Reference no: EM132317529

PART B

Consider the following two sources and answer the following questions. Answer each question directly. You do not need to write a lot for each question and for some you will need to use excel calculations. Submit you excel spreadsheet together with your report

Source 1: Apple Yahoo Finance
Source 2: Forbes

Apple Loop: Massive iPhone 11 Leaks, Tim Cook's Big Battery Problem, iPhone XR Price Cuts

Ewan Spence Senior Contributor

Following an investors report, some of the additional features for the iPhone family for the 2019 handsets have been revealed: a new antenna, improved WiFi, and a brighter light for facial recognition. Are these new features going to be enough to sell the 2019 iPhones in September?

More Price Cuts Expected For iPhone XR
But the biggest change in the iPhone line up could be a significant price cut on the iPhone XR. With sales of all three 2018 handsets contributing to Apple's profit warning earlier this month, analysts are predicting that the cuts to carrier subsidies will be followed by larger price cuts in the months to follow - and those cuts will be seen by consumers.

A report that Apple would be rolling out iPhone price cuts across a range of models in China was also confirmed this month, with discounts of around 20% across the iPhone 8, iPhone 8 Plus and XR. The price cuts follow Apple's warning that its earnings for the holiday quarter will be anywhere from $5B to $9B lower than the company originally forecast. The resulting shock has seen AAPL shares plunge further and analysts reduce their target price for the stock.

Battery Replacements And Anticipating Problems

How much of an impact did Apple's battery replacement program have on sales of the iPhone XR, XS, and XS Max (which lead to the profit warning earlier this month)? As John Gruber notes, Apple anticipated 1-2 million battery replacements in a normal year, but saw 11 million under the replacement program. A few million extra iPhone users happy with the performance of their old iPhones with new batteries - who would have otherwise upgraded to a new iPhone this year - put a ding in the bottom line.

And Finally...
Apple's awkwardly designed battery case (with ‘the hump') has made its debut for the new XR, XS,
and XS Max handsets.

a) According to the sources above does Apple currently have equity capital on issue? Why do companies raise equity capital? What has happened to the Apple share price in 2019 and why has this happened? (you will need to do some research here)

b) Below are details about a project Apple is undertaking. Please answer questions i-vi with the aid of an excel spreadsheet. You also need to answer the below questions in your word file and refer to your excel spreadsheets as a supporting document.

Apple's new IPhoneXI

• You are the financial analyst for Apple which is investing in a project to develop a new IphoneXI.
• The project will last for 4 years and require an initial capital outlay on new Machinery of $5 million (paid today).
• The plant will be depreciated to $1 million book value over the 4 years and can be sold in year 5 for $2 million.
• The revenues from the sale of the new IPhone will be $2.8 million per year for the next four years (starting at the end of year 1). Variable costs will be 20% of revenues for the next four years.
• Apple's Research and Development department has spent $1 million researching demand for the new product as well as ways to address the battery problems and found that the project is feasible. The revenue for Apple's existing IPhoneX product is expected drop by $1 million per year for the next four years as a result of the new product.
• The project requires $30,000 for working capital immediately but it will not require any other working capital investments during its life. This working capital will be recovered in the last year of the project.
• The tax rate is 30%
• The project is funded only using ordinary shares which have a required return of 10%. So the cost of capital is 10%.

i) What are the FCFs for this project?

ii) What is the NPV of this project?

iii) State whether Apple should invest in this project and explain why or why not based on your calculations, research and sources 1-2.

iv) Is funding this project with ordinary shares the cheapest way to finance? Why or why not? Imagine Apple could refinance using only bonds. Would this affect its NPV? Why or why not?

Attachment:- Case.rar