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Ratio Analysis (7)
Ratio Analysis (8 & 9)
⚫Relative IBM, Apple does not use debt financing,
thus losing out on the ability to leverage its high
RNOA into an even higher ROE
debt.
Forecasting Analysis (10)
Forecasting Analysis (10)
⚫There are two obvious reasons why these assumptions
lack plausibility
⚫Suggested changes
–Based on answers to question 5:
⚫bump sales growth to 30% for 2010, then back down to 11% in 2011
⚫reduce CoGS/Sales to 59% in 2010
–Trend cash balance to 10% of sales terminal value
reversal of conservative accounting for iPhone
Valuation Analysis (12)
⚫The analyst values Apple at 16x EV/FCF on CY10E
FCF estimate of $11,241
⚫The approach is not grounded in sound valuation
What Happened?
⚫Q1, 2010: Retrospective Adoption of New Accounting Principles
⚫Under the historical accounting principles, the Company was required to account for sales of
both iPhone and Apple TV using subscription accounting because the Company indicated it
might from time-to-time provide future unspecified software upgrades and features for those
iPhone and Apple TV as two deliverables. The first deliverable is the hardware and software
essential to the functionality of the hardware device delivered at the time of sale, and the
second deliverable is the right included with the purchase of iPhone and Apple TV to receive
on a when-and-if-available basis future unspecified software upgrades and features relating to
the product’s essential software. The new accounting principles result in the recognition of
2010 Results Exceed Expectations
Mad Money Version of Case
⚫http://www.cnbc.com/id/15840232?video=1255375408&play=1
