Class 11 - Apple 7-9

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Dartmouth College *

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211A

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Finance

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Apr 3, 2024

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docx

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Financial Ratio Analysis (CASE – group hands in one set of answers) Josie Benjamin, Ashley Huang, Nolan Ewens, Jocelyn Lin 7. Compute Apple’s return on common shareholders equity (ROE) for the 2022 fiscal year using average common equity in the denominator. ROE=[(revenues-expenses)/(assets-liabilities)]=[(average income)/(average shareholder’s equity)] ROE=[(99,803)/(56,881)]=1.75 8. Use the advanced Dupont model to decompose Apple’s ROE (as computed above) into RNOA, leverage and spread. Verify that you obtain the same ROE from the advanced Dupont model. Calculations in excel ROE=RNOA+(spread*leverage) RNOA=0.6 NBC=-0.02 spread=0.62 leverage=1.83 ROE=0.6+1.15=1.75 9. Also provided with the Apple case materials is a link to the 2022 Form 10-K of Microsoft Corporation. Calculations in excel a. Use the advanced Dupont model to compute Microsoft’s ROE. ROE=RNOA+(spread*leverage) RNOA= 0.35 NBC= -0.04 spread=0.39 leverage=0.31
ROE=0.35+1.12=0.47 b. Decompose Microsoft’s ROE into RNOA, leverage and spread. Calculations in excel RNOA=70,946/202,818=0.35 spread=0.35-(-0.04)=0.39 leverage=48,553/154,265=0.31 c. Identify any major differences in RNOA, leverage and spread between Apple and Microsoft and try to explain the reasons for these differences. Apple’s larger financial leverage ratio is larger than Microsoft’s, and this could potentially be due to the differences in their manufacturing process with short-term financings to its parties. On their operating activities, Apple listed commercial paper. Apple’s higher spread compared to Microsoft means that it is advantageous for Apple to use debt financing as they are generating a higher return on investment from borrowing, leading to a higher leverage ratio. Lastly, Apple has a higher return on net operating assets than Microsoft, which is potentially due to their reliance on outsourced manufacturing and from generating higher profits than Microsoft.
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