1. Apple Inc., formerly known as Apple Computer, Inc., incorporated under the laws of the State of California on January 3, 19771. The company engages in design, manufacture, and marketing of personal computers and related software solutions worldwide. It also provides a line of portable digital music players, as well as related accessories and services, including the online distribution of digital content via iTunes music store. Recently Apple Inc. added to its product offerings by launching a new line of smart phones (iPhone), distributing it through an exclusive multi-year agreement with AT&T wireless division.

Steve Jobs, Steve Wozniak, and Ronald Wayne founded Apple on April 1, 1976. Apple was incorporated in 1977 to sell its first product, “Apple I Personal Computer Kit”. The original Apple was hand built by Steve Wozniak. Two hundred units of the initial Apple I was sold as an assembled circuits board, but lacked the basic parts we came to know now, such as keyboard and monitor. Apple differentiated itself from other major rivals by offering color graphics and open architecture, which allowed introduction of third party applications and easier integration with the device. Apple sustained growth throughout the 1980s mainly due to its leadership in the education sector. A deal negotiated by Steve Jobs established Apple’s presence in all schools throughout California.

As the company continued to grow, an internal power struggle developed between Steve Jobs and the new CEO John Sculley in 1985. Apple’s board of directors sided with the CEO and Steve Jobs resigned. After resigning, Jobs founded NeXT2, which was acquired by Apple for $400 million in 19963. As Apple continued improving product offerings and incorporating new technology, research and development costs skyrocketed. Growing development of Microsoft

1 Sabrient, AAPL Research, pg 5 2 Company founded by Stephen Jobs after leaving Apple 3 S&P AAPL Research

2Windows continued to cut deeply into Apple Inc. profits. Instead of a clear marketplace response Apple sued Microsoft for theft of intellectual property; the lawsuit dragged on for years. Although the case was later thrown out, it distracted management and caused several major product flops and missed deadlines. In 1997 Steve Jobs returned to Apple as consultant, and then became an interim CEO; in 2000, he took the CEO position full time.

Although opinions may vary on acquisitions, Apple tends to focus on small companies that can be integrated into the projects that are already being developed internally. Some of its more notable acquisitions include Final Cut Pro from Macromedia (now Adobe Inc.) as well as purchase of small German company called EMagic in 2002.

Apple Inc’s. early litigation dates back to 1978 when Apple Corps Records, owned by The Beatles record label filed suit for trademark infringement. The case was settled in 1981 for $80,000 paid to Apple Corps (Beatles owned company). In addition, Apple Inc. agreed to stay out of music business. This case came back again in 1989, Apple Inc. settled in 1991 with similar terms and additional $26.5 million. However, in September 2003, Apple Corps, sued Apple again, this time over the iTunes music store. The trial, which was held in the UK, ended in victory for Apple Inc. Similarly, in January 2007, Cisco sued Apple Inc. for the name “iPhone”. This case was settled out of court without financial damage to the company.

Apple Inc. has a rich corporate history that’s been prone to radical change. From introduction of new products to maintaining customer relations by offering rebates, Apple Inc. is continually striving to become a prominent figure in the personal technology world. Much of the recent success for Apple can be attributed to Steve Jobs who in recent years has transformed the company he once helped to build.

3

2. As stated earlier, Apple Inc. engages in the design, manufacturing, and marketing of personal computers and related peripherals, software, and networking solutions worldwide. It also provides the online sale of third-party audio and video products to enhance the experience of the users of their line of portable digital music players. Apple offers products such as the Macintosh desktop and portable computers, the Mac OS X operating system, and iPod storage products, which are complimented by the iTunes store. The company has a vast array of products from computers, storage devices, software, and supplies.

Apple Inc. sells its products to education, business, consumer, and government customers. They use online stores, a direct sales force, and retail stores to sell their products. The company had 173 retail stores as of March 9, 2007 in the United States, Japan, United Kingdom, and Canada.4 3. On December 27, 2006 SEC announced that Apple was under investigation by the federal government in connection to some illegal activity with regards to backdating stock options.5

On January 17, 2007 Apple announced that it expects 2nd quarter 2007 revenue of $4.8- $4.9 billion and EPS of $0.54 to $0.56. Analysts, however, believed the company to report EPS of $0.60 on revenues of $5.24 billion during the same time period.6

Then, on February 21, 2007 and agreement was finally announced between Apple and Cisco Systems regarding their dispute over the ‘iPhone’ trademark. Within the agreement both companies are free to use the ‘iPhone’ trademark on their products.7

On April 12, 2007 Apple made an announcement to delay the launch of Leopard, Macintosh operating system.8

4 Sabrient, pg 5 5 http://money.cnn.com/2006/12/27/technology/apple_options/index.htm 6 http://www.apple.com/pr/library/2007/01/17results.html 7 http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=av_XXNfwk8KI

4

Only twelve days later, on April 24, 2007 the SEC charged two former Apple Inc. executives over their alleged roles in backdating stock options. Fred Anderson, former Chief Financial Officer immediately settled and agreed to pay $3.5 million in fines and penalties. Nancy Heinen’s attorneys fought the charges.9

Good news struck for Apple on May 17, 2007 when it announced the U.S. FCC approval of the iPhone for sale in the United States. The iPhones were sold by AT&T in late June.10

On July 25, 2007 Apple announced 4th quarter expectations below that of what analysts expect. Apple expected fourth quarter 2007 revenues of $5.7 billion with earnings of about $0.65 per share. Analysts expected the company to earn $6.03 billion in revenues and generated $0.82 earnings per share.11

Apple Inc. introduced new iPod Nano, iPod Touch, and iPod Classic on September 5, 2007. New features were brought to these devices offering more user-friendly capabilities.12 4. A ticker symbol is a tool used to identify a mutual fund or stock. These symbols may be made up of 3-5 letters depending on what market they are traded on13. Apple Incorporated’s ticker symbol is “AAPL”. Apple’s stock is traded on NASDAQ. 5. Apple Computer Inc. was incorporated on January 3, 1977 in the state of California . In January 2007 Apple Computer Inc. changed its name to Apple Inc. and today they are headquartered in Cupertino, California15.

8 http://www.macworld.com/news/2007/04/12/leopard_reax/index.php 9 http://www.msnbc.msn.com/id/18279935 10 http://www.wirelessinfo.com/content/FCC-Approves-iPhone.htm 11 http://www.apple.com/pr/library/2007/07/25results.html

12 http://www.apple.com/pr/library/2007/09/05classic.html 13 Investorwords.com 14 Rochdale Securities, AAPL Research, pg 1 15 Sabrient, AAPL Research, pg 5

5

14

Report of the Independent Accountant / Auditor

6. The independent Auditors for apple are KPMG LLP. KPMG is a member of KPMG international they are located in 148 countries and in 731 cities worldwide.16 Apple Inc. conducts extensive business with KPMG’s San Francisco branch located at 55 Second Street, San Francisco. However certain auditing activities are performed abroad via numerous KPMG offices worldwide.

7. The Auditors report dated December 29, 2006 covers the three year period ending September 30, 200617 which includes the re-statement reports for fiscal years 2004 and 2005. The Auditors report for fiscal year 2005 is dated November 29, 2005 and the report for fiscal year 2004 is dated November 30, 2004.

8.

The independent auditors are responsible for: Assuring that the financial statements give a true and fair view of, the financial position

of the company, their expenses and income for the year in question; They make sure that the statements have been prepared properly in accordance with relevant legislation and applicable accounting standards; The auditors make sure that the statements are free from material “misstatement” due to fraud or irregularity; Auditors also make sure that the company has complied with the relevant requirements for accounting presentation;18

•

•

•

•

16 Source: www.apple.com/investor 17 Source: www.apple.com/investor 18 http://www.audit-commission.gov.uk/reports/NATIONAL-REPORT.asp?CategoryID=&ProdID=A9F9AD95-

AE7D-4755-935B-94700E020A9E&SectionID=sect3#

6

These responsibilities differ from the company’s management responsibilities in that auditors provide an outside and presumably untainted picture of company records the true amount of the company’s value in their financial statements. In addition, auditing company operates with a significant amount of freedom from organization and its management.

Based on the reviews and discussions above, the Audit Committee recommended to the Board of Directors that the financial statements referred to above be included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 27, 2003.

9. The auditor’s report points out that Apple Computer, Inc. used incorrect measurement dates for its stock option grants. Therefore the company re-stated its 2004 and 2005 financial statements in 2006 Form 10-K. The auditors also added four specific matters pertaining to stock options that occurred during the period:

• The procedures that the company used for granting, accounting, and reporting of stock option grants did not include adequate protections that were important in order to prevent manipulation

• The selected grant dates for a number of grants were used or picked to attain favorable exercise prices

• Two former officers of the company were involved in some questionable transactions related to granting, accounting, recording, and reporting of stock options

• Steve Jobs, the company’s CEO, was well informed about the selection of some favorable grant dates. He recommended this action even though he did not receive any financial benefit from these grants.

7

These specific matters should be included in auditor’s report so that the public would know whether or not the company follows the appropriate accounting principles. From an auditor report, public would know about some unusual aspects that happened in the company.

10. “In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the company as of September 30, 2006 and September 24, 2005 and the results of their operations and their cash flows for each of the years in the three-year fiscal period ended September 30, 2006, in conformity with accounting principles generally accepted in the United States of America.”19 This shows that the audit report is an unqualified audit report because it contains and unqualified opinion which means the auditors are not calling attention to anything wrong with the financial statements.

The Financial Statements

11. The company’s fiscal year end date is September 30th. 12. Changes in Revenues over the Last 2 Years.

During 2006, the net revenues/net sales of Apple Computer increased by $5.4 billion or 39% from 2005. One of the reasons for this increase was that 2006 comprised 53 weeks whereas 2005 comprised 52 weeks. Another reason was the net sales’ increase in most of the company’s products during 2006 compared to 2005.20

iPod net sales experienced a $3.1 billion increase or a 69% increase from 2005 to 2006. The company sold 39.4 million units of iPods in 2006. In comparison, the company only sold 22.5 million units of iPods in 2005. This 75% increase in unit sales during 2006 was due to the

19 http://media.corporate-ir.net/media_files/irol/10/107357/reports/10K_FY2006.pdf pg. 118 20Apple Inc. 10-K 2006 Form, Pg. 55

8

introduction of iPod video in October 2005, the introduction of iPod nano in September 2005, and the expansion of iPod distribution points. 21

Macintosh net sales experienced a $1.1 billion increase or an 18% increase from 2005 to 2006. The company sold 769,000 units more of Macintosh products in 2006 than it did in 2005. This 17% increase in unit sales was due to the strong demand for the Intel-based MacBook and MacBook Pro systems. While the portable products such as MacBook, iBook, MacBook Pro, and PowerBook increased by 42% in 2006; desktop products such as iMac, eMac, Mac mini, Mac Pro, Power Mac, and Xserve decreased by 3% in 2006. The sales of the Macintosh desktops decreased in 2006 because many customers delayed their purchases of the company’s professional-oriented desktop products in anticipation of the Intel-based Mac Pro. Also, many consumers preferred portable computers to desktop computers.22

Other music related products and services consist of iTunes Store sales, iPod services, Apple-branded iPod accessories, and third-party iPod accessories. The net sales of other music related products and services experienced a $986 million increase or 110% increase from 2005 to 2006. The increase of these products was primarily due to the increase in net sales from the iTunes Store. iTunes Store opened in Japan during August 2005 and in Australia during October 2005. These openings affected the company’s 2006 net sales of other music related products and services greatly. The availability of videos, television shows, and feature-length movie downloads in iTunes Store also affected the increase in the company’s 2006 net sales of other music related products and services.23

Software, service, and other sales products consist of Apple-branded operating system, application software, third-party software, AppleCare, and Internet services. The net sales of

21 Apple Inc. 10-K 2006 Form, Pg. 55 22 Apple Inc. 10-K 2006 Form, Pg. 55 23 Apple Inc. 10-K 2006 Form, Pgs. 59-60

9

these products experienced a $188 million or a 17% increase from 2005 to 2006. This increase was mainly due to the sales of AppleCare Protection Plan and the sales of application software. The sales of Mac OS X were lower in 2006 than in 2005 because the company released Mac OS Tiger in April 2005 so that the sales of Mac OS X were very high in 2005.24

Peripheral and other hardware products consist of Apple-branded displays, third-party displays, wireless connectivity, networking solutions, and other hardware accessories. Unlike the other products mentioned above, peripheral and other hardware products experienced a decrease of $26 million or 2% in 2006 net sales. This decrease was primarily due to price decrease in 2006. Also, the shift in mix from desktop to portable systems caused the sales of displays to drop in 200625.

Changes in Profits over the Last 2 Years

Apple Computer’s gross profit increased by $1.6 billion during 2006 compared to 2005. However, the gross profit percentage remained 29% in 2006 and in 2005. The company had higher overall revenue, which was offset by higher cost of sales during 2006. The company experienced more favorable pricing on LCD flat-panel displays and DRAM memory but the company had more production costs from these commodity components. On the other hand, the company’s average selling prices for all iPods decreased during 2006 but the company was able to sell 75% more iPods in 2006 compare to 2005. Thus, the company’s gross margin percentage stayed the same in 2006 even though the company’s gross profit increased in dollars.

24 Apple Inc. 10-K 2006 Form, Pgs. 59-60 25 Apple Inc. 10-K 2006 Form, Pgs. 59-60

10

The company’s net income increased by 50% during 2006 compared to 2005. This was because the company generated higher net sales even though the company had to cover higher operating expenses, other expenses, and taxes in 2006. 26 13. Since Apple Computer, Inc. had to restate its consolidated financial statements due to stock-based compensation and the related tax adjustments, some of the information needed to calculate common-size balance sheet in 2004 is not available. Also, the 2004 balance sheet report on Form 10-K would not be reliable because it did not reflect the stock-based compensation and the related tax adjustments.

Common-size balance sheet analysis is very effective in identifying changes in a company’s asset mix and financial structure. Common-size income statement analysis is very useful in identifying changes in a company’s cost structure and profitability. Common-size information reveals something that is not apparent in the raw numbers from a review of a balance sheet and an income statement in a particular year. Common-size financial statements are the easiest, most intuitive, and fastest tool available to analyze a company’s comprehensive financial statements.27 The company’s common-size balance sheet and common-size income statement for the past three years are located on page 13 and page 14 of this paper.

Apple Inc.’s common-size income statement shows that the company’s operating income and net income has continued to grow in the past 3 years. The company has been able to keep its cost of sales in the same percentage range in the past 3 years. The company’s common-size balance sheet shows that the company has been efficient in generating its cash and cash equivalents. The company’s cash and cash equivalents jumped by 6.84% in 2006 compared to 2005. The company’s current assets in 2006 were lower than in 2005 because its short-term

26 Information for question 12 was derived from www.apple.com/investor (2006 10-K Annual Report) 27 Financial Accounting Reporting & Analysis 7th Edition by Stice, pg 81-86

11

investments dropped dramatically in 2006 compared to 2005 since many of its short-term investments matured in 2005. Moreover, the company’s current liabilities during 2006 were higher than they were during 2005 and the company’s common stocks in 2006 were lower than they were in 2005.

14. As shown in the 10-K form Apple Inc. did not have any extraordinary items or discontinued operations reported on the income statement. However, some financial data was restated on the most recent statement to reflect adjustments related to stock-based compensation expense and associated tax impact. Cumulative effects of accounting changes, net of income tax as restated for fiscal year 2003 was reduced by $12 million and for fiscal year 2002 income was reduced by $23 million. These items are reported separately on the income statement to reflect the adjustments to income statement and to allow shareholders to evaluate the restated figures. 15. Apple Inc. uses straight-line method to compute depreciation for the Property, Plant and Equipment (PP&E). All PP&E assets are stated at cost. Apple Inc. reported following on the most recent income statement filing:

Depreciation and amortization expense on property and equipment for year 2006 was $180 million.

Depreciation Method

Depreciation Terms

Buildings

Straight-Line

Lesser of 30 years or remaining useful life

Equipment

Straight-Line

Up to 5 years

Leasehold Improvements

Straight-Line

Lesser of lease terms of 10 Years

Internal Use Software

Straight-Line

From 3 to 5 Years

12

13

14

16. Debt a. In February of 2004 Apple inc. repaid the complete amount of their notes upon maturity

resulting in the elimination of their total long term debt. b. Presently speaking Apple Inc. does not operate with a high number of contingent liabilities, the company states the following, “In the opinion of the management, the Company does not have a potential liability related to any current legal proceedings and claims that would individually or in the aggregate have a material adverse on its financial condition, liquidity or results of operations.28 Being that there is very little risk of any legal implications and the fact that Apple has not been forced to make any payments the company did not record these costs as of either September 30, 2006 or September 24, 2005.

However, though Apple may at the moment not have any legal liabilities, one form of contingent liabilities they do operate with are limited parts and labor warranties and the cost for the last three years are presented below and can also be found in Note to Consolidated Financial Statements29.

2006 2005 2004

Beginning accrued…………………………………………$188 Cost of warranty claims……………………………………(267) Accruals for product warranties…………………………….363 Ending accrued warranty and related costs………………..$284

$105 $ 67 (188) (105) 271 143

$ 188 $ 105

17. Common Stock a. As of September 30, 2006 Apple’s balance sheet informs us that the company was authorized to issue 1,800,000,000 shares of common stock and in comparison to the last four years the numbers have not seen significant change. On September 24, 2005 the number of

28 Notes to Consolidated Financial Statements pg. 108 Note 10- Commitments and Contingencies. 29 Apple Inc. Form 10-K 2006 Note 10 pg. 107

15

shares was authorized 1,800,000,000. On September 25, 2004 there were shares authorized 900,000,000. On September 27, 2003 the numbers of shares authorized were 900,000,000. The changes in authorization of shares in the last four years are due to the stock splits. b. The number of shares the company had issued at the end of each the four fiscal years has not changed much. They had issued 835,019,364 shares of common stock in 2006. They had issued 835, 019,364 shares in 2005. They had issued 391,443,617 shares in 2004. They issued 366,958,989 shares in 2003.

c. There were 358,958,989 shares outstanding in 2003. There were 366,726,584 shares outstanding in 2004. Due to the stock splits in February 2005, there were 782,887,234 shares outstanding in 2005. In 2006, there were 835,019,364 shares outstanding. d. Apple does not pay dividends. Moreover, they state, “The Company did not declare pay of cash dividends in either 2006 or 2005. The company anticipates that, for the foreseeable future, it will retain any earnings for use in the operation of its business.”30

18. Cash Flows. a. Operating Activities

i) In 2006, 2005 and 2004 the company’s operations were a source of cash being that numbers were positive.31

Cash generated by operating activities ii) Operating Income32

2006 2005 2004 2,220 2,535 934

2006 2005 2004 2,453 1,643 313

30 United States Securities And Exchange Commission Annual Report Pursuant To Section 13 or 159(d) of the securities exchange act of 1934. Apple Computer, INC. pg 46. 31 Consolidated Statements of Cash Flows pg. 76 32 United States Securities And Exchange Commission Annual Report Pursuant To Section 13 or 159(d) of the securities exchange act of 1934. Apple Computer, INC. Consolidated Statement of operations pg.74

16

Operating income differs from cash generated by operating activities in that the cash flow from operations is what’s generated from the day to day business transactions in addition the numbers for cash flow are derived at by alterations to the net income. Moreover, depreciation is added back in the operating income as opposed operating activities where it is recorded as a deduction in the cash flow.

iii) The cash flow information can tell us specific data regarding the cash position in a company where as net income is calculated through earnings not in how much cash was received and spent. For example, the income statement could show positive earnings but not the ability to pay debt, after all the cash flow is what pays the bills. b. Investing Activities

i) The Company’s major sources and uses of cash from investing activities in the

most recent fiscal year as follow:

Purchases of short-term investment……………………………………………… (7,255) Proceeds from maturities of short-term investment……………………………….. 7,226

ii) Observing the fact that most of the sources and use of cash are deriving from the purchase of short-term investment and the proceeds from maturities it is safe to assume that this is a growing company. In addition it is not necessary for them to sell their assets in order to continue their operations. c. Financing Activities

i) The company’s major sources and uses of cash from financing activities in the

most recent fiscal year is the following:

Proceeds from issuance of common stock…………………………………………………..318 Excess tax benefits from stock-based compensation………………………………………. 361 Repurchases of common stock……………………………………………………………..(355)

ii) The company has not paid dividends to preferred stockholders since 1996. 17

iii) The company has not paid dividends to common stockholders since 1996. d. The cash flow statement shows that the company is prosperous and growing. Apple uses cash flow from operations and inflows from financing activities to acquire investments and the repurchase of stocks. 19. Ratio Analysis.33 a. Profitability

Overall, the financial health of the company seems to be very good. There is an obvious increase in profitability over the last three years and a significant jump in profitability during the first two. The profit margin ratio for Apple indicates in the last two years that for each dollar of sales the company is able to contribute about ten cents towards net income. However, in 2004, the profit margin was only about three cents for each dollar in sales. The return on assets ratio indicates that in the last two years Apple has earned over an eleven percent profit on the amount that is invested in assets. This return is favorable as long as it is higher than the rate that these assets are financed for. Since Apple, for the most part, uses no long term debt this yield is very favorable. Return on equity indicates that Apple shareholders earned a 19.92% return in 2006, a favorable 17.88% in 2005, and in 2004 a 3.21% was realized. The high sales revenue that Apple has generated in 2005 and 2006 helps to explain the difference in 2004. Net income was increased because of the larger volume of sales more so than the increase in shareholder’s equity in the years following 2004. Because Apple uses no long term debt, all assets are financed using

33 All information is based on figures taken from Apple Inc. Financial Statements as reported in 10-K forms. 18

Profitability:

2006

2005

2004

Profit Margin

10.30%

9.53%

3.21%

ROE

19.92%

17.88%

5.24%

ROA

11.56%

11.53%

3.30%

EPS-Basic

$2.36

$1.64

$0.36

EPS-Diluted

$2.27

$1.55

$0.34

owner’s equity and sales revenue. Earnings per share have increased from 2004 through 2006 to indicate more profits per share of outstanding stock.

Apple uses a model of business that does not include long-term debt. Since assets equals liabilities & owner’s equity the ROE ratio is higher than ROA since the assets are primarily financed using owners equity. b. Short-term Liquidity

Over the last three years the liquidity position of the company has declined some. In the year 2005 Apple seems to be the most liquid. While current assets have increased over the past three years so have current liabilities. The most significant change seems to be in accounts payable. Accounts payable has almost tripled in the last three years. c. Efficiency

At first look at these calculations the first thing that stands out is the number of days’ sales in inventory numbers. During the last three years this number has been close to 5 for each year. Fixed asset turnover has also fluctuated relatively little. Meaning, sales have increased, but so have the fixed assets. The average collection period has managed to decrease over the last three years. In 2004 a 40 day average has been cut in half by 2006 to a 20 day period of time. In either case this is a relatively short collection period. Also, while sales are increasing the

Short-Term Liquidity:

2006

2005

2004

Current Ratio

2.24

2.95

2.66

Quick Ratio

1.76

2.63

2.46

Efficiency:

2006

2005

2004

Average Collection Period

20.29

25.48

40.03

# of Days’ Sales in Inventory

5.79

4.91

4.76

Fixed Asset Turnover

1.61

1.56

1.51

19

company has been able to collect the revenue in a shorter period of time and increase their efficiency by almost 100 percent in this category. d. Solvency and Leverage

Apple is able to pay it’s debts by a fair margin. Total debt to equity has increased in year 2006 to about 72 percent. The two years prior the ratio was between 55 and 59 percent. The company uses no long term debt so current liabilities are the only obligations that must be accounted for. Apple has had in the last three years about a 40% debt to total assets ratio. Because Apple hasn’t used much on any long term debt the times interest earned ratio is not definable. However, in 2004 some interest expense was recorded, because in February 2004 all secured long-term notes payable were paid off. e. Cash Flow Ratios

There is always some kind of textbook standard that is necessary. However, by looking at Apple’s numbers and the numbers of other profitable businesses in different industries that ratio may be a little harsh. The standard of 0.4 for the CFO to CL ratio for each of these companies has never been reached in the last three years. The company seems to be healthy

Solvency & Leverage:

2006

2005

2004

Total Debt to Equity Ratio

72.33%

55.04%

58.59%

Long-term Debt to Equity Ratio

0.00%

0.00%

0.00%

Debt to Total Assets

41.97%

35.50%

36.94%

Times Interest Earned

N/A

N/A

128.67

Cash Flow:

2006

2005

2004

Cash Flows to Net Income

1.12

1.90

3.38

Cash Flow Adequacy

3.38

9.75

5.31

Cash Times Interest Earned

N/A

N/A

348.00

Cash Flows from Operations to Current Liabilities

0.34

0.73

0.35

Other Industries:

Honda

0.21

0.14

0.20

Wal-Mart

0.39

0.36

0.35

20

judging by other ratios. For instance, the cash flows to net income ratio indicate that cash flows from operating activities exceed net income.

The largest industry characteristic that seems to be a factor in this ratio is the cost of inventories & equipment. These expensive assets must be financed and as a result liabilities increase. For Honda the cost of these assets is much greater than for Apple and Wal-Mart. It is interesting to see the similarities between Wal-Mart in this ratio. f. Market & Dividend Ratios (Using end of fiscal year as market price)

20. The Competition. Apple’s primary competitor is Dell.

21. Apple vs. Dell Key Ratios

Apple’s key ratios and Dell’s key ratios in the past three years are provided on page 25 of this paper.

i. Profit Margin

Gradually, Apple has been able to generate greater profit on each dollar of its sales from 2004 to 2006. On the other hand, Dell has been able to maintain the amount of profit that the company generated on each dollar of its sales. Dell was more profitable in 2004 but Apple was more profitable in 2005 and 2006.

Market & Dividend Ratios:

2006

2005

2004

Price-Earnings Ratio

30.80

46.10

90.90

Market-to-Book Value

6.50

7.20

4.50

Dividend Yield

0.00

0.00

0.00

Dividend Payout Ratio

0.00

0.00

0.00

21

ii. Earnings per Share

EPS for both Apple and Dell increased from 2004 to 2006. Compared to Dells’ shareholders, however, Apple‘s shareholders associated greater amount of net income with each share of their stocks. Apple was more profitable than Dell. iii. Return on Assets

In 2004, Apple only generated 3.30 cents of net income by each dollar of its assets compared to Dell that generated 13.70 of net income for each dollar of its assets. There was a big difference in 2004. However, Apple was optimizing the use of its assets to generate income in 2005 and 2006. Apple generated close to 12 cents of net income by each dollar of its assets during those years. iv. Return on Equity

Even though both Apple and Dell have gradually increased the amount of profits that their investors earn from their investment, Dell’s investors have earned more profits than Apple’s investors have for each dollar that they invest. In 2006, Dell’s investors earned four times as much of profits as Apple’s investors for each dollar that they invest. v. Current Ratio

Compare to Dell, Apple had smaller ability to pay its debts in the short run. This is not necessarily a bad thing consider the fact that Apple had no long-term debts. Dell had greater ability to pay its debts because Dell also financed its company using long-term debts. vi. Cash Flows from Operations to Current Liabilities

Apple’s Cash Flow from Operations to Current Liabilities ratio has been higher than that of Dell. This shows that Apple has lower short-term liquidity risks than Dell does.

22

vii. Total Debt to Equity

Looking at the overall debts of Apple and Dell, Apple’s shareholders had greater potential return than Dell’s investors did in 2004 through 2006. In 2006, for example, Apple’s shareholders only borrowed $0.72 for every dollar that they own in the company. In contrast, Dell’s shareholders borrowed $4.60 for every dollar that they own in the company in 2006. viii. Long-term Debt to Equity

Since Apple do not finance its company with long-term debts. Apple’s long-term debt to equity ratio is zero. Meanwhile, Dell investors had 12 cents of long-term liability in 2006 for every dollar that they invested in the company. ix. Times Interest Earned

Since Apple did not have long-term liabilities, they did not have interest expense. They had interest expense in 2004 since they paid off all of their long-term notes in February 2004. In 2004, Apple could cover 128 times of its interest payments with its operating earnings while Dell could cover 267 times of interest payment with its operating earnings. In 2004, Dell was doing better in terms of Times Interest Earned but Apple was doing better in 2006 since they didn’t even have to pay interest at all. x. Cash Times Interest Earned

Apple did not have interest expense in 2005 and 2006 and Dell did not have interest expense in 2005. In 2004, however, Apple could pay 348 times of its interest from the cash that it had from its operating activities before it paid interest expense and tax expense. Dell could only pay 340 times of its interest from the cash that it had form its operating activities before it paid interest expense and tax expense. That is why Apple seemed to be more efficient than Dell did in using its cash.

23

xi. Price-Earnings Ratio

Dell’s P-E ratio has been going down from 2004 to 2006, which is not a very good indication of the company’s growth potential. In 2006, Apple’s P-E ratio was 30.80 and Dell’s P- E ratio was only 17.70. This shows that Apple’s investors were willing to pay more than Dell’s investors were for each dollar of earnings. Thus, Apple has more potential growth than Dell does. xii.

xiii.

Dividend Yield

Both Apple and Dell do not pay dividends.

Dividend Payout Ratio

Both Apple and Dell do not pay dividends.

24

25

22. Executive Compensation a. The compensation of the Apple’s CEO, Steve Jobs, was $1.00 for each year of the three

years under study.34 b. Steve Jobs does not receive any other forms of compensation besides the $1.00 salary per year.35 c. CEO Stock Ownership

i. As of March 20, 2007, Steve Jobs own 5,546,451 shares of Apple’s stock, which includes the 120,000 shares of common stock that he has the right to acquire by exercise of stock options.36

ii. The CEO owns 0.64% of the total shares outstanding.37

iii. The level of CEO stock ownership should influence the CEO’s management of the company to maximize the value of the shareholders’ investment. Since the market value of the company is a direct measure of the shareholder wealth, CEO would be interested in increasing the stock price when the CEO owns shares in the company.38

iv. The level of the CEO stock ownership can influence CEO or top management decision-making in a negative way because it can cause an unhealthy fixation on short-term stock fluctuations. CEO and/or top management might try to increase profits in the short term to boost the stock price and maximize the value of their stocks. Moreover, some boards might grant excessive stock options to top managers since the same CEO usually chair the top management and the boards of directors.39

34 http://www.sec.gov/Archives/edgar/data/320193/000110465907028382/a07-9991_1def14a.htm 35 http://www.sec.gov/Archives/edgar/data/320193/000110465907028382/a07-9991_1def14a.htm 36 http://www.sec.gov/Archives/edgar/data/320193/000110465907028382/a07-9991_1def14a.htm 37 http://www.sec.gov/Archives/edgar/data/320193/000110465907028382/a07-9991_1def14a.htm 38 Financial Accounting book, page 712

39 Financial Accounting book, page 712

26

d. Stock Options i. The value of the stock options granted to the CEO is $8,547,600.40 ii. The CEO acquired 120,000 shares upon the exercise of stock options. The value

realize from the exercise was $71.2341 e. Given my analysis of the financial data and stock prices of the company, I believe that the executives of Apple Company are appropriately compensated. As a matter of fact, the CEO of the company only received $1.00 of compensation each year. The CEO was granted 120,000 stock options that he voluntarily cancelled in March 2003. All current executive officers and directors own 1.00% of common stocks outstanding as of March 20, 2007. This means that the company does not grant excessive options to the top managers.42

23. (a) Stock Price Analysis

40 http://www.sec.gov/Archives/edgar/data/320193/000110465907028382/a07-9991_1def14a.htm 41 http://www.sec.gov/Archives/edgar/data/320193/000110465907028382/a07-9991_1def14a.htm 42 http://www.sec.gov/Archives/edgar/data/320193/000110465907028382/a07-9991_1def14a.htm

27

b. If Apple stock was purchased on Jan 1, 2003 (or Jan 13 as it was the first day of trading in 2003) and held until 31st of October 2007 this very wise investor would of accrued investment gains of approximately 2150%.

Although if purchased in January 2004 Apple stock would have value of approximately $12, almost double of that from a year before, this would still be a lucrative deal as it continued to rise and reached $32 by end of the year. Further, if purchased in 2005 AAPL would boast a price tag of around $34, which is three times as much as it would have cost early 2004. However considering the increase in price of the stock we still believe Apple would have been a great investment as the stock went on to 2:1 split on February 28, 2005, hence virtually doubling the original investment overnight. If purchased on January 2006, Apple stock would carry a price tag of $76 and go on to finish of the year with modest 25 % increase in stock value with closing price on December 29, 2006 at $85.40. Purchase on January 2007, would have been one of the smartest moves for any investor. From starting on January 3rd at $86.29 Apple sees market gains upwards of %100. Although most recent market downturn caused Apple to shed some of its value, if stock was purchased on January 2007 and sold on 31st of October 2007 the sale would occur prior to the downturn, thus insuring a return of over %115. c. As shown on the chart below AAPL increased in value in access of 2000% since early 2003. However all of the major indexes (S&P500, NASDAQ, DOW) remained flat in comparison.

28

24. Conclusions a. Conservative of value

Apple is a stock that has a great track record over the past years. However, as with many technology stock companies it may not be the first pick for a conservative investor. Technology is a fast changing environment for a business. Lately, Apple has been able to stay ahead of the curve by introducing new products that the market loves. This could be something that may not always be the case and to a conservative investor may create an element of risk. Also, at the current price around $172 per share an investor would need a large amount of financial resources in order to purchase this stock and yet diversify the portfolio through other purchases. For a conservative investor the recommendation would be a hold. If the stock is currently held then it has probably been a great performer. There is nothing that indicates a reason to doubt that this performance won’t continue to provide great returns.

29

b. Aggressive/Speculation With Apple’s innovative products there is plenty of room for speculation of new products

with even more features. Apple Inc. is a great investment for an aggressive investor. High returns have been realized and as with all stocks it greatly fluctuates due to publicity and the new product announcements. The announcement of new products provides a good opportunity for speculation. For this investor the stock would be rated as a buy. Apple is entering the holidays and represented are products in great demand for the shopping season. Stock price may benefit as a result of the holiday shopping and provide good returns for the investor. c. Growth

Apple would be a great growth stock if purchased five years ago. The stock price has increased from about $7 per share to $172 per share. For the growth investor that has purchased this stock, a hold is recommended. With the stock price at $172 per share the typical growth investor may view this stock to be too inflated to purchase for the long haul. Apple will have its market swings, but long-term investors may not realize the returns that they would like to see in their growth stock. 25. This project would be more beneficial in the future if it was done by a group no larger than three people. The primary reason for this is because it was very difficult to get everyone’s schedules to line up.

Another recommendation to help this project be more advantageous in the future is for peer evaluations to be given at each submission of a draft of the paper. This would give a sense of responsibility to each member for every part of the project. This would also allow the group to overcome some problems and operate more effectively in the submissions yet to come. Learning to be work in a team and accountability is a valuable part of this project.

Download PDF of the entire project in preserved formatting: