Apple a Case Study
Optimal Capital Structure
Apple currently uses 100% equity to finance its operations. Even though this is the standard in the tech industry, this paper will examine the benefits and costs associated with Apple adopting a capital structure to finance it operations. There are two benefits: Decreased weighted average cost of capital (WACC) and the development and increase of a tax shield. The costs associated with adopting a capital structure are bankruptcy and financial distress. An analysis was performed on Apple to find its optimal capital structure. To perform the analysis some information had to be gathered form Apples 2011 10K as well as up to date market figures. The optimal capital structure for Apple is 34% leveraged with a WACC of 6.91%. Assuming the optimal capital structure, the tax shield was calculated at $1,580 Million. The findings of this paper recommend two scenarios for changing Apples financing structure. The first is in the event Apple decides to start manufacturing products or builds factories. Second is event that Apple has not reached their deduction ceiling for the year. Otherwise their current financing methods should be kept in place.
Apple currently finances its operations exclusively with equity, classifying it as an unleveraged firm. This is not an uncommon practice in the tech industry, simply because most of their assets are intellectual property (intangible assets). Such intellectual property includes: patents, industrial design rights and trade secrets. Because these assets are intangible and not physical in nature, creditors may ask a higher yield premium for the increased risk. Though the cost of debt financing may be more expensive than equity financing, a mix of both has some benefits that may out way 100% of either one. These benefits include:
1. A lower weighted average cost of capital (WACC)
2. Increasing tax shield and increased earnings per share...