Apple Computer-Business Analysis and Valuation Using FS

8/16/2019 Apple Computer-Business Analysis and Valuation Using FS

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Ratio Analysis and Forecast Financials

This section will include financial ratio analysis for MSN.A ratio analysis is a

quantitative analysis of information contained in MSN’s financial statements.

Ratio analysis is based on line items infinancial statements like thebalance

sheet,income statement and cash flow statement; the ratios of one item – or

a combination of items - to another item or combination are then calculated.

Ratio analysis is used to evaluate various aspects of a company’s operating

andfinancial performance such as its efficiency,liquidity, profitability

andsolvency. The trend of these ratios over time is studied to check whether

they are improving or deteriorating. Ratios are also compared across

different companies in the same sector to see how they stack up, and to get

an idea of comparativevaluations. Ratio analysis is a cornerstone

offundamental analysis.

http://www.investopedia.com/terms/f/financial-statements.asphttp://www.investopedia.com/terms/b/balancesheet.asphttp://www.investopedia.com/terms/b/balancesheet.asphttp://www.investopedia.com/terms/i/incomestatement.asphttp://www.investopedia.com/terms/f/financialperformance.asphttp://www.investopedia.com/terms/l/liquidity.asphttp://www.investopedia.com/terms/s/solvency.asphttp://www.investopedia.com/terms/v/valuation.asphttp://www.investopedia.com/terms/f/fundamentalanalysis.asphttp://www.investopedia.com/terms/b/balancesheet.asphttp://www.investopedia.com/terms/b/balancesheet.asphttp://www.investopedia.com/terms/i/incomestatement.asphttp://www.investopedia.com/terms/f/financialperformance.asphttp://www.investopedia.com/terms/l/liquidity.asphttp://www.investopedia.com/terms/s/solvency.asphttp://www.investopedia.com/terms/v/valuation.asphttp://www.investopedia.com/terms/f/fundamentalanalysis.asphttp://www.investopedia.com/terms/f/financial-statements.asp


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uidity / Operating Efciency Analysisliquidity ratios will provide information indicating whether or not Apple will be able to pay o

clude that the %rm&s numbers are very satisfactory" and give them an overall

Trend Analysis

2011 2012 2013 2014 2015

Sales Growth - 47.2% 14.9% 34.7% 90%

Liquidity Analysis

Current Ratio 3.46 1.94 1.14 1.39 1.11

Quick Asset Ratio 3.29 1.82 1.04 1.26 0.82

Inventory Turnover 8.7 375.27 8.5 7.09 6.91

Days supply of inventory

Accounts Receivable Turnover

Days supply of receivables

Working Capital Turnover

Profitability AnalysisGross rofit !argin '("() '*")(+ '1",-+ '1"*+ ("*"perating #$pense ratio

%et rofit !argin /"0- 1"1(+ ("/,+ -"/1+ '",(+Asset Turnover 1"* -",)+ )"-,+ (*"(,+'"-(+Return on Assets )",,+ ("-+ *"0/+ "*'+ "*-+Return on #&uity 1"'( 0"*,+ ("1(+ /"10+ )"')+

a!ital "tru#tur$ Analysis

Debt to e&uity ratio *"/- 1"(/ 1"-1 "*/ 1"-)Ti'es Interest #arne( 1*"*/ 0"01 )", ",/ "(Debt Service !argin

good short term solvency rating.


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perating e2ciency 3wor!ing capital management4 ratios provide

insight


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into Apple& cash to cash cycle. 5ore speci%cally" how e2ciently Apple

is able to convert inventory into sales" sales into payment" and use

wor!ing capital to generate sales. 6nventory turnover has been

decreasing over time" which is not a favorable trend" but is suspected

to be due to the increase of demand" sales" and new products

launches. Furthermore" accounts receivable turnover has been

7uctuating within reasonable means" showing no indication of a trend

in either direction. 8owever" in **' they collected on accounts

receivables much more e2ciently than in the previous year. The cash

to cash cycle in **' was appro9imately '* days. :astly" $or!ing

capital has been growing steadily since **1" which is a favorable

trend with more sales dollars being generated per dollar of wor!ing

capital. This is a good indication of growth and liquidity.

$ith the e9ception of inventory turnover" Apple shows favorable

numbers in terms of liquidity analysis. The company is both able to

meet short term obligations and has been steadily recovering its

receivables. $hile inventory could be a concern" it is our opinion that

the ratio is a re7ection of increased sales and growing stoc!piles of

inventory precluding the release of new products.

Protability Analysis

;ro%tability ratios will demonstrate Apple&s ability to earn

satisfactory pro%ts" so that investors and shareholders will continue to

provide capital. Apple is strong in terms of its pro%tability and trends

indicate stability" and increased e2ciencies in some areas. 5uch of

their success in the arena of pro%tability can be credited to productdierentiation and pricing strategy. As mentioned previously Apple is

one of the few computer companies who have been pro%table of

recent. The gross pro%t margin for Apple has been relatively steady

since **1" showing no concerns for an increased cost of goods. The

operating e9pense ratio shows what portion of sales is used for

operating e9penses. The ratio has been consistently declining" which is


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a favorable trend" suggesting that smaller portions of sales are

consumed by operating e9penses.


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after all e9penses have been paid. Apple&s ratio hit a low in **1"

but since

then" there has been an increasing trend in net pro%t margin.

Finally" Apple has been slowly increasing the ratios concerning

asset turnover" return on assets" and return on equity. These increases

are favorable" showing the companies ability to increase its earnings in

proportion to the overall investment in the company.

Capital Structure Analysis

Capital structure 3gearing4 ratios are used to assess the %nance

ris! of a business 3long term solvency4. Capital =tructure refers to the

dierent ways in which a company raises the capital needed to

establish and grow it business activities. Apple" per the ratio numbers

above" has been moving towards a capital structure that primarily

uses equity as the means to %nance operations. 6n **'" Apple paid

o all long term debt" essentially ma!ing equity the sole source of

capital for the company. This allows the classi%cation of Apple as low

geared and solvent 3long term4. This lends itself 7e9ibility in acquiring

long term debt if required to %nance future operations.

Other Observations

=ome additional ratios were analy>ed concerning apple and the

industry to better represent some of the !ey success factors identi%ed

in previous assessments. R?@ turnover is a very important number for

Apple" as they have stated through the 1*B their focus on creativity"

and research and development. The numbers above re7ect this focus"

as Apple has continually brought in a very favorable ratio concerning

its R?@ costs relative to its overall sales.


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mpetition and industry averages will provide very limited information to the investor" and cou

Cross Sectional Analysis

The purpose of the cross sectional analysis is to add value to the

meaning of the ratios derived in the previous section. Analy>ing

the ratios independent from


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Sales ro!th"##$ "##" "##% "##&

Apple -32.8% 7.0% 8.1% 33.4%

'ell -.+ .(+ 1(.-+ 1/.1+

(P /.)+ ).*+ 0.*+ 0.'+ate!ay ().,+ 0.,+ 1,.'+ /.(+

Co)petitor )./*+ .(/+ ,.*/+ 11./+

40.00%

30.00%

20.00%

10.00%

0.00%

2001 2002 2003 2004

-10.00%

-20.00%

-30.00%

-40.00%

A!!l$ $ll &P 'at$( ay o)!$titor A*+

=ales growth is an e9cellent indicator of how well a company is

performing in its industry as well as its ability to capture new mar!et

share. A close loo! at the competitors numbers show a battle in sales

growth between @ell" 8;" and Dateway. 6t is of particular interest to

note that strong gains in one company usually resulted in a loss or

smaller gain in a competitor. This can be credited to these companies

%ghting over a mar!et that is already primarily saturated. Apple does

not seem to be eected by the earnings of its competitors" as shown in

its steady growth from ** to present. This is a result of Apples

computer products capturing a niche mar!et and its portable music

products entering a mar!et e9periencing rapid growth. $hile Apples

numbers seem to be increasing signi%cantly for now" it is very possible


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that with the saturation of the portable music mar!et that Apples

numbers could slump in the not so distant future.


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er the past %ve year Apples current ratio has been declining. 8owever"r current ratio has remained considerably higher than their competitors" who have all failed

Current *atio"### "##$ "##" "##% "##&

Apple 2.81 3.39 3.25 2.50 2.63

'ell 1.** 1.*) 1.'( 1.', 1.*(

(P 1.-1 1.', 1.)( 1.)( 1.)1ate!ay 1.25 1.67 2.08 1.85 1.37

Co)petitor 1.0 1.'* 1.-, 1.- 1.(*


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with their current ratio" Apples quic! ratio has been declining over thevious %ve years" but it has remained consistently higher than their competitors and the indu

+uic, Asset *atio"### "##$ "##" "##% "##&

Apple 2.58 3.16 2.96 2.26 2.33

'ell .0- 1.*1 1.(, 1.'* .0)

(P 1.(/ 1.) 1.1) 1.1) 1.)ate!ay 1.07 1.55 1.99 1.75 1.18

Co)petitor 1.1( 1./ 1.)1 1.'( 1.1(


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-nventory Turnover"### "##$ "##" "##% "##&

Apple 176.27 375.27 91.98 80.34 59.60

'ell 0'.0) 0.(1 -(.-1 )1./ 1-./'

(P ,.,) /.1' -.(0 -.11 11.(ate!ay 17.03 25.75 40.62 42.40 23.94

Co)petitor '*., '1./( (-.,/ ((.- )(.00

400

350

300

250

200

150

100

50

0

2000 2001 2002 2003 2004


Apples inventory turnover has sharply declined since **1. A probable

e9planation of the sharp decline e9perienced by the Apple can be

associated with the state of the economy at the time. ;ost =eptember

11" **1" the economy was e9periencing recession. Apple who

speciali>es in dierentiated" higher priced goods" was unable to

convert inventory into sales" resulting in a longer inventory turnover

period and the large decline. Also the costs associated with holding

inventory will have increased the cost of goods sold. As the economy

has begun to pic! up" Apples ratio has begun leveling o" and is more

re7ective of the industry norms. 8owever" it still is declining" albeit at a

much slower rate. This can be attributed to the increased demand for


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Apple products" and our assumption is that they are deliberately

increasing inventory levels in preparation for new product launches.


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Accounts *eceivable Turnover

"### "##$ "##" "##% "##&

Apple 8.38 11.51 10.16 8.10 10.70

'ell 1(.-0 1(./' 1(.1- 0.-0 11.'

(P ,.10 -.-0 1*.*, /.-' (./

ate!ay 10.67 16.19 21.09 26.99 17.62Co)petitor 1*.,) 1.1 1'./, 1'.// 1*.01

30

25

20

15

10

5

0

2000 2001 2002 2003 2004


ver the past %ve years Apples accounts receivable turnover

has been fairly consistent with respect to how the industry has been

performing. From ** to **( Apple was below the industry average"

suggesting that competitors were collecting on their accounts

receivables faster. 8owever" out of the ( competitors also

e9perienced declines in their AR turnover" and Dateway&s high

increase in receivables turnover resulted in a less re7ective industry

average. From **( to **' apple had the largest increase in

improving their AR turnover" while Dateway suered the largest

decline in AR turnover. Apple and @ell" the two more pro%table


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companies of recent have AR turnover ratios similar to the industry

average in **'" with day sales outstanding of (' and (" respectively.


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.or,ing CapitalTurnover

"### "##$ "##" "##% "##&

Apple 2.28 1.48 1.54 1.76 1.89

'ell


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les gross pro%t margin has been consistently around /+ during the pastyears with the e9ception of **1" where it dropped to (.*(+ due to the decreased sales a

ross Prot argin"### "##$ "##" "##% "##&

Apple 27.13% 23.03% 27.92% 27.52% 27.29%

'ell 1/.0(+ 17.67% 20.21% 20.65% 1,.*+

(P -.)/+ -.,-+ -.'-+ ,./-+ './*+ate!ay 8.41% 13.62% 13.57% 14.12% 21.45%

Co)petitor 1/.-'+ 10.(,+ *.*,+ 1.1,+ 1.')+


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Operating E0pense *atio"### "##$ "##" "##% "##&

Apple 20.59% 29.44% 27.62% 27.53% 23.35%

'ell 0.0*+ 11.0(+ 11.,)+ 11./*+ 1*.1(+

(P 22.60% 25.07% 23.28% 20.53% *.)-+ate!ay 24.91% 28.76% 25.83% 34.05% 21.45%

Co)petitor 10.1'+ 1.0+ *.(+ .*0+ 1/.(,+

40.00%

35.00%

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%

2000 2001 2002 2003 2004


@ell clearly has the upper hand in the area of operating

e9penses. They are the masters of Hust 6n Time manufacturing" which is

responsible for their very low operating e9pense ratio. Apple has

consistently had an operating e9pense ratio higher than its competitors

and that of the industry average. Although this could be viewed as a

bad sign" 3e9cluding @ell4 Apple deviates from the ratios of its

competitors only by a few percentage points in **'. Also" the eects

of their increased operating e9penses are somewhat counteracted

once again" by its pricing strategy. ver the last %ve years the trend

amongst Apple along with most of its competitors has been a

decreasing ratio. 6f Apple were to implement stricter cost control

measures and decrease its overall e9penses" it could easily translate


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into Apple having the highest net pro%t margins in the industry. 3A

portion of Apples elevated operating e9penses can be accredited to

its high R?@ costs" a !ey success factor for Apple4.


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1et Prot argin"### "##$ "##" "##% "##&

Apple 9.85% -0.47% 1.13% 1.11% 3.33%

'ell ).00 '.**+ -.,(+ -.)0+ -.(*+

(P (.', 1.-*+ .0*+ /.)-+ ).1)+ate!ay -15.55% -15.13% -7.14% -16.96% 2.52%

Co)petitor .*(+ '.'+ *.*+ *.0'+ '.--+

15.00%

10.00%

5.00%

0.00%

2000 2001 2002 2003 2004

- 5.00%

- 10.00%

- 15.00%

- 20.00%


Apples net pro%t margin has been increasing since **1" and

tripled from **( to **'. nce again @ell&s methodical control of

e9penses is illustrated through their high net pro%t margin. Apple&s

high operating e9penses results in them having a lower net pro%t

margin than most of its competitors. 8owever" in **'" Apple&s

operating e9penses ratio was appro9imately 1( percentage points

higher than @ell&s" yet there is only a ( percentage point dierence in

their net pro%t margin. This is a direct result of Apple&s superior gross

pro%t margin. Apple is in a growth phase" and is utili>ing a philosophy

of get big fast" and then decrease operating e9penses. Also" from **(


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to **'" as net pro%t margins of Apple&s main competitors decreased"

Apple&s tripled.


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les asset turnover is important as an increase in the ratio can directly eectma9imum sustainable growth" yielding higher growth rates in the future. $hile the ratio is g

Asset Turnover"### "##$ "##" "##% "##&

Apple 1.17 0.89 0.91 0.91 1.03

'ell .0 .(* .(( .* .1)

(P .0, .,* 1.(0 1.'' 1.*)ate!ay 2.06 1.68 1.66 1.99 2.30

Co)petitor 1./, 1.)0 1./0 1.,, 1.,(


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les return on assets ratio is an indication of the companys struggle toover from a history of losses. The ratio itself shows how well Apple is utili>ing its assets afterar with the li!es of @ell.

*eturn on Assets"### "##$ "##" "##% "##&

Apple 11.55% -0.42% 1.03% 1.01% 3.43%

'ell 1(./ 0.1+ 1).0(+ 1'.)+ 1(.)*+

(P (.'* 1.,+ 1.)+ 1*.,/+ ).1+ate!ay -32.04% -25.38% -11.86% -33.72% 5.78%

Co)petitor '.0/+ ).,+ 1.//+ ./,+ ,.1-+


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*eturn on Equity"### "##$ "##" "##% "##&

Apple 19.14% -0.64% 1.59% 1.63% 5.44%

'ell '(.))+ -.)'+ (,./+ (1.(0+ ').1*+

(P -./(+ .'0+ .0,+ -.*+ 0.0+ate!ay -231.65% -71.30% -23.88% -64.36% 10.14%

Co)petitor -*.'-+ 1)./)+ ).0'+ .(+ 1./+

100.00%

50.00%

0.00%

2000 2001 2002 2003 2004

- 50.00%

- 100.00%

- 150.00%

- 200.00%

- 250.00%


Return on Iquity shows how eectively a company is at using

investors money. Again" @ell has glowing numbers in this respect due

to its cost leadership" leading the industry with a (/.*-+ average over

the last ) %scal years. Apple is only a fraction of @ells numbers" with

its highest recent return on equity at ).''+. $hile this could be

perceived as dismal" Apple was able to !eep its ratio positive in many

of the years the industry was suering from maGor losses. verall" the

positive movement in the last two years is a good indicator of Apples

business strategy moving forward with relative success.


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'ebt to Equity *atio"### "##$ "##" "##% "##&

Apple 0.66 0.54 0.54 0.61 0.59

'ell .1/ 1.,, 1.'( 1.1- .*,

(P .0, .0) 1.(- 1.(0 1.*(ate!ay 6.23 1.54 0.86 0.79 0.76

Co)petitor (.1( 1.'- 1. 1.11 1.0


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bt to equity ratio demonstrates the e9tent to which a %rms capitalcture is %nanced through debt. I9cessive use of debt will result in larger ratios" indicating a

equity. Apple signi%cantly beats the competitor average in all recent

years in its debt to equity ratio. 6f necessary" Apple is allowed more

7e9ibility in acquiring more debt if needed to %nance operations.


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Ti)es -nterest Earned"### "##$ "##" "##% "##&

Apple )( .) ,.0 1.) 1,.-/

'ell /(.*1 -,.0- 1/0.*- -/ /,.,1

(P 1*.') './/


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more than adequate as to not raise any concern. $ith its latest ratio"

creditor con%dence in Apple should be high and allow debt to be

secured at lowerris! interest rates.


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'ebt Service argin"### "##$ "##" "##% "##&

Apple .,0 .),' ., .0) *

'ell /./( ,.' /.(* -.00 /.(*

(P .(, 1.'0 (.*' ).*/ .*(

Co)petitor 23#4 &356 23$6 43#% &32%

KDateway e9cluded due to lac! of su2cient %nancial data

9

8

7

6

5

4

3

2

1

0

2000 2001 2002 2003 2004

A!!l$ $ll &P o)!$titor A*+

@ebt =ervice 5argin is an indicator of how well a company can

pay o its short term notes payable. As seen above" the cash 7ows

generated by Apple are mee! in terms of being able to pay o its long

term obligations through the years of **1 to **(. @ell" again"

succeeds in leading the industry with a /.)1 average over the past )%scal years. $hile this could be of great concern" showing a wea!ness

in Apples ability to meet the current portion of its long term

obligations" its recent **' ratio indicated no notes payable on the

boo!s. This is probably a result of Apples increasing use of equity to

%nance operations instead of debt. $hile the lac! of notes payable in

**' leaves no negative impact on Apple" the previous years show


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that Apple could have trouble paying o its short term obligations if

long term debt were acquired.


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*7' Turnover"### "##$ "##" "##% "##&

Apple '.,+ ,.*+ /.,+ /.-+ ).0+

'ell 1.+ 1.1+ 1.)+ 1.(+ 1.1+

(P .)+ .-+ .-+ .)+ .'+ate!ay


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its high investment in R?@ will counteract the increased operating

e9penses through increased revenues and high gross pro%t margins.


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8orecast ethodology

See: Appendix A – D

=ales DrowthE The forecasting method for sales growth was a

combination of dierent elements. $e considered the overall

sustainable growth rate of the company" which was very meager"

along with its growing asset turnover rate and sales boom

following the release of the i;od in **'. Additionally"

information released in the 1 **) 1* showed (.0 billion in

sales and earnings estimated at (.1- billion. Lsing decreased

estimates for ( and ' earnings" along with careful analysis of

the ratios mentioned above" it was concluded that there would

be a )+ growth in sales in **) followed by a decreased growth

in the following years down to /+ in *1'. The further out we

forecast" the less certain we can be about the accuracy. The

stability of the environment is a !ey factor in determining the

future sales growth" as seen in the instability of Apple" among

other competitors in the industry" during the *****1

economic recession. Apple is especially sensitive due to the fact

they speciali>e in higher cost goods.

Although Apple is currently engaged in selling in a

relatively untapped portable music mar!et" it is felt that pro%ts

will begin to level o within ' years. This is the logic behind the

drop to 1-+ sales growth in **0 continuing into *1'. $e feel

this estimate best represents Apples sales growth following the

end of the portable music boom. $hile Apple will lose signi%cant

growth when the portable music mar!et becomes saturated" the

i;od halo eect is li!ely to carry customers to Apples other

productsM generating future pro%ts in goods other than the i;od.


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Liquidity Analysis

An average of the current ratio for the past ) years was used in

forecasting the ne9t 1* years. This is accurate in the fact that the

current ratio has shown no historical trend in moving a particular

direction. The same methods were utili>ed in the computation of

the quic! asset ratio forecast.

Operating Efciency Analysis

For the operating e2ciency ratios" some of the outlying numbers

had to be removed to facilitate an accurate forecast. The years

*** and **1 were removed in average calculations due to the

boom and bust of the economy related to those time periods.

Additionally" the ratios analy>ed were not e9pected to grow over

time" but instead settle at an average. Therefore" a ( year

average was used on the inventory turnover" accounts receivable

turnover" and wor!ing capital turnover forecasts.

Protability Analysis

Concerning the gross pro%t margin and operating e9pense ratios"

it was felt that they were best forecasted using a ) year average.

The numbers in these ratios" overall" remained relatively

constant and there is no indication that they would subGect to

any maGor changes during the forecasted years. This is assuming

that Apple does not change its core business strategy from

dierentiation to cost leadership. 6f such a change were to occur"

these ratios would change substantially.


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to be the status quo for the foreseeable future. The success

of the i;od has shifted Apple into innovating new


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products" not necessarily ma!ing e9isting products cheaper. This

would mean a relatively stable net pro%t margin in the future.

Asset turnover" return on equity" and return on assets were

all calculated using a ( year average. This assumption was made

in belief that these ratios will go unchanged over time under the

current operating strategy Apple is employing. RI and RA

traditionally and over e9tended periods of time are not very

volatile.


6n general" these ratios are a direct result of corporate policy.

@ebt to Iquity was forecasted using a ) year average due to the

stability of the numbers over the past ) %scal years. 8owever"

times interest earned and debt service margin were not

forecasted due to the fact they cannot be accurately predicted

because of their direct lin! to management decision concerning

capital structure. 6n **'" Apple paid o all of its long term debt"

which suggests that the company desires operations and growth

to be %nanced by equity and not debt.

*7' Turnover

The amount of funding devoted to research and development is

determined by corporate policy rather than demand or sales

volume. 8owever" historical data suggests that Apple devotes

more to research and development during periods of low sales

growth. ;er sales growth forecasts" this would suggest that R?@

would be estimated to be a lower percentage of sales in future

years due to high sales growth. R?@ was proGected to be ).()+

in future years" which is an average of the two years in which

Apple e9perienced its highest sales growth. $hile we foresee this


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number changing slightly in the future" there is no indication that

future R?@ costs would deviate far from the above average.


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8orecast o9 8inancialState)ents

-nco)e State)ent :Appendi0 A;

Forecasting of the 6ncome statement was done utili>ing a

combination of the forecasting assumptions along with other

mathematical methods. For net sales" the forecasted sales

growth was applied to each year following **'. The gross pro%t

was proGected out to *1' using the forecasted gross pro%t

margin from the forecasting assumptions. This then left the cost

of sales to be the dierence between the net sales and gross

pro%t for each of the respective forecasted years.

Research and development was proGected out using a (+

growth rate" =D?A was proGected using a /+ growth rate" and

total operating e9penses was proGected using a 1(+ growth

rate. Iach of these proGections was calculated by %nding the

average growth throughout the ) year series 3*****'4.

perating income and income before ta9es were calculated by

%nding the dierence between the proGected gross pro%t and

total operating e9penses.

;rovision for income ta9es was calculated using the average

percent ta9ed in the previous years.


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Total liabilities and stoc!holders equity were calculated using the

debt to equity and current ratio forecasted assumptions. The

remaining line items were then calculated using the sum and

dierences of these forecasts.

State)ent o9 Cash 8lo!s :Appendi0 C;

Cash 7ows from operations were found by using the proGected

operating income from the income statement and applying a

forecasted cash 7ow from operations percentage from the

forecasting assumptions sheet.

Cash 7ows from investment activities were found by %nding the

change in the ;;?I and other assets proGected in the balance

sheet.

E0planation to 1u)bers 1ot 8orecasted

The various numbers in the balance sheet" income statement"

and statement of cash 7ows that were left unforecasted were

done so due to the inability to accurately forecast the numbers.

An e9ample would be restructuring costs" which is clearly

unable to be forecasted along with being a very small

percentage of the larger income statement elements.

Li)itations to 8orecasts

6n determining these forecasts" historical data was used to

e9trapolate the future. The underlying assumption of all the

techniques applied is that the forces responsible in creating the past

will continue to operate in the future. This assumption is most valid in

short and medium term forecasts" but becomes less accurate in longterm forecasting.

6f Apple were to change its modus operandi regarding cost

leadership and the use of debt in %nancing future operations"

pro%tability and capital structure forecasted ratios will deviate greatly

from the numbers current proGected. $hile there is no suggestion that


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Apple will change its policy regarding these issues anytime soon" it is a

signi%cant wea!ness in the long term forecasts.

ne %nal note is the volatile nature of the portable music industry.

$ith Apple garnering most of its growth and pro%ts from its entrance

and success in the portable music industry" Apple will have to continue

to maintain its leadership


45/63

signi%cantly due to the nature of their products.

in this mar!et to continue the proGected growth rates. Additionally" a

downturn in the economy could greatly hurt Apples overall forecasted

sales growth. 6f disposable income falls among the general population"

Apples revenues will drop


46/63

=aluations Analysis

Su))ary o9 =aluation Analysis

8or!ard P/E >"#346

Trailing P/E >$234$

ar,et to %63$4

'iscounted 8ree Cash 8lo!s >"53?2

Abnor)al Earnings ro!th >"%3

*esidual -nco)e >"%3""

Long *un *esidual -nco)e >"#35&

'iscounted 'ividends 1/A

The purpose of this section is to evaluate the overall value of

Apple as compared to its current stoc! price by utili>ing various

valuation models. Apple will be analy>ed using the method of

comparables" abnormal earnings growth" discounted free cash 7ows"

residual income" and long run residual income perpetuity models. Jy

comparing the various models to the actual stoc! price" a conclusion

can be made regarding the nature of the stoc! 3overvalued"

undervalued" or fairlyvalued4.

ethod o9 Co)parables =aluation

5ethod of comparables allows us to compute an industry

average of Apples direct competitors to determine a simple way of

evaluating Apples price per share. Apples direct competitors

include Dateway" @ell" and 8ewlett ;ac!ard.


47/63

PPS EPS 8or!ard P/E*atio

les forward price to earnings shows a valued price per share of .-/ a share as compared to Apples actual price per share of N'*.,0. This method shows a g

Trailing Price to Earnings

Apples trailing price to earnings gave a valued price per share of N1)which is substantially lower than Apples actual price of N'*.,0.

8or!ard Price to Earnings

PPS EPS

8or!ardP/E

@ell (,.*( 1., *.1

8; 1./1 1./ 1./,

Dateway 3.99 6.2 15.96

Apple

In(ustry

# Average )#

arnings er Share

1.27

#$pecte( Sharerice

*+,-.

@ell (,.*( 1.10 (1.0-

8; 1./1 1.1, 1,.(0

Dateway 3.99 ,A ,AIn(ustry

Average )##arnings er

Share#$pecte( Share

rice

Apple 25.18 .62 /0,-/


48/63

ar,et to


49/63

6t was decided that a ( year average would be used as the

regression analysis showed that it e9plained 0.-+ of the mar!et

3which is higher than the or ) year average4. For the ris! free rate

we too! the average of the ) year Treasury bill interest rates for the

mar!et. $e chose this because %nancial analysts recommend using

a forecast of somewhere between ) to / years. The beta is

calculated by running a slope of the %rms return and the mar!et

ris! premium. Finally" historical mar!et ris! premium was selected

as (+ as supported by recent academic research.

.ACC :be9ore ta0; :=d/=9;:Dd; B :=e/=9;:De;

Apple has no long term debt obligations and the only liabilities on

the boo!s consist of accounts payable and accrued e9penses. =ince

accounts payable and accrued e9penses have no determinable

interest rate" we applied the federal funds rate of .-(+. Cost of

equity was determined to be -./0-+ using the above CA;5

formula.

'iscounted 8ree Cash 8lo!s =aluation >"53?2

The discounted free cash 7ows valuation model uses forecasted

free cash 7ows and $ACC to determine the companys intrinsic value

on a per share basis. Apples $ACC is ).-+. Lsing this method" our

intrinsic value per share is

N,.0). Compared to our share price of N'*.,0" this method shows

that Apple has a signi%cantly overvalued share price. This method is

e9tremely sensitive to changes in the growth rate.

Sensitivity Analysis

WACC

Growth

+ +,+*0 +,+0 +,+.0

+,+* 45*,65 %)A %)A %)A

+,+6 437,*3 473,*3 %)A %)A

+,+0*- 4*5,70 467,36 6-/,55 %)A


50/63

+,+5 4/.,7+ 4*3,60 435,*0 *+/,+/

+,/ 4/3,.3 4/-,0. 4**,*6 37,*-

Abnor)al Earnings ro!th =aluation >"%3

Abnormal Iarnings Drowth Paluation model incorporates the

present value of the investment opportunities of the dividends paid to

the shareholders. =ince Apple pays no dividends the cumulative

dividend earnings is equal to earnings per share. Also" growth rate has

no eect on the value per share because the value of our perpetuity is

>ero. Lsing this method" our intrinsic value per share is N(.'* which

is substantially lower than the mar!et price of N'*.,0.


8e

Growth

+ +,+*0 +,+0 +,+.0

+,+* 4//*,** 4//*,** 4//*,** 4//*,**

+,+6 465,0+ 465,0+ 465,0+ 465,0+

+,+-.7- 4*3,6+ 4*3,6+ 4*3,6+ 4*3,6+

+,+5 4/.,05 4/.,05 4/.,05 4/.,05

+,/ 4/*,.6 4/*,.6 4/*,.6 4/*,.6KDrowth does not matter since the perpetuity was >ero

*esidual -nco)e =aluation >"%3""

6n the residual income valuation model we use a stream of

forecasted residual income values 3which is the dierence between

forecasted I;= and normal income4" a terminal value" and then

discount them bac! to the present year using the %rms cost of

equity. Lsing these techniques we derived an


51/63

intrinsic value of the %rm of N(. per share" which is similar to the

value derived using the AID method. 6n both cases" the models have

indicated that Apple is overvalued.


8e

Growth

+ +,+*0 +,+0 +,+.0

+,+* 4//*,+6 %)A %)A %)A

+,+6 465,33 47/,-* %)A %)A

+,+-.7- 4*3,** 4*-,-* 37,0/ %)A

+,+5 4/5,/+ 4/7,*3 4**,*6 00,3-

+,/ 4/*,0. 4/*,37 4/*,+3 /+,76

Long *un *esidual -nco)e Perpetuity >"#35&P


52/63

and it is our best estimate that the true price is in the range of N*

N'.


53/63

- 67 -

Appendi0 A

Current ;iabilities

A##ounts Payabl$ 1157.00 801.00 911.00 1154.00 1451.00

A##ru$d !$ns$s 776.00 717.00 747.00 899.00 1229.00

urr$nt $bt .00 .00 .00 304.00 .00Total Current ;iabilities 1933.00 1518.00 1658.00 2357.00 2680.00 2493.41 2652.98 2822.78 3003.43 3195.65 3400.17 3617.79 3849.32 4095.68 4357.80

Lon+-t$r) d$bt 300.00 317.00 316.00 .00 .00

$f$rr$d ta liabiliti$s and ot$r non-#urr$nt liabiliti$s 463.00 266.00 229.00 235.00 294.00 306.99 320.55 334.71 349.50 364.94 381.07 397.90 415.48 433.84 453.00

Total ;ong:Ter' ;iabilities 763.00 583.00 545.00 235.00 294.00

Total ;iabilities 2696.00 2101.00 2203.00 2592.00 2974.00 3212.09 3417.67 3636.40 3869.13 4116.75 4380.22 4660.56 4958.83 5276.20 5613.88

S


54/63

Appendi0 nr$ali?$d loss on # on* $r tibl$ s$#urit i$s . 00 - 13.00 . 00 . 00 .00

/nt$r$st and ot $r in#o)$ n$t 203. 00 217. 00 112. 00 83. 00 53. 00ot al ot $r in#o )$ and $!$ns$ 570. 00 292. 00 70. 00 93. 00 57. 00

Inco'e before ta$es 1092.00 -52.00 87.00 92.00 383.00 566.41 832.59 1171.88 1601.50 1952.29 2371.50 2871.67 2799.84 2687.50

Pro*ision for in#o)$ ta$s 306.00 -15.00 22.00 24.00 107.00 158.59 233.13 328.13 448.42 546.64 664.02 804.07 783.95 752.50

/ n# o) $ b $f or$ a ## oun ti n+ # a n+ $s 78 6. 00 -3 7. 00 65. 00 68 .00 27 6. 00

u)ulati*$ $ff$#ts of a##ountin+

#an+$s n$t of in#o)$ ta$s

%et inco'e

.00

786.00

12.00

-25.00

.00

65.00

1.00

69.00

.00

276.00 407.81 599.46 843.76 1153.08 1405.65 1707.48 2067.60 2015.88 1935.00


55/63

Appendi0 C State)ent o9 Cash 8lo!s

A!!l$ o)!ut$rs. /n#. 10- as @lo( 9"R#CASTS

2000 2001 2002 2003 2004 *++0 *++- *++. *++5 *++7 *+/+ *+// *+/* *+/3

as and #as $qui*al$nts b$+innin+ of t$ y$ar 1326000000 1191000000 2310000000 2252000000 3396000000

!$ratin+ A#ti*iti$s<

,$t in#o)$ 786000000 :25000000; 65000000 69000000 276000000

u)ulati*$ $ff$#ts of a##ountin+ #an+$s n$t of ta$s Adust)$nts to r$#on#il$ n$t in#o)$ to #as +$n$rat$d

0 :12000000; 0 :1.000.000; 0

by o!$ratin+ a#ti*iti$s<

%$!r$#iation. a)orti?ation and a##r$tion 84000000 102000000 114000000 113000000 150000000"to#-bas$d #o)!$nsation $!$ns$ 5000000 16000000 33000000

,on-#as r$stru#turin+ 8000000 12000000 5000000Pro*ision for :b$n$fit fro); d$f$rr$d in#o)$ ta$s 163000000 :36000000; :34000000; :11.000.000; 20000000Loss on dis!osition of !ro!$rty !lant and $qui!)$nt 10000000 9000000 7000000 2000000 7000000

'ains on sal$s of sort-t$r) in*$st)$nts n$t :367.000.000; :88000000; :7000000; :21.000.000; :1000000;

: 'ains ; loss $s on n on-# ur r$ nt in* $st )$nt s n$t 42 000 00 0 :10.000.000; :4000000;'ain on for(ard !ur#as$ a+r$$)$nt 0 :6.000.000; 0

0 13000000

Pur#as$d in-!ro#$ss r$s$ar# and d$*$lo!)$nt 0 11000000 1000000 0 0an+$s in o!$ratin+ ass$ts and liabiliti$s<

A##ounts r$#$i*abl$ :272.000.000; 487000000 :99000000; :201000000; :8000000;/n*$ntori$s :13.000.000; 22000000 :34000000; :11.000.000; :45000000;

t$r #urr$nt ass$ts :37.000.000; 106000000 :114000000; :34.000.000; :176000000;t$r ass$ts 20000000 12000000 :11000000; :30.000.000; :39000000;

A##ounts !ayabl$ 318000000 :356000000; 110000000 243000000 297000000

t$r liabiliti$s 176000000 :60000000; 36000000 159000000 419000000

Cash generate( by operating activities 868000000 185000000 89000000 289000000 934000000 423.800.000 396485425 582812720 820319401 1121050157 976.145.712 1185750434 1435836695 1399917671 134

/n*$stin+ A#ti*iti$s<Pur#as$s of sort-t$r) in*$st)$nts :4.267.000.000; :4268000000; :4144000000; :2648000000; :3270000000;Pro#$$ds fro) )aturiti$s of sort-t$r) in*$st)$nts 3075000000 4811000000 2846000000 2446000000 1141000000

Pro#$$ds fro) sal$s of sort-t$r) in*$st)$nts 256000000 278000000 1254000000 1116000000 801000000

Pro#$$ds fro) sal$s of non-#urr$nt in*$st)$nts 140000000 339000000 25000000 45000000 5000000

Pur#as$s of !ro!$rty !lant and $qui!)$nt :142.000.000; :232000000; :174000000; :164000000; :176000000;as us$d for busin$ss a#quisitions 0 0 :52000000; 0 0

t$r :34.000.000; :36000000; :7000000; 33000000 11000000

Cash generate( by @use( for investing activites :972.000.000; 892000000 :252000000; 828000000 :1488000000; :187687668; :69484011; :73.930.987; :78662571; :83696975; :89.053.582; :94753011; :100817203; :107.269.504; :1

@inan#in+ A#ti*iti$s<

Pay)$nt of lon+-t$r) d$bt 0 0 :300000000;

Pro#$$ds fro) issuan#$ of #o))on sto# 85000000 42000000 105000000 53000000 427000000

as us$d for r$!ur#as$ of #o))on sto# :116.000.000; 0 0 :26.000.000; 0Cash generate( by financing activities :31.000.000; 42000000 105000000 27000000 127000000

/n#r$as$ :d$#r$as$; in #as and #as :135.000.000; 1119000000 :58000000; 1144000000 :427000000;

$qui*al$ntsas and #as $qui*al$nts $nd of t$ y$ar 1191000000 2310000000 2252000000 3396000000 2969000000

"u!!l$)$ntal #as flo( dis#losur$s<

as !aid durin+ t$ y$ar for int$r$st 20000000 20000000 20000000 20000000 10000000

as !aid :r$#$i*$d; for in#o)$ ta$s n$t 47000000 42000000 11000000 45000000 :7000000;

,on#as transa#tions</ssuan#$ of #o))on sto# for #on*$rsion of "$ri$s A

!r$f$rr$d sto#

/ssuan#$ of #o))on sto# in #onn$#tion (it

74000000 76000000

a#quisition 0 66000000


56/63

Appendi0 ' 8orecasting Assu)ptions

Ratio Analysis Section 9"R#CASTS

2000 2001 2002 2003 2004 *++0 *++- *++. *++5 *++7 *+/+ *+// *+/* *+/3 *+/6

Sales Growth -32.82% 7.07% 8 .10% 33.38% 25.00% 20.00% 2 0.00% 2 0.00 % 16.00% 16.00% 16.00% 7.00% 7.00% 7.00%

Sustainable Growth Rate 1 9. 14 % -0. 64 % 1.59% 1. 63 % 5. 44 %

;i&ui(ity Analysis

urr$nt atio 2.81 3.39 3.25 2.50 2.63 2.92 2.92 2.92 2.92 2.92 2.92 2.92 2.92 2.92 2.92

Bui# Ass$t atio 2.58 3.16 2.96 2.26 2.33 2.66 2.66 2.66 2.66 2.66 2.66 2.66 2.66 2.66 2.66

/n*$ntory urno*$r 176.27 375.27 91.98 80.34 59.60 77.31 77.31 77.31 77.31 7 7. 31 77.31 77.3 1 77.31 77.31 77.31

ays su!!ly of in*$ntory 2.07 0.97 3.97 4.54 6.12

A##ounts $#$i*abl$ urno*$r 8.38 11.51 10.16 8.10 10.70 9.77 9.77 9.77 9.77 9.77 9.77 9.77 9.77 9.77 9.77

ays su!!ly of r$#$i*abl$s 43.57 3 1.72 35.9 2 45.04 34.12

Corin+ a!ital urno*$r 2.28 1.48 1.54 1.76 1.89 1.79 1.79 1.79 1.79 1.79 1.79 1.79 1.79 1.79 1.79

rofitability Analysis

'ross Profit Dar+in 27. 13% 2 3. 03% 27. 92 % 27. 52% 27. 29% 26.58% 26.58% 26 .5 8% 2 6.58 % 26 .58% 26.58% 26.58% 26.58% 26.58% 26.58%

!$ratin+ !$ns$ ratio 20. 59 % 29.4 4% 27. 62% 27. 53% 23. 35% 25.71% 25.71% 25 .7 1% 2 5.71 % 25 .71% 25.71% 25.71% 25.71% 25.71% 25.71%

,$t Profit Dar+in 9. 85 % -0. 47 % 1.13% 1.11% 3.33% 1.86% 1.86% 1.86% 1.86% 1.86% 1.86% 1 .86% 1.86% 1.86% 1.86%

Ass$t urno*$r 1.17 0.89 0.91 0.91 1.03 0.95 0.95 0.95 0.95 0.95 0.95 0.95 0.95 0.95 0.95

$turn on Ass$ts 11 .55% -0.42% 1.03% 1.01% 3.43% 1.82% 1.82% 1.82% 1.82% 1.82% 1.82% 1 .82% 1.82% 1.82% 1.82%

$turn on quity 1 9. 14 % -0. 64% 1.59% 1.63% 5.44% 2.89% 2.89% 2.89% 2.89% 2.89% 2.89% 2 .89% 2.89% 2.89% 2.89%


$bt to $quity ratio 0.66 0.54 0.54 0.61 0.59 0.60 0.60 0.60 0.60 0.60 0.60 0.60 0.60 0.60 0.60

i)$s /nt$r$st arn$d

$bt "$r*i#$ Dar+in

= urno*$r 4. 80% 8. 00% 7.80% 7.60% 5.90% 5.35% 5.35% 5.35% 5.35% 5.35% 5.35% 5 .35% 5.35% 5.35% 5.35%

Total Assets -11.49% 4.60% 8 .21% 18.12% 6.40% 6.40% 6.40% 6.40% 6.40% 6.40% 6 .40% 6.40% 6.40% 6.40%

!$ratin+ as @lo( as % !. /n# 79.49% -355.77% 102.30% 314.13% 243.86% 130.00% 70.00% 70 .0 0% 7 0.00 % 70.00% 50.00% 50.00% 50.00% 50.00% 50.00%

Total Current Assets 79.77% 85.42% 85.55% 86.38% 82.64% 85.00% 85.00% 85.00% 85.00% 85.00% 85.00% 85.00% 85.00% 85.00% 85.00%


57/63

Appendi0 E 'iscounted 8ree Cash 8lo! odel

Cash 9low fro' "perations

Cash rovi(e( @=se( by Investing Activities

9ree Cash 9low @to fir'

2 9actor

Apple Co'puter In(ustry

@A'ounts in 'illions of (ollars e$cept per share (ata

/ * 3 6 0 - . 5 7

*++6 *++0 *++- *++. *++5 *++7 *+/+ *+// *+/* *+/3 *

Sensitivity Analysis#arnings er Share 4+,-* g

Divi(en(s per share + +,+*0 +,+0 +,+.0

1ook 2alue er Share WACC +,+*

+,+6

Actual rice per share 46+,57 +,+0*-

g 0 +,+5

WACC 0.0526 +,/

46*3,5+ 437-,67 405*,5/ 45*+,3* 4/B/*/,+0 47.-,/0 4/B/50,.0 4/B630,56 4/B377,7* 4/B36

:4/5.,-7 :4-7,65 :4.3,73 :4.5,-- :453,.+ :457,+0 :476,.0 :4/++,5* :4/+.,*. :4/

4*3-,// 43*.,++ 40+5,55 4.6/,-- 4/B+3.,30 455.,+7 4/B+7/,++ 4/B330,+* 4/B*7*,-0 4/B*

+,70+ +,7+3 +,50. +,5/0 +,..6 +,.30 +,-75 +,--6 +,-3+

resent 2alue of 9ree Cash 9lows 4**6,3/ 4*70,/6 463-,36 4-+6,/- 45+*,5+ 4-0*,*/ 4.-*,+6 4550,57 45/6,7/ 4.

Total resent 2alue of Annual Cash 9lows 46B--*,7+

4*6B0.0,+-Continuing @Ter'inal 2alue @assu'e no growth

resent 2alue of Continuing @Ter'inal 2alue 4/-B3+.,0/

2alue of the 9ir' @en( of *++6 4*+B7.+,6/

1ook 2alue of Debt an( referre( Stock

2alue of #&uity @en( of *++6 4*+B7.+,6/#sti'ate( 2alue per Share @+7)3/)+6 4*5,**

#sti'ate( 2alue per Share @+6)+/)+0 4*5,70

45*,65

437,*3 473,*3

4*5,70 467,36 6-/,55

4/.,7+ 4*3,60 435,*0 *+/,+/

4/3,.3 4/-,0. 4**,*6 37,*-


58/63

Appendi0 8 Abnor)al Earnings ro!th odel

/ * 3 6 0 - . 5 7 erp

9orecast >ears*++6 *++0 *++- *++. *++5 *++7 *+/+ *+// *+/* *+/3 *+/6

#S 4+,00 4+,5/ 4/,/6 4/,00 4/,57 4*,3+ 4*,.5 4*,./ 4*,-+ 4*,60

DS 4+,++ 4+,++ 4+,++ 4+,++ 4+,++ 4+,++ 4+,++ 4+,++ 4+,++ 4+,++DS investe( at /. 4+,++ 4+,++ 4+,++ 4+,++ 4+,++ 4+,++ 4+,++ 4+,++ 4+,++ 4+,++

Cu':Divi(en( #arnings 4+,5/ 4/,/6 4/,00 4/,57 4*,3+ 4*,.5 4*,./ 4*,-+ 4*,60

%or'al #arnings 4+,07 4+,5- 4/,*/ 4/,-- 4*,+* 4*,60 4*,7. 4*,7+ 4*,.5

Abnor'al #arning Growth @A#G 4+,** 4+,*. 4+,36 4+,*3 4+,*5 4+,33 @4+,*- @4+,*7 @4+,33 +

2 9actor +,73- +,5.. +,5*/ +,.-7 +,.*+ +,-.6 +,-3/ +,07/ +,003

2 of A#G 4+,*/ 4+,*6 4+,*5 4+,/5 4+,*+ 4+,** @4+,/- @4+,/. @4+,/5

Core #S 4+,00

Total 2 of A#G 4+,77

Continuing @Ter'inal 2alue 4+,++

2 of Ter'inal 2alue 4+,++

Total 2 of A#G

Average erpetuity 4/,06

Capitaliation Rate @perpetuity +,+-.7-

2alue er Share pv 4**,-6 +7)3/)+6

fv *3,6+ +6)+/)+0

8e +,+-.7- Sensitivity Analysisg + g

+ +,+*0 +,+0 +,+.0

8e +,+*

Actual rice per share 4*+,55 +,+6

+,+-.7-

+,+5

+,/

4//*,** 4//*,** 4//*,** 4//*,**

465,0+ 465,0+ 465,0+ 465,0+

4*3,6+ 4*3,6+ 4*3,6+ 4*3,6+

4/.,05 4/.,05 4/.,05 4/.,05

4/*,.6 4/*,.6 4/*,.6 4/*,.6


59/63

Appendi0 *esidual -nco)e odel

/ * 3 6 0 - . 5 7 /+

$+innin+ :!$r sar$;

#arnings er Share

Divi(en(s per share ndin+

:!$r sar$;

$

E,or)alE /n#o)$

$sidual /n#o)$ :/;

Pr$s$nt Falu$ of / @+,3- @+,/6 +,+7 +,30 +,0+ +,-0 +,5* +,-/ +,6/ +,*/

F quity :!$r sar$; 2004

otal PF of / :$nd 2004;

ontinuation :$r)inal; Falu$

PF of $r)inal Falu$ :$nd 2004;

#sti'ate( 2alue @+7)3/)*++6#sti'ate( 2alue @+6)+/)*++0 8e +,+*

+,+6

+,+-.7-

Sensitivity Analysisg

+ +,+*0 +,+0 +,+.0

/+,73

Actual rice per share 46+,57 +,+5

Growth + +,/

,$t /n#o)$ 407.81 599.46 843.76 1153.08 1405.65 1707.48 2067.60 2015.88 1935.00 1819.59

Shares "utstan(ing 743180000

*++6 *++0 *++- *++. *++5 *++7

9orecast >ears

*+/+ *+// *+/* *+/3 *+/6/3,-- /6,*/ /0,+* /-,/0 /.,.+ /7,07 */,57 *6,-. *.,37 *7,77

4+,00 4+,5/ 4/,/6 4/,00 4/,57 4*,3+ 4*,.5 4*,./ 4*,-+ 4*,60

4+,++ 4+,++ 4+,++ 4+,++ 4+,++ 4+,++ 4+,++ 4+,++ 4+,++ 4+,++

/3,-- /6,*/ /0,+* /-,/0 /.,.+ /7,07 */,57 *6,-. *.,37 *7,77 3*,66+,+-.7-

+,73 +,7. /,+* /,/+ /,*+ /,33 /,67 /,-5 /,5- *,+6@+,35 @+,/- +,// +,60 +,-7 +,7. /,*7 /,+6 +,.6 +,6/

/3,--

3,/0

/+,730,--

4**,6.*3,**+

4//*,+6

465,33 47/,-*

4*3,** 4*-,-* 37,0/

4/5,/+ 4/7,*3 4**,*6 00,3-

4/*,0. 4/*,37 4/*,+3 /+,76


60/63

- 74 -

Appendi0 ( Calculation o9 Cost o9 Equity

sti)at$d

$ta - "quar$d

A*$ra+$ is

@r$$ at$

Gaoo

Publis$d

$ta

&istori#al

Dar$t is

Pr$)iu)1.71111 0.207471064 0.0409 1.857 0.03

#sti'ate( 8e 9.22%

#sti'ate( 8( 2.63%

1.1412053 year

0.296197961 0.0337 1.857 0.03

#sti'ate( 8e 6.796%

0.710647* year

0.02854379 0.0326 1.857 0.03

#sti'ate( 8e 0,376


61/63

Appendi0 - Pro8or)a -nco)e State)ent

Pro-@or)a :P$r#$nt of "al$s; /n#o)$ "tat$)$nt

2000 2001 2002 2003 2004

,$t sal$s 100% 100% 100% 100% 100%

ost of sal$s 73% 77% 72% 72% 73%

Gross 'argin

!$ratin+ $!$ns$s<

$s$ar# and d$*$lo!)$nt

27%

5%

23%

8%

28%

8%

28%

8%

27%

6%

"$llin+ +$n$ral and ad)inistrati*$

"!$#ial #ar+$s<

$stru#turin+ #osts

15%

0%

21%

0%

19%

1%

20%

0%

17%

0%

Pur#as$d in-!ro#$ss r$s$ar# and d$*$lo!)$nt 0% 0% 0% 0% 0%

$#uti*$ bonus 1% 0% 0% 0% 0%

Total operating e$penses 21% 29% 28% 28% 23%

!$ratin+ in#o)$ :loss;

t$r in#o)$ and $!$ns$<

'ains :loss$s; on non-#urr$nt in*$st)$nts n$t

7%

5%

-6%

2%

0%

-1%

0%

0%

4%

0%

>nr$ali?$d loss on #on*$rtibl$ s$#uriti$s 0% 0% 0% 0% 0%

/nt$r$st and ot$r in#o)$ n$t 3% 4% 2% 1% 1%

otal ot$r in#o)$ and $!$ns$ 7% 5% 1% 1% 1%

Inco'e @loss before provision for inco'e ta$es 14% -1% 2% 1% 5%

Pro*ision for in#o)$ ta$s 4% 0% 0% 0% 1%

/n#o)$ b$for$ a##ountin+ #an+$s 10% -1% 1% 1% 3%

u)ulati*$ $ff$#ts of a##ountin+ 0% 0% 0% 0% 0%

#an+$s n$t of in#o)$ ta$s 0% 0% 0% 0% 0%

%et inco'e

arnin+s !$r #o))on sar$ b$for$ a##ountin+ #an+$s<

asi#

ilut$d

arnin+s !$r #o))on sar$<

asi#

ilut$d

"ar$s us$d in #o)!utin+ $arnin+s !$r sar$ :in tousands;<

asi#

ilut$d

10% 0% 1% 1% 3%

Pro-@or)a :P$r#$nt Lin$ /t$) 'ro(t; /n#o)$ "tat$)$nt 2000 2001 2002 2003 2004

,$t sal$s -33% 7% 8% 33%

ost of sal$s -29% 0% 9% 34%

Gross 'argin

!$ratin+ $!$ns$s<

$s$ar# and d$*$lo!)$nt

-43%

13%

30%

4%

7%

6%

32%

4%

"$llin+ +$n$ral and ad)inistrati*$

"!$#ial #ar+$s<

$stru#turin+ #osts

-2%

-100%

-3% 9%

-13%

17%

-12%

Pur#as$d in-!ro#$ss r$s$ar# and d$*$lo!)$nt

$#uti*$ bonus -100%

-91% -100%

Total operating e$penses -4% 0% 8% 13%

!$ratin+ in#o)$ :loss;

t$r in#o)$ and $!$ns$<

'ains :loss$s; on non-#urr$nt in*$st)$nts n$t

-166%

-76%

-105%

-148%

-106%

-124%

-32700%

-60%

>nr$ali?$d loss on #on*$rtibl$ s$#uriti$s

/nt$r$st and ot$r in#o)$ n$t 7% -48% -26% -36%

otal ot$r in#o)$ and $!$ns$ -49% -76% 33% -39%Inco'e @loss before provision for inco'e ta$es -105% -267% 6% 316%

Pro*ision for in#o)$ ta$s -105% -247% 9% 346%

/n#o)$ b$for$ a##ountin+ #an+$s

u)ulati*$ $ff$#ts of a##ountin+

#an+$s n$t of in#o)$ ta$s

%et inco'e

-105%

-103%

-276%

-360%

5%

6%

306%

300%


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Apple Computers" 6nc.1*B ;ercent 3Asset" :iability" Iquity4 Jalance =heet

Total Liabilities 7 Shareholders Equity

Appendi0 I Pro8or)a

Current ;iabilities

A##ounts Payabl$ 42.92% 38.12% 41.35% 44.52% 48.79% A##ru$d !$ns$s 28.78% 34.13% 33.91% 34.68% 41.32%

urr$nt $bt 0.00% 0.00% 0.00% 11.73% 0.00%

Total Current ;iabilities 71.70% 72.25% 75.26% 90.93% 90.11%

Lon+-t$r) d$bt

$f$rr$d ta liabiliti$s and ot$r non-#urr$nt

11.13% 15.09% 14.34% 0.00% 0.00%

liabiliti$s 17.17% 12.66% 10.39% 9.07% 9.89%

Total ;ong:Ter' ;iabilities 28.30% 27.75% 24.74% 9.07% 9.89%

Total ;iabilities 100.00% 100.00% 100.00% 100.00% 100.00%

S


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