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    Coursehero 40252829

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    Janice Jing
    This document discusses a case study involving Apple returning cash to shareholders through the issuance of preferred shares, or "iPrefs". It first lists reasons why companies like Apple may want to hold cash, and reasons they may want to return it. It then defines preferred shares and lists ways Apple could return cash, including through dividends. It estimates Apple's value before iPrefs based on earnings per share. It argues the reasoning of an activist investor named Einhorn is flawed in assuming both a constant P/E ratio and positive sentiment from iPrefs. Finally, it calculates the new value of common equity and value to shareholders after iPrefs are issued.

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    Coursehero 40252829

    Uploaded by

    Janice Jing
    1K views2 pages
    This document discusses a case study involving Apple returning cash to shareholders through the issuance of preferred shares, or "iPrefs". It first lists reasons why companies like Apple may want to hold cash, and reasons they may want to return it. It then defines preferred shares and lists ways Apple could return cash, including through dividends. It estimates Apple's value before iPrefs based on earnings per share. It argues the reasoning of an activist investor named Einhorn is flawed in assuming both a constant P/E ratio and positive sentiment from iPrefs. Finally, it calculates the new value of common equity and value to shareholders after iPrefs are issued.

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    This document discusses a case study involving Apple returning cash to shareholders through the issuance of preferred shares, or "iPrefs". It first lists reasons why companies like Apple may want to hold cash, and reasons they may want to return it. It then defines preferred shares and lists ways Apple could return cash, including through dividends. It estimates Apple's value before iPrefs based on earnings per share. It argues the reasoning of an activist investor named Einhorn is flawed in assuming both a constant P/E ratio and positive sentiment from iPrefs. Finally, it calculates the new value of common equity and value to shareholders after iPrefs are issued.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    1K views2 pages

    Coursehero 40252829

    Uploaded by

    Janice Jing
    This document discusses a case study involving Apple returning cash to shareholders through the issuance of preferred shares, or "iPrefs". It first lists reasons why companies like Apple may want to hold cash, and reasons they may want to return it. It then defines preferred shares and lists ways Apple could return cash, including through dividends. It estimates Apple's value before iPrefs based on earnings per share. It argues the reasoning of an activist investor named Einhorn is flawed in assuming both a constant P/E ratio and positive sentiment from iPrefs. Finally, it calculates the new value of common equity and value to shareholders after iPrefs are issued.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    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

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