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Apple Incorporated has a common stock that is traded on the Nasdaq Stock Market LLC. In 2018, the company had 12,600,000 shares authorized, 4,754,986 shares are issued, and 5,126,201 shares are outstanding (Apple Inc., 2018, p. 40). Apples treasury stock for the year 2018 is equal to $0, so it does not impact the overall stockholders equity. If Apple had treasury stock, it would reduce stockholders equity. The given memo will analyze Apples stockholders equity and make recommendations on whether the company should issue the common stock and convertible bonds.
Issuing the common stock to the general public is a good way of generating capital. Other advantages of selling new stock include the possibility of selling debt, which is large for Apple. The debt-to-equity ratio of 2.41 indicates that the companys total liabilities are approximately two and a half times greater than its total shareholders equity. With the debt being more than two times greater than shareholders equity, Apple could benefit from issuing the new common stock by not having to make obligatory interest payments to investors.
The capital structure leverage ratio of 70% indicates that 70% of the companys assets are financed by the creditors, and owners are providing only 30% of the cost of assets. Nevertheless, Apples return on equity is equal to 55.5%, which means that the company can generate profit without heavily relying on its capital (Atrill & McLaney, 2017). Moreover, the capital is efficiently deployed by the shareholders equity. It is worth mentioning that the companys times interest earned ratio of 21.88 speaks of Apples ability to meet its debt obligations successfully.
However, there are several cons of the common stock issuance that should be taken into account. Firstly, an increase in the number of outstanding shares facilitates the dilution of the ownership of existing shareholders. In other words, share issuance gives shareholders the right to vote on the important companys developments. Secondly, after considering taxes, issuing new stock maybe even more expensive than borrowing money (Hancock, Bazley, & Robinson, 2015). Thirdly, the issuance of shares must be followed by a disclosure of the companys financial details to the public.
Taking into account all the above-said, it is recommended that Apple should not issue the new stock. Instead, the company can consider repurchasing its shares to reduce its corporate tax rate, which was equal to 24.6 in 2017 (Apple Inc., 2018, p. 28). As Apple will funnel money to shareholders, they may increase their investments in the company. As to the convertible bonds, the advantages of their issuance include reduced interest rates and the tax deduction of interest. However, the main disadvantages are the liquidity risk and the possibility of a decline in the shareholders equity as a result of stock dilution (Atrill & McLaney, 2017). It is recommended that Apple should issue convertible bonds to finance stock repurchase and increase stocks dividend.
References
Apple Inc. (2018). Form 10-K. Web.
Atrill, P., & McLaney, E. J. (2017). Accounting and finance for non-specialists (10th ed.). Harlow, UK: Pearson Education.
Hancock, P., Bazley, M. E., & Robinson, P. (2015). Contemporary accounting: A strategic approach for users (9th ed.). South Melbourne, Australia: Cengage Learning Australia.
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