In 2013, Apple Inc. sold $17 billion of bonds in the biggest corporate offering on record as the iPhone maker seeks to help finance a $100 billion capital reward for shareholders. This financial policy changed Apple's capital structure significantly. The leverage ratio of Apple increased after the buyback of common stocks and the issuance of long-term bonds. Repurchase is a way to give it back to shareholders. It is especially the case for Apple as the company has been piling up cash and now shows signs of a slowdown in innovation and growth.

 

There are several ways a firm could give back to loyal shareholders. Companies could reward shareholders by paying dividends, using existing cash to buy back shares, granting preferred stocks to existing shareholders, or issuing bonds to buy back shares.

Discuss:

1. What is the potential impact of the policy on Apple's capital structure? Discuss Apple's financial positions, profitability and risk by analyzing the commitment of cash payment, the tax liabilities, the risk of financial distress, and the growth opportunities.
2. Do you think issuing bonds and using the cash to buy back shares is Apple's best financial strategy? What would you recommend?

 

Answer:

Apple inc. is a giant in technology and gadgets market, it is known for its innovation and growth, but a slowdown in the corporate market in recent days makes the company go through some financial decision and strategy such as :

Issuing the bonds of $17 billion to help finance a $100 billion capital reward for shareholders as by taking such decision Apple Inc. could buyback their common stock from their existing shareholders :

Solution 1 : The potential impact of the policy on Apple's capital structure is that its capital structure changes in many ratios and determination dimensions such as leverage ratio increased ( Total debts / Total Assets) as by issuing the bonds and by buy-backing the common shares the total assets of the company comprises now more debts then earlier so Leverage Ratio increases and the revenue received by issuing bonds will be further used to making payments of buy-back of shares from existing shareholders includes the outflow of cash so this will impact the other side and some dimensions of capital structure.

Apple's financial position before this decision was in a diminishing path or a slowdown may occur in future but after this decision besides the cash outflow, it will recover the satisfaction of their shareholders as Apple's stock has suffered in recent months, with shareholders unhappy about what they see as declining momentum and insufficient dividends.

The Tax liabilities will be dropped down after this decision as to when capital structure comprises of more debts ( a charge on profit ), this will decrease the total taxable income of the year, so from managing the tax liabilities, it could be considered as a good decision.

Risk of financial distress occurs when a company has more debt obligation in its capital structure, issuing the $17 billion bonds will surely create a risk of financial distress but the brand name of Apple inc. and its financial position can be made it insignificant.

After implementing this financial strategy, Apple inc. has many growth opportunities in the future as reward shareholders by paying dividends would attract the believe of market to the company, there would be numerous growth opportunities for the company in the future.

Solution 2 :

As discussed above, the issuing of bonds  and using the cash to buy back shares has many advantages and some disadvantages, still it could not be considered as the best financial strategy for Apple Inc.because it has various alternatives or other financial strategies to implement in the current scenario of market, I would recommend granting preferred stocks to existing shareholders, as it will not affect the leverage ratio and would easily satisfy the shareholders and market, so it would not a best financial strategy for the Apple Inc.