Apple Inc.’s Business Case and Financial Plan

Introduction

Apple Inc. is a publicly listed corporation that creates, produces, and sells mobile communication and media products, personal computers, and portable digital music players. Cupertino, California, is the corporation’s headquarters, formed in 1976 (Addison & Adelaide 2022). Apple company is one of the leading companies in the information technology industry. The sector faces several difficult business conditions, especially when even the best-conceived plans may fail (Sivamani et al., 2021). The information technology industry is very competitive, with disruptive innovation developing as a mainstream approach organizations utilize to generate and maintain growth in various sectors (Kumar et al., 2021). These advances provide new value propositions to new consumers who do not need the performance established enterprises offer. After establishing themselves in a basic application or user niche, potentially disruptive goods get to the point where they “alter the game,” displacing existing enterprises. Apple faces several competitors, including Lenovo Group and Hewlett-Packard Company, that have product line similarities with Apple in several product categories, including home computers, cellular phones, and other electrical devices are among its offerings. Apple’s management recognizes the need for sustained growth and innovation to secure the company’s competitive advantage.

Funding Justifications at Apple

Propose for Funding

Some of the proposed strategies for securing a strong competitive position include access to new global markets, the development of more advanced features on products, and managing the current market disruptions. In seeking new global markets, Apple has shown great interest in the Indian markets and has been in discussions with the Indian government to produce the iPhone and other items in India (Ferrati & Muffato, 2021). Apple’s strategy was a bigger attempt to boost iPhone sales in India, which has eclipsed the United States as the second-largest smartphone market after China. The company’s management is making similar attempts to integrate the markets in India and the Philippines. Apple has committed $44 million to a research and development facility in Indonesia over the next three years as part of a bigger campaign to get regulatory approval for the sale of iPhones in the country (Arratia et al., 2021). The growing market saturation influences the corporation’s position in developed economies. Apple announced it decreased iPhone sales year-over-year (YoY) in the United States and Greater China during the third quarter of 2016, resulting in a 5% reduction in global iPhone sales (Van De Vliert 2021). During the third quarter, iPhone sales increased across Latin America, India, and South Asia. The growth trends justify the need to invest further into finding new markets and maximizing the company’s superior technology to secure a stable competitive advantage.

Development of New Products

Apple is set to release several new product improvements further to advance its competitive status in the information technology industry. During the first quarter of 2022, the 3rd generation iPhone SE, 5th generation iPad Air and 1st generation Mac Studio were released to the market (Sivamani et al., 2021). Equally, Apple has fast-tracked the release of its Studio Display, M2 MacBook Air, and M2 13in MacBook Pro into the market. Apple has pledged to switch all Macs using Intel CPUs to its silicon within two years, beginning in 2020. Apple has upgraded several of its devices, such as the MacBook Air, Mac mini, 24-inch iMac, 13-inch Macbook, 14-inch, and 16-inch MacBook Pro, and introduced the new Mac Studio. In addition, Apple revealed the M2 chip for the MacBook Air and 13-inch MacBook Pro during WWDC in June 2022 (Sobczak et al., 2022). In the second half of 2022, consumers are anticipating Apple to introduce new and enhanced customer experiences. The development still needs funding for an Apple silicon upgrade for Macs. Similarly, the company plans to provide an upgrade to macOS in the fall of 2022, which may include new features tailored to the newest Macs. The Apple Silicon Mac Pro is said to be under development with a 32-core CPU and up to a 128-core GPU, which might be achievable if Apple combines four M1 Max in a single system, with rumors stating that this chip will be called the M1 Extreme.

Potential Sources of Funding

Self-Funding

In facilitating the aggressive strategy for competitive advantage, the company has focused on securing financing through its self-funding programs, borrowing, and equity. In terms of self-funding, Apple Inc. unveiled its purchase now, pay later scheme to increase its self-funding prospects (Ensign 2021). With this change, the new initiative no longer depends on Goldman Sachs for finance, changing its dependence on Apple Pay services. Apple prioritizes establishing its entity, which will be known as Apple Financing LLC (Sobczak et al., 2022). In the past, Apple’s product range comprises high-end laptops, mobile gadgets, and other expensive equipment, prompting some observers to question the business’s risk. Economists accept that Apple has significant wealth that it can use to support its initiatives. However, concerns exist that a $1,200 phone may accrue a $600-per-month debt on pay in four, diminishing its consumer base (Ensign 2021). The Annual Percentage Rate (APR) for the self-funding is calculated from 1.14 to 1.48, adding up to an extremely high rates of 1.18. But there are trade-offs considering that minimizing Goldman Sachs’s participation to protect client privacy is commendable. The option might be problematic considering the huge losses recorded by customers who have skipped payments.

Borrowing

Beyond self-funding, the company is trying to optimize the cheap loan available in the market. Although Apple is a cash-rich firm, the company is nevertheless seeking a slice of the ultra-cheap money available on the bond market. Trends show that with 30-year Treasury yields at historic lows, many businesses have been able to finance more affordably and for longer periods (Sobczak et al., 2022). The interest rate on Apple’s new 30-year notes will be around 2.99 percent, compared to 3.45 percent on the 30-year bonds in 2015 (Myers & Read 2022). On a $1.5 billion issuance, this corresponds to interest savings of approximately $7 million each year, or more than $200 million over thirty years. Today’s debt offering might assist Apple with refinancing around $2 billion in loans slated to expire this year, in addition to a significant portion of the $10 billion it had maturing in 2020 (Arratia et al., 2021). In terms of the borrowing APR, in June 2022, the United States Commercial Bank lending rate was recorded as 4% per year (Bredl 2022). US Bank Lending Rate data is updated daily, with June 7, 2022, recording an average of 3.250 percent annually. Compared to its share price, the company performs at about 5.6%, while it can take credit for 30 years for less than 3%. However, the changing global markets increase borrowing risks due to the increasing concern over stagflation.

Equity

In equity funding, the company sells its shares for direct cash investment into growth and research as per the market valuations. Apple has assets under management of $351 billion, current debt of $287.91 billion, and an overall owner’s equity of $63.09 billion as of September 25, 2021 (Sobczak et al., 2022). Apple has a high market share value due to its impressive current ratio of 1.07, which compares its company’s liquidity obligations. Over the last five years, Apple’s debt-to-equity rate has risen as the company has taken on more debt to fund share repurchases and enhanced payouts (Sivamani et al., 2021). The company’s total holdings take account of its shareholders’ equity and liabilities. Apple has raised $6.2 billion in fundraising across six funding rounds. Their most recent investment round occurred on September 6, 2017, and was a Post-IPO Debt deal. Microsoft and Berkshire Hathaway are the most recent investors in the business. Apple has raised a total of $375 million over two funds, the most recent of which was the European fund on January 15, 2022, for a total of $75 million. In Equity APR, Apple has a debt-to-equity ratio of 148%, a market shift that indicates how rapidly the capital structure may change. With such dynamics, the risks are compounded by limitations in equity funds that cannot be an investment option for a short period. There are inadequate controls over managers and investors and greater capital costs.

Self-financing as the Preferred Funding Source

Apple is predominantly funded by stock, with a market capitalization about eight times that of its long-term debt. Apple’s equity cost is 9.7 percent based on the earnings yield concept and 8.5 percent based on the CAPM. The average of these two is to achieve an acceptable cost of equity of 9.1%. Even the cash cost of Apple’s stock is more than the company’s after-tax cost of debt. Since Apple’s stock cost is far greater than its cost of debt, the business should opt to issue debt if it needs more financing. The approach is advantageous since the firm does not need any additional capital at this time, and its operating cash flows are sufficient to cover all of its capital expenditures, leaving over $65 billion in free cash flows annually. Similarly, since the firm creates more capital than it requires, it can repay the money. The corporation can repay the debt when its notes expire, repurchase its notes before they mature, or repurchase its common stock. Since Apple’s stock cost is much greater than its cost of debt, the corporation should not attempt to lower its debt and instead repurchase as many shares as possible.

Conclusion

Apple has a promising growth trend that is sustainable, especially with the launch of new products and access to new global markets. The financial analysis shows that as of September 25, 2021, Apple’s balance sheet amounted to $351 billion in assets, $287.91 billion in receivables, and $63.09 billion in shareholders’ capital. Current ratios for the corporation indicate a 1.07 out of the $134 billion / $125 billion status, showing that current assets are sufficient to meet current liabilities. By the end of 2021, Apple’s EV has increased from $928 billion in total in 2017 to just about $3 trillion. The company’s share price and liquidity have increased gradually. By the end of 2021, Apple’s budget deficit had increased from about $3.45 billion at the end of 2020 to $11.64 billion. Apple is perhaps the most cash-rich company in America, which shareholders cannot overlook. Apple reported possessing $172.6 billion in cash, financial assets, and preferred stock in its 2021 10-K filing. In the near future, Apple’s heavily leveraged financial structure should not threaten the company’s stability.

The company needs funding to maintain operations and support its expansion plans for continued viability. Apple Inc. has chosen to raise finance via venture capitalists, loans, and equity. Apple Inc. will be appealing to venture capitalists because of its history of innovation and success. Since going public in 1980, the company has consistently developed industry-changing breakthroughs and stayed profitable. In addition, Apple Inc. has a loyal customer base willing to pay a premium for its products. Because Apple Inc. has a strong balance sheet and produces a substantial cash flow from operations, loans and equity are feasible financing choices. Apple Inc. has a huge amount of cash, marketable securities, and outstanding shares on its balance sheet. In addition, the company’s operations generate a substantial cash flow that may be used to pay down debt and fund its growth goals (Arratia et al., 2021). The mix of debt and equity will determine Apple Inc.’s cost of capital to support its operations and growth objectives. The cost of capital will be lower if the company uses a greater proportion of debt. The cost of capital will be higher if the company uses a greater proportion of shares.

Table 1: A profit-and-loss statement for three years, including estimated direct costs, including the capital, marketing, labor, and supply costs.

US$ in millions
12 months ending: 2025 2024 2023
Products 307,392 297,000 273,200
Services 79,700 67,700 56,100
Net sales
Net sales 387,092 364700 329300
Products 190,266 151,286 144,996
Services 21,515 18,273 16,786
Cost of sales
Cost of sales 212,781 169,559 161,782
Gross margin 152,836 104,956 98,392
R&D 22,913 18,752) 16,217
Administrative costs 21,953 19,916 18,245
Operating expenses 43,889 38,669 34,463
Operating income 108,950 66,288 63,930
Interest and dividend income 2,843 3,763 4,961
Total Interest expense 2,645 2,872 3,577
Other income net 258 803 1,807
Income before taxes 109,207 67,091 65,737
Provision for income taxes 14,530 9,681 10,479
Net income 120,955 147,596 124382

Apple Inc. will need $1 billion in capital to sustain operations and achieve its growth plans. The company plans to raise $1 billion total, including $500 million in venture capital and another $500 million in loans and equity. If Apple Inc. raises all of its capital via shares, its cost of capital will be 10%. The cost of capital will be 8 percent if the company obtains $500 million in equity and $500 million in debt. Apple Inc. will need $1 billion in capital to sustain operations and achieve its growth plans. The company plans to raise $1 billion total, including $500 million in venture capital and another $500 million in loans and equity. If Apple Inc. raises all of its capital via shares, its cost of capital will be 10%. Based on the case, Apple has a higher liquidity cost and a low debt expense. Therefore, it is prudent to raise the company’s leverage to minimize its cost of capital. By debt issuance and utilizing the revenues to buy shares, Apple may simultaneously reduce its cash costs and boost its profits per share. If the debt is issued in currencies other than the dollar, the corporation receives a free hedge against the adverse effects of a strong currency.

References

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