Question

Question:

Please show calculations:

                                                                                2017                           2018

BALANCE SHEETS:

Assets:

                      Cash                                                  74,181                        66,301

                      Accounts Receivable                         35,673                        48,995

                      Inventory                                          4,855                          3,986

                       Other Current Assets                       13,936                        12,057

                       Fixed Assets, net                              33,783                        41,304

                      Investments                                     212,891                      233,082

                      Total Assets                                     375,319                      405,725

Liabilities and Equity:

                      Accounts Payable                             44,242                        55,888

                       Other Current Liabilities                   50,226                        55,416

                      Long-Term Debt                               103,703                      102,519

                       Other Noncurrent Liabilities              43,251                        48,209

                      Common Stock                                 35,567                        33,293

                      Retained Earnings                             98,330                        110,400

                      Total Liabilities and Equity              375,319                      405,725

INCOME STATEMENT:

                                                                                                        FY 2018

           Revenue                                                                                265,595

           Cost of Goods Sold                                                               163,756

           General and Administrative                                                   14,793

           Depreciation Expense                                                            10,903

           Earnings Before Interest and Taxes                                       76,143

           Interest Expense                                                                    3,240

           Pretax Net Income                                                                 72,903

           Income Taxes                                                                         13,372

           Net Income                                                                            59,531

A. What was Apple's Equity Multiplier for 2018?

B. What was Apple's Return on Equity for 2018 (For balance sheet accounts, use the average of the beginning and end-of-year balances)?

C. If Apple had an average of 4,337 million common shares outstanding during 2018 and its stock is currently worth $175 per share, what is its Price : Earnings (PE) ratio?

D. If the analysts who follow Apple project 2019 sales to increase by 7.4% over 2018, its after-tax profit margin to remain the same, and anticipate a 60% dividend payout ratio, what are the projected retained earnings by the end of 2019?

E. Assuming that Apple's net working capital is expected to vary directly with sales, based on a projected 7.4% sales increase in 2019, what is the projected accounts receivable balance at the end of 2019?

F. If the management of Apple projects that by the end of 2018, it was operating at 62% of capacity, what is its full level capacity of sales?

Answer 1

Assumption: All the figures of balance sheet and income statement are assumed as expressed in $ Million

A. Equity Multiplier for 2018 = Total Assets / Stockholders' Equity

Thus, it tells how many times the assets are greater than the equity. If Equity Multiplier is 2, it means only 50% of assets are finance using equity. Remaining are financed using debt. If Equity Multiplier is 3, it means only 1/3rd of the assets are financed through equity, remaining through debt.

This means, higher the equity multiplier, higher is the financial leverage / debt of the business.

Equity Multiplier for 2018 = Total Assets / Stockholders' Equity

Equity Multiplier for 2018 = Total Assets / (Common Stock + Retained Earnings)

= 405,725 / (33,293 + 110,400) = 405,725 / 143,693 = 2.82 times

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B. Return on Equity for 2018 = Earnings available to Equity Stockholders / Stockholders' Equity

= Net Income for 2018 / (Common Stock + Retained Earnings)

We are advised in the question to take averages of the beginning and year end balances for balance sheet accounts. So here, we calculate average Stockholders' Equity.

Therefore,

Return on Equity for 2018 = Net Income for 2018 /[ (Opening Common Stock +Opening Retained Earnings + Closing Common Stock + Closing Retained Earnings) / 2] * 100

= 59,531 / [(35567+98330+33293+110400)/2] *100 = 59531 / 277,590 *100 = 21.44%

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C. Price Earnings Ratio = Market Price per share / Earnings per share = MPS / EPS

Earnings per Share (EPS) = Income available to Equity Stockholders / No. of Equity Shares Outstanding

EPS for 2018 = $ 59,531 Million / 4337 Million Common Equity Shares = 13.726 $ / share

MPS = $ 175

So, Price Earnings Ratio = MPS / EPS = 175 / 13.726 = 12.75 times (approx.)

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D. After Tax Profit Margin for 2018 = Net Income / Revenue = 59531 / 265595 = 22.41%

After Tax Profit Margin for 2019 = 22.41% (Same as that of 2018, as given in the question)

Increase in Sales in 2019 = 7.4% over 2018

Therefore, expected Net Income in 2019 = Net income for 2018 * ( 1 + 7.4%) = 59,531 * 1.074 = 63,936.30

Dividend Payout Ratio in 2019 = 60%

Dividend Payout ratio is the ratio which measures what percentage of net income is paid out as Dividends. Thus, the remaining is retained earnings.

So, Retained Earnings to be transferred in 2019 = (1 - 60%) of Expected Net Income of 2019 = 40% of 63,936.30 = 25,574.52

Retained Earnings Balance in 2019 = Retained Earnings Balance in 2018 + Retained Earnings transferred in 2019 = 110,400 + 25,574.52 = 135,574.52

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E. As the Net working capital will vary directly with Sales, the accounts receivables balance should also directly vary with Sales. Net Working Capital = Total Current Assets - Total Current Liabilities.

So, 7.4% increase in sales will cause increase in Accounts receivables by a corresponding 7.4% increase.

Projected Accounts Receivables Balance at the end of 2019 = AR in 2018 * (1 + 0.074) = 48,995 * 1.074 = 52,620.63

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F. Sales in 2018 at 62% Capacity = 265595

Sales at 100% Capacity = 265595 x 100 / 62 = 428,379

At Full level Capacity, Sales would be $ 428,379 Million