Apple Inc.

(NASDAQ: AAPL) Financial Information from Annual Report

(millions)
Financing Policy Current Assets $ 34,690
Current Assets > Current Liabilities (34,690 > 14,092) Cash & Cash Equivalents $ 11,875
NCA < NCL + Equity (4,882 < 4450 + 21030) Marketable Securities $ 12,615

Short Term Liquidity Account Receivables $ 2,422

Current Ratio = 34,690 / 14,092 = 2.46 Non-Current Assets $ 4,882

Quick Ratio = 26,912 / 14,092 = 1.91
Current Liabilities $ 14,092
Leverage Non-Current Liabilities $ 4,450
Gearing Ratio (%) = (Non-Current Liabilities / Capital Shareholders Equity $ 21,030
Employed)*100 = Source: Apple - Annual Report 2008 (pg 54)
➥ 4450 / 20,598 = 21%

Debt to Asset = Total Liabilities / Total Assets

➥ 18,542 / 39,572 = 46.9%

Debt to Equity = Total Liabilities / Shareholders Equity

➥ 18,542 / 21,030 = 88.2%

Given the above calculations, Apple have adopted a defensive financing position. Although, equity financing is
generally more expensive than debt financing, a greater proportion of equity provides a cushion and is seen as a
measure of financial strength1. Apple is in a healthy position in terms of liquidity. Both Current and quick ratios
indicate that they can easily pay their short term debt obligations without needing additional financing.

Apple’s success over the past six years has enabled them to accumulate $24.49 billion in cash, cash
equivalents and short term investments as of 2008; a 59% increase YOY. Upon further analysis, short term
investments increased 109% YOY to $12.615 billion; representing the main driver behind their defensive
financing position. In particular, Apple’s investments in US Treasury and Agency Securities increased from 1.028
million to 9.934 billion in 2008 (pg 65). As US Treasury Securities are backed by the full faith and credit of the
U.S. Government, they are generally seen to be risk free. However, Agency securities are not, and hence carry
additional risk. In summary, Apple has decided to invest the majority of it’s 2007 retained earnings in low risk
investments. This may be a reflection of the volatility of the markets during this economic crisis.

Despite Apple having a relatively high Debt to Equity Ratio, Apple has zero debt (no loans). This has been the
case since 2004. Their total liabilities consists entirely of accounts payable and accrued expenses. In reflection
of this, their payables payment period is 94 days. Apple’s market dominance has enabled them to demand very
attractive payment terms from their component suppliers.

Although some investors have criticised Apple for “not doing anything” with the $24.49 billion in cash, cash
equivalents and short term investments, I believe their defensive strategy is well chosen. Apple has positioned
itself to take advantage of any acquisition opportunities that may offer long term strategic advantages. For
example, the acquisition of P.A Semiconductors $268 million in 2008 has offered Apple a significant strategic
advantage in the mobile communications industry. During an economic downturn, that level of cash creates
"extraordinary opportunities," according to CEO Steve Jobs.

1 Investopedia, Gearing Ratio, 21 June 2009, http://www.investopedia.com/terms/g/gearingratio.asp

Mark Regan - MIB 5 - 090291 1

Research in Motion Ltd. Financial Information from Annual Report
(millions)
(NASDAQ: RIMM) Current Assets $ 4,841.59
Cash & Cash Equivalents $ 835.55
Financing Policy
Marketable Securities $ 682.67
Current Assets > Current Liabilities (4,842 > 2,115)
NCA < NCL + Equity (3,260 < 112 + 5,874) Account Receivables $ 2,269.85
Non-Current Assets $ 3,259.79
Short Term Liquidity
Current Ratio = (4,842 / 2,115) = 2.29 Current Liabilities $ 2,115.35
Quick Ratio = 3,789 / 2,115 = 1.79 Non-Current Liabilities $ 111.89
Shareholders Equity $ 5,874.13
Leverage
Source: RIMM - Annual Report 2009 (pg 49)
Gearing Ratio (%) = (Non-Current Liabilities / Capital
Employed)*100
➥ [(111,893 / 2,726,235)]*100 = 4.1% Fig1: Debt to Equity (2005 - 2008)
100%
Debt to Asset = Total Liabilities / Total Assets
➥ 2,227,244 / 8,101,372 = 27.5% 80%

Debt to Equity = Total Liabilities / Shareholders 60%

Equity 40%
➥ 2,227,244 / 5,874,128 = 37.9%
20%
Similar to Apple, Research in Motion (RIMM) have
0%
adopted a defensive financing position. Both their 2005 2008
current and quick ratios are inline with Apple’s;
reflecting their ability to pay their short term obligations
RIMM AAPL
without the need for additional financing. Historical data provided by www.allfactors.com.
Graph created by Mark Regan
One notable difference between RIMM and AAPL is the
gearing ratios. RIMM leverages very little debt financing in
comparison to AAPL. As debt financing is generally cheaper than equity financing, RIMM should consider
leveraging more debt financing as it would lower their WACC. Fig 1 illustrates how RIMM has been leveraging
more debt financing since 2003. However, RIMM leverages considerably less debt financing compared to Apple
(AAPL).

In contrast to AAPL, RIMM had long term debt of 7.259 million in 2008. However, RIMM paid off all long term
debt obligations in 2009 (Annual Report, pg 49). During periods of economic uncertainty, maintaining a debt free
balance sheet is a good survival tactic.

The company has a $100 million revolving credit facility, of which it has utilised only $6.5 million. RIMM use this
facility to “support and secure operating and financing requirements”. The excess credit facility will offer RIMM a
reasonable amount of cushioning in the event of liquidity issues. (Annual Report 2009, pg 43)

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CSR Plc: Financing Structure Financial Information from Annual Report
(millions)
Financing Policy Current Assets GBP 409.91
Current Assets > Current Liabilities (409.91 > 102.1) Cash & Cash Equivalents GBP 180.90
NCA < NCL + Equity (181.77 < 22.84 + 466.75) Marketable Securities GBP 81.00
Account Receivables GBP 81.81
Short Term Liquidity
Non-Current Assets GBP 181.77
Current Ratio = (409.91 / 102.10) = 4.01
Quick Ratio = (Cash + Marketable Securities + Accounts
Current Liabilities GBP 102.10
Receivables) / Current Liabilities
Non-Current Liabilities GBP 22.84
➥ 343.71 / 102.10 = 3.37
Shareholders Equity GBP 466.75
Leverage Source: CSR - Annual Report 2009 (pg 65)
Gearing Ratio (%) = (Non-Current
Liabilities / Capital Employed)*100 Fig 2: Leverage Comparison
➥ (22.84 / 307.81)*100 = 7.42%

Gearing
Debt to Asset = Total Liabilities / Total
Assets
➥ 124.94 / 591.68 = 21.12% Debt to Assets

Debt to Equity = Total Liabilities / Debt to Equity

Shareholders Equity
➥ 124.94 / 466.75 = 26.77% 0% 20% 40% 60% 80% 100%

CSR RIMM AAPL

Similar to AAPL and RIMM, CSR has adopted a
defensive financing position. More
impressively, CSR has excellent liquidity Fig 3: Liquidity Comparison
with Current and Quick ratios of 4.01 and
3.37 respectively. 2009 has been a Current Ratio
particularly difficult year for CSR with profit
before tax falling from £150 million to Quick Ratio
negative 6.5 million. Fortunately, CSR have
generated a sizeable balance of cash, cash 0 1 2 3 4 5
equivalents and short term investments in CSR RIMM AAPL
recent years. Their strong balance sheet and good
liquidity enabled them to survive the past year. Historical data provided by www.allfactors.com.
Graphs created by Mark Regan
Fig 2 & Fig 3 clearly illustrate the leveraging and liquidity
differences between AAPL, RIMM and CSR. Apple is
leveraging far more debt financing in comparison to both RIMM and CSR. This is mainly due to Apple’s long
payables payment period of 94 days.

CSR have a policy of leasing some of its equipment under finance leases and purchase certain software
licences under agreements containing deferred payment terms. The average lease term is 2.0 years and interest
rates are fixed at the contract date. Current lease obligations have a present value of $1.35 million, however it is
denominated in Sterling. All other obligations are denominated in US dollars. (Annual Report, pg 87)

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Question 2: Estimate the WACC of CSR plc.

Market Value of Equity = No. Of Shares Outstanding x Share Price

➥ 449.4 million
Source: According to Google Finance: http://www.google.com/finance?q=LON%3ACSR (21st June 2009)

Market Value of Debt = Assets - Equity

➥ 591.681 - 449.4 = 142.281 million
Source: Annual Report 2009, pg 65

CAPM: Cost of Equity = Risk Free Rate of Return + β*(Market Return - Risk Free Rate of Return)
Risk Free Rate of Return: According to Motley Fool, the Risk free rate of return in the UK is the interest rate you
get on gilts. The UK benchmark of gilt yields can be found on the Financial Times web site. Given that the
project is due to last 7 years, a 7 year guilt yields 2.79%.
➥ Risk Free Rate of Return = 2.79%
Source: http://markets.ft.com/markets/bonds.asp (21st June 2009)

Calculating the β value: The β value of CSR can be found on Reuters.com

➥ β = 1.49
Source: http://www.reuters.com/finance/stocks/overview?symbol=CSR.L (21st June 2009)

Market Return: Due to the recent economic crisis, stocks around the world have been significantly devalued. In
order to measure market return, we must chose a period in time that fairly reflects the markets average return. I
have chosen to analyze the FTSE 100 between the dates of the 19th June 1989 and the 19th of June 2007 we
calculate the market return to be:

➥ Market Return = (6650.2 / 2154.7)1/18 - 1 = 6.46%

Cost of Equity = Risk Free Rate of Return + β*(Market Return - Risk Free Rate of Return)
➥ Cost of Equity = 5.6% + (1.49) x (6.46% - 2.79%) = 11.07%

Cost of Debt = Borrowings / Interest

Present Value of lease obligations = 1350
Interest Expenses = 286
➥ Cost of Debt = 1350 / 286 = 4.72%
Source: Annual Report 2009: pg 79 & 86

Effective Corporation Tax

➥ Corporation Tax = 28.5%
Source: Annual Report: pg 80

Calculate Weighted Average Cost of Capital

WACC = [449.4 / (449.4 + 142.281)] x (11.07%) + [142.281 / (449.4 + 142.281)] x (4.72%) x (1 - 0.285)
➥ WACC = 8.41% + 0.81% = 9.22%

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Question 3: Calculate te NPV of this project, using the WACC calculated for CSR plc in the
previous example. (In millions unless otherwise stated)

Table 2: Calculate Net Present Value of Project

Year: 0 1 2 3 4 5 6
Plant Cost (900.00) 10.77
Working Capital (160.00) 172.37
Adjusted Cashflow due to Inflation 203.00 288.46 418.27 594.36 323.19
Tax (40.60) (57.69) (83.65) (118.87) (64.64)
Tax Savings from Depreciation 45.00 33.75 25.31 18.98 14.24 40.53
Allowance
Net Cashflow (1,060.00) 248.00 281.61 385.89 529.69 401.69 (24.11)
Discount Factor 1.0000 0.9156 0.8383 0.7675 0.7027 0.6434 0.5891
Discounted Final Cashflow (1,060.00) 227.06 236.07 296.18 372.23 258.45 (14.20)
NPV 315.80

WACC used in calculations: 9.22%

Conclusion
Table 1: Tax Saving from Depreciation Allowance
Given that the project has a positive net present value
Year Plant NBV Depreciation Tax Savings
of 315.80 million, I recommend that the project should
Allowance
go ahead.
0 900.00
Explanation of calculations: 1 675.00 225.00 45.00
Working capital is affected by inflation and is hence 2 506.25 168.75 33.75
equal to 172.37 million in year 5.
3 379.69 126.56 25.31
Adjusted Cashflow takes into consideration the effect 4 284.77 94.92 18.98
of inflation. 5 213.57 71.19 14.24
➥ Year 4 Cashflow = 560*(1+0.015)4 = 594.36 6 10.93 202.64 40.53

Tax is calculated as 20% of adjusted cashflow and is

offset by one year.
➥ Year 4 Tax = 0.2*418.27 = 83.65

Tax Allowance is calculated as 20% of depreciation allowance. Plant is sold as scrap in year 6 for a NRV of
10.93, hence a loss of 202.64 is made on the sale. Tax authorities give a depreciation allowance on the full loss
value of the asset.
➥ Year 4 Tax Savings from Depreciation Allowance = 0.2 x 0.25 x 379.69 = 18.98
➥ Year 6 Tax Savings from Depreciation Allowance = 0.2 x (213.57 - 10.93) = 40.53

Discount Factor is found using Present Value Interest Factor Tables

➥ Year 4 Interest Factor =1 / (1 + 0.06038)4 = 0.7910

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