RSM433 Case 1

Name: Qiyan Huang Hui Huang

Student Number: 1002092406 1002396604

1. Why keeping cash could make sense for Apple? Why not? 4 poinst
Why keep cash:
 For tech companies, profits can turn to losses faster than you might think due
to speedy product innovation and consumer shift. Keeping cash as a rainy day
fund can help tech companies like Apple to survive through those hard times,
especially when Wall Street won’t be there with fresh capital.
 Tech companies usually believe that there is no reward for distributing cash.
On the contrary, there is a fear that dividends signal poor growth prospects or the
end of innovation.
 Tech companies often view their self-importance by the size of their bank
accounts, which to some extent represent their ability of making acquisitions.
Why not:
 The opportunity cost of unused cash is high, and the interest generated by cash
is even less than inflation.
 Cash-rich balance sheets have led to poor P/E multiples.
2. What are preferred shares? 2 points
A preferred shares is a class of ownership in a corporation that has higher claim on
its assets and earnings than common shares. Meanwhile, preferred shares usually
have a dividend that must be paid out before dividends to common shareholders but
they generally do not have voting rights.
3. How could Apple return cash to shareholders? 4 points
Apple has 4 conventional alternatives to return cash to shareholders:
A one-time special distribution of excess cash;
A one-time stock repurchase using excess cash;
A plan to use future cash to repurchase stock in the future; and
An increase in the common dividend.
4. What is the value of Apple? 3 points
Value of an Apple share before iPrefs distribution was constant P/E multiple of
10.0x * $45 earnings per share = $450
Apple market capitalization was 945 million * $450 = $425.25 billion
5. Is Einhorn reasoning correct? Why? Is the price earning ratio a good
benchmark to estimate the value created by Iprefs? 4 points
Einhorn’s reasoning is incorrect because he is assuming a positive sentiment
regarding Apple from the issuance of iPrefs but is assuming constant P/E ratio at
the same time.
The price earning ratio is not a good benchmark to estimate the value created by
iPrefs because under the assumption of investor base expansion and positive
attitude change toward Apple considering their introduction of a safer income, the
P/E ratio should increase rather than remain constant.
6. What is the new value of common equity after the issuance? The value to
shareholders? 3 points
The new value of common equity = P/E * new EPS = 10 * ($45-$2) = $430
The value to shareholders = value of common equity + value of iPref = $430 + $50
= $480