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Apple is now Debt Free
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i never drank in my finance class, but...
I think the valuation of the company was right. You are buying _everything_ from the company. That would include debt, assets and cash. So, think of this: I am going to sell you an envelope. In it is $.50 and a stick of gum worh $.50. The stick of gum is good stuff, and you are willing to buy it for $.65. But, because that $.50 is in there, you are willing to go to $1.15, since you essentially get a $.50 rebate. Now, I could take the $.50 out and try to buy the envelope too, but you'll win - you are trying to buy it for $.65.
I think simplifying it like this ruins a bit of the analogy, but at the basics, it make some sense
Also, I remember something like this: a stock price, as it's very core, is nothing more than the future value of its dividends. So, if, theoretically, a company wrote in its charter that it would issue no dividends, ever, and then issued stock, that stock would be worthless. So, if apple began to issue dividends again, and made them constant, that could do a lot for the stock price. But, it isn't all about stock.
One of you Finance 101 guys let me know how that sounds - it has been a good 2 years since my finance classes, and it is fading fast!
Last thing - I trust Apple's Finance Dept more than my two semesters of finance. So, while I may not get it, I trust that it has been looked at from more angles than I know about, and it is pretty sound.
Nate
I think the valuation of the company was right. You are buying _everything_ from the company. That would include debt, assets and cash. So, think of this: I am going to sell you an envelope. In it is $.50 and a stick of gum worh $.50. The stick of gum is good stuff, and you are willing to buy it for $.65. But, because that $.50 is in there, you are willing to go to $1.15, since you essentially get a $.50 rebate. Now, I could take the $.50 out and try to buy the envelope too, but you'll win - you are trying to buy it for $.65.
I think simplifying it like this ruins a bit of the analogy, but at the basics, it make some sense
Also, I remember something like this: a stock price, as it's very core, is nothing more than the future value of its dividends. So, if, theoretically, a company wrote in its charter that it would issue no dividends, ever, and then issued stock, that stock would be worthless. So, if apple began to issue dividends again, and made them constant, that could do a lot for the stock price. But, it isn't all about stock.
One of you Finance 101 guys let me know how that sounds - it has been a good 2 years since my finance classes, and it is fading fast!
Last thing - I trust Apple's Finance Dept more than my two semesters of finance. So, while I may not get it, I trust that it has been looked at from more angles than I know about, and it is pretty sound.
Nate
Apple out of debt = cash cow
Buy AT&T Wireless? Heavens no, it's a mess and the wrong industry for Apple.
Let's buy Walt Disney, Inc.
Historically, being "too debt free" can make Apple a target for corporate takeover.
Buy AT&T Wireless? Heavens no, it's a mess and the wrong industry for Apple.
Let's buy Walt Disney, Inc.
yawn
As part of the big picture, this is great.
But, I would rather be posting about the new G5 powerbook or powermac.
You can not buy us off Steve, with a measly $300,000,000.
Bad dog, no biscuit.
As part of the big picture, this is great.
But, I would rather be posting about the new G5 powerbook or powermac.
You can not buy us off Steve, with a measly $300,000,000.
Bad dog, no biscuit.
I'm saying that "saving for a rainy day" is inviting rain.
If it's so "obvious", why are you apparently disagreeing with it?
Yes, they're obviously doing some investing but with $4.8 billion in cash leftover, they're clearly not doing all they can. OTOH, maybe they've got some plans they're not ready to share with the general public.
P.S. This is a response to a post about three pages ago--sorry about that, but I had to go out for a while.
Re: Re: Apple is now Debt Free
You chose the name Frohickey, and then lambasted someone for leaking information? Was this supposed to be funny? I now have an awful headache thanks to you.. spraying Fresca out my nose is painful.Originally posted by Frohickey
A pox on the idiot Apple employee who sent the internal memo to outside people. Internal memos are supposed to be internal!
For all of you who are oohhing and ahhing over Apple's debt free status, it is easy from a business perspective to say this is a BAD thing.
Having money sitting around can COST you. How? While you might be able to earn interest, you are still paying out some cash for your other expenses. The other money you are paying out is not helping out your bottom line, or in other words, helping you earn money.
Simply put, you could buy a new building to house some new manufacturing process. If you pay cash (no debt) you own it free and clear, but is costs you whatever you paid (say 1 mil. for this example). If you borrowed that same 1 mil., you would owe interest on that money but also would get tax breaks both on the federal and local levels. If done correctly, these tax breaks can be a significant savings. You might pay 1+ mil on the building but save an extra $100k every year in tax breaks on your bottom line. Ten years and you've made some money on your "debt."
Now, this is a VERY OVER SIMPLIFIED example. But the many posts who have said this is soo good and how dare anyone say it is bad do not understand how modern business works. If Apple can do things with their cash, then it will be good - but don't look for your Apple stock to jump just because no debt.
This could be bad news since having a lot of cash means that a large portion of investors money that you are holding on to (equity) is now in unspecified short term investments. If Apple is just clearing out debt in preparation for a large leveraged buyout then the news is neutral until we know more about the acquisition. If no new large investments or acquisitions are around the corner then this could be very bad news since it would send a signal that Apple execs don't expect to be able to make money off of leveraging some of the lowest rates in a long time. In other words, they don't expect sales to grow beyond what they can handle with cash. I can only base my opinion based upon public knowledge and no acquisition plans have been made public to my knowledge (although there are rumors). Therefore the news is negative for the time being.
Yes that's always a good deal, give somebody $100,000 so you can reduce your net income by $100,000 (aka, get back 10's of thousands in reduced taxes from the government).
So in 10 years you may have saved $100,000 in actual taxes due and spent an addition $1,000,000 doing it.
Sort of the twisted women shopper's math... "But, see how much I saved you by buying this?"
Re: Apple out of debt = cash cow
Here, here. Apple's a "unique" company that could understand and run Disney. The whole idea behind Comcast buying Disney is vertical integration. Disney has media, Comcast has distribution. Apple has media creation and itunes is a revolutionary distribution method. Disney and Apple would form a more vertically integrated company, but at the same time both could retain their uniqueness. What's the best way to close the Pixar/Disney squabble? For Apple to buy Disney! Apple could offer stock and a small amount of cash per share with the 4.8b they have in the bank.
W
Originally posted by MacRAND
Let's buy Walt Disney, Inc.
Here, here. Apple's a "unique" company that could understand and run Disney. The whole idea behind Comcast buying Disney is vertical integration. Disney has media, Comcast has distribution. Apple has media creation and itunes is a revolutionary distribution method. Disney and Apple would form a more vertically integrated company, but at the same time both could retain their uniqueness. What's the best way to close the Pixar/Disney squabble? For Apple to buy Disney! Apple could offer stock and a small amount of cash per share with the 4.8b they have in the bank.
W
Re: Re: Re: Apple is now Debt Free
Choice of a name has nothing to do with my revulsion in divulging internal company memos.
This sort of information leak is what makes it difficult for employees to be informed of the internal going-ons at Apple from management, lest some rogue employee blurt out the email on the rumor sites.
Choice of a name has nothing to do with my revulsion in divulging internal company memos.
This sort of information leak is what makes it difficult for employees to be informed of the internal going-ons at Apple from management, lest some rogue employee blurt out the email on the rumor sites.
Re: THEY CAN'T BUY DISNEY
Stop the dumb spelling errors.
Please don't make fun of other peoples posts. They have the right to be wrong
Stop the dumb spelling errors.
Please don't make fun of other peoples posts. They have the right to be wrong
Re: THEY CAN'T BUY DISNEY
That guy Eisner sounds the sort of shrewd businessman who would probably think $5bn cash and a free Mac for life was a good deal.
That guy Eisner sounds the sort of shrewd businessman who would probably think $5bn cash and a free Mac for life was a good deal.
God, that was funny.
I get to learn about corporate financial strategy and be entertained all at once. What a great site!
All I need now is that 20" iMac with a 2.0 GHz G5 underneath...
Thanks so much - the m and g keys are just sooo close together...
Re: Re: Apple out of debt = cash cow
Then Apple could start a whole new computer division called GOOFY Computers just to make PCs with iNtel chips.
The new flagship desktop computer would be very cheap and come in a do-it-to-yourself Kit for $269 called the Tinker Bell Computer including a very very flat and very very small screen, sprinkled with protective Pixie Dust, the
GOOFY laptop would be under 2" thick boasting the new hot Intel Prescott® chip dubbed the Steam Boat Willie SourBook® because it has to be water cooled and is powered not by a battery but by a eHydrogen iFuelCell® so the exhaust is merely steam, thus the name Steam Boat Willie.
All GOOFY computers would come with a tailless Mickey MOUSE or a small portable USB Minnie MOUSE, and a floating Donald Duck FireWire800 keyboard with shuttle wheel, scroll wheel and built in Buzz Lightyear Turbo TrackBall which would levitate 1/2" above the desktop using secret technology that was going to be called déjà vu until some guy from Virginia Tech copyrighted the term first for some Big Mac computer (boy, is that a conflict or what), so now it's got to be called déjà vu too! .
GOOFY could market a fire wireless PLUTO Projector that's out of this world, the new Mini iPod would have to be renamed the Minnie iPod, AirPort Extreme® would have its own antenna called an Ariel which also works under water,
the GOFFY networking software would be automated through the newly patented Mad Hatter setup.
AppleCare would have a Cinderella clause where all initial warranties would expire after midnight at the end of 1-year, the other 2-years of purchased warranty would have so many loopholes the provisions would be called Captain Hook clauses.
The mascot for BlueTooth® would become Babe the Blue Ox and
Woody would be the hard working sponsor of the all new iDrug through the iDrugs Store along with his horse iRexas a supplement to iTunes through the Evil Witch's iLink to the AppleStore, with a line of nutritional supplements under the Pooh brand name...and the slogan Kids just love GOFFY Pooh
Can't you just see the next PepsiTunes ad on TV:
"Wash the Pooh down with Pepsi, while downloading iTunes from the Apple Store on your GOOFY Computer "
Some things just come together, don't they? Yes, I know - Pure geniass! That's me.
Hey, what do you think?
Exactly, Downdivx!
Then Apple could start a whole new computer division called GOOFY Computers just to make PCs with iNtel chips.
The new flagship desktop computer would be very cheap and come in a do-it-to-yourself Kit for $269 called the Tinker Bell Computer including a very very flat and very very small screen, sprinkled with protective Pixie Dust, the
GOOFY laptop would be under 2" thick boasting the new hot Intel Prescott® chip dubbed the Steam Boat Willie SourBook® because it has to be water cooled and is powered not by a battery but by a eHydrogen iFuelCell® so the exhaust is merely steam, thus the name Steam Boat Willie.
All GOOFY computers would come with a tailless Mickey MOUSE or a small portable USB Minnie MOUSE, and a floating Donald Duck FireWire800 keyboard with shuttle wheel, scroll wheel and built in Buzz Lightyear Turbo TrackBall which would levitate 1/2" above the desktop using secret technology that was going to be called déjà vu until some guy from Virginia Tech copyrighted the term first for some Big Mac computer (boy, is that a conflict or what), so now it's got to be called déjà vu too! .
GOOFY could market a fire wireless PLUTO Projector that's out of this world, the new Mini iPod would have to be renamed the Minnie iPod, AirPort Extreme® would have its own antenna called an Ariel which also works under water,
the GOFFY networking software would be automated through the newly patented Mad Hatter setup.
AppleCare would have a Cinderella clause where all initial warranties would expire after midnight at the end of 1-year, the other 2-years of purchased warranty would have so many loopholes the provisions would be called Captain Hook clauses.
The mascot for BlueTooth® would become Babe the Blue Ox and
Woody would be the hard working sponsor of the all new iDrug through the iDrugs Store along with his horse iRexas a supplement to iTunes through the Evil Witch's iLink to the AppleStore, with a line of nutritional supplements under the Pooh brand name...and the slogan Kids just love GOFFY Pooh
Can't you just see the next PepsiTunes ad on TV:
"Wash the Pooh down with Pepsi, while downloading iTunes from the Apple Store on your GOOFY Computer "
Some things just come together, don't they? Yes, I know - Pure geniass! That's me.
Hey, what do you think?
Attachments
There is one glaring flaw in this analysis: IT ASSUMES a monthly profit guaranteed by this approach.
Guess what? If this were guaranteed businesses would need not file Chapter 11 protection so often as they do.
Bottomline: This is a win for Apple and a Loss for Banks who only earn money off of interests loans, period. Banks have come up with quite the gambit of options to do one thing, charge consumers interest in order to make money. They should see this as an opportunity to invest into Apple and purchase some of its outstanding stock.
Banks only make money when it is moving and the swifter money moves the more they make money.
Banks get the advantage of borrowing against the Fed at incredibly low interest rates.
Imagine if Corporations had this luxury.
This is a win/win for Apple. Wall Street will see it in the form of improved manufacturing resources and continued drive to innovate.
For those that don't know jack...
About corporate finance.
I do this sort of stuff as my job and I did years of it in school.
Here's the scoop. The value of a company is or should be equal to the present value of its future cashflows (not dividends). Debt has a key role in corporate finance as it costs less than equity - and use of debt optimises the cost of capital (key value driver).
Apple's debt pay off is a 'bad' thing because the company is funded soley by expensive equity. Its cost of capital is higher than it needs to be, and in that sense having a high cost of capital doesn't do a lot for shareholder value creation.
However, and this is my view, having a big stack of cash in the money bin in a fast moving industry like computing is a good thing.
The bet that the company is making is that it can grow its earnings fast enough to offset the drag on this value created by having no debt and having a higher cost of capital than it needs to. Having a war chest allows the company to move fast either with acquisitions or with new developments becuase it doesn't have to defer to its bankers on the spending. In an industry where you can get blown away very quickly having this capital flexibility is crucial.
Debt is not bad if it is used optimally, but that implies that the industry and company will move slowly. Debt is not a good thing in the computer industry.
Apple has strengthened its corporate flexibility by becoming debt free. this may translate into a higher share price over time but it depends on how clever the company is at converting this flexibility into value. Still, having $4.3 billion in the bank may help Steve sleep better at night.
About corporate finance.
I do this sort of stuff as my job and I did years of it in school.
Here's the scoop. The value of a company is or should be equal to the present value of its future cashflows (not dividends). Debt has a key role in corporate finance as it costs less than equity - and use of debt optimises the cost of capital (key value driver).
Apple's debt pay off is a 'bad' thing because the company is funded soley by expensive equity. Its cost of capital is higher than it needs to be, and in that sense having a high cost of capital doesn't do a lot for shareholder value creation.
However, and this is my view, having a big stack of cash in the money bin in a fast moving industry like computing is a good thing.
The bet that the company is making is that it can grow its earnings fast enough to offset the drag on this value created by having no debt and having a higher cost of capital than it needs to. Having a war chest allows the company to move fast either with acquisitions or with new developments becuase it doesn't have to defer to its bankers on the spending. In an industry where you can get blown away very quickly having this capital flexibility is crucial.
Debt is not bad if it is used optimally, but that implies that the industry and company will move slowly. Debt is not a good thing in the computer industry.
Apple has strengthened its corporate flexibility by becoming debt free. this may translate into a higher share price over time but it depends on how clever the company is at converting this flexibility into value. Still, having $4.3 billion in the bank may help Steve sleep better at night.
Originally posted by Foxer
$300 million in debt ain't that bad (step outside of your "consumer credit" mindset for a moment.) These days, with interest rates so low, money is practically free. Many "forward" thinking companies would take advantage of this "free" money and borrow to finance expansion. To a corporation, on a strictly balance-book view, debt can be an asset.
Keep in mind that gobs of cash sitting around unused can be a anchor on stock price. Ford, in the late 90's, had tremendous cash reserves of around $9 billion and no plan to invest them in growing the company which served to keep the stock low despite huge profits.
That being said, I wish I had $300 million to pay off debt.
It's true that debt can be a good thing, but apple obviously can't find enough places to spend their money since they already had over $5billion in liquid capital. There it makes sense to cut down on the meager interest payments by getting rid of some of that debt. This could also be a possible indicator that Apple won't be making any other big spending indicators in the future. Maybe they'll start distributing a dividend?