple Incorporation first introduced the IMac, the company managed to sell 800,000 units of iMac, out of which 32 percent of sales belonged to those customers who never used the computer before. Hence, this indicated that people adopt Apple Incorporation’s product due to its value creation for the products, innovation, and brand reputation.
Apple Incorporation possesses a diversified range of products, which enables the company to target different market segments. Therefore, it can be stated that the growth strategy adopted by the Apple Incorporation is to introduce a range of diversified and value creation products.
The competitive advantage that the Apple Incorporation possesses is its brand reputation and state of the art technology incorporated in their products.
Although Apple Incorporation faced competition with Android devices, the company still managed to acquire a greater market share compared to its competitors due to the innovative and value-creating products launched for customers.
1.2. Historical Analysis of the Financial Performance and Position of the Company
Apple Incorporation had enjoyed a financial success soon after its inception. Since the company launched its first personal computer in 1976, the company become profitable in the span of 30 days after distributing its products to the local computer stores.
Furthermore, when Steve Jobs left the company in 1985, the company faced financial distress, which led the company to appoint Steve Jobs again in 1997. Soon after Steve Jobs appointed the company’s interim CEO, Apple Incorporation launched…