Capital Projects and Problems
Apple Inc. is one of the well-known companies that operate in the technological segment by providing iPhones and others. Due to Apple’s outstanding performance and worldwide recognition, Apple has been working on its development in a diversity of spheres and, now, it plans to expand its areas of operations and product lines. Thus, it will be easier to become a market leader and gain recognition in the market (AP, 2017). For example, to become recognized in the sphere of online streaming and television, it will be reasonable to acquire Netflix (AP, 2017). This acquisition will assist in becoming a market leader in this industry while having a positive impact on its development.
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The estimated cost of Netflix is $183.64 per share (Nasdaq, 2017). Consequently, a high investment will be required to control a substantial percentage of shares. In this instance, the estimated initial investment is $53 billion, thus, it is expected to deliver $30 billion in the recent future while incremental after-tax cash flow will account for income ($30 billion) – initial investment ($53 billion) – expenses ($3 billion) = $(26) billion. Due to this high investment, it will take several years to cover the costs related to this project, but it is still reasonable to invest in it due to its growth opportunities. The company can consider possibilities for making this acquisition, as it has relatively high market shares, cash flows, and can raise finances by using the equity method.
The aspects depicted above imply that acquiring Netflix can be discovered as another sphere and product line that Apple, Inc. wants to control (AP, 2017). Nevertheless, becoming a leader in this segment is associated with a number of problems. In the first place, as it was mentioned earlier, the project requires a substantial investment, as the price per Netflix’s share remains high ($183.64) (Nasdaq, 2017). In this instance, one of the related risks is the fact that Apple can overpay for this acquisition and create unexpected financial losses. Another internal problem may be associated with the inability of the management of both companies to generate a favorable economic environment and ensure sufficient integration of two organizational cultures. This matter will create challenges for the company, as it may be discovered as a primary source of tensions and internal conflicts. This concept complies with the ideas of theories of organizational culture and management. In this instance, making this acquisition very rapidly will also lead to similar consequences, as the overall integration will be ineffective due to the issues with planning.
In turn, other risks and problems may be related to politics due to the need to sign different agreements while public relations may also be viewed as a potential threat since the users of Netflix may experience discomfort when learning about this acquisition and discovering Netflix as a part of Apple. These factors entirely comply with a diversity of theories that show interdependence between the external environment and the overall financial performance. A combination of these factors also implies that Apple has to ensure that investors and the Board of Directors are interested in this offer, as, without their support, it will not be possible to make monetary transactions.
Project and Sources of Funding
The previous section of the paper described a capital project in general, but there are also other fields that have to be financed. In this case, the Board of Directors and CEO are mostly responsible for making the decisions while the major activities include finding sponsors, discovering acquisitions, marketing products, and maintaining relationships with suppliers. When referring to capital long-term investment project such as the acquisition of Netflix, Apple Inc. can present the idea to its investors and the Board of Directors, as this activity will have a direct impact on financial stability due to high price per share ($183.64; $53 billion total) (Nasdaq, 2017). Thus, the company can also issue shares and bonds and gain some additional financing, as debt will require some extra spending. Apart from being associated with high risks, but the price per Apple’s share is relatively high ($159.6), and it will be reasonable to use it as a finance-generating tool (60%) along with debt (40%) (MarketWatch, 2017). Consequently, relying on this concept is rational, as it will assist in increasing the profitability of the capital project.
Speaking of short-term projects, the company may rely on a similar approach to finance its marketing campaigns for the new iPhone X and 8. Today, the overall, Apple’s advertising budget accounts for $1.8 billion for all of its product lines, and spending for iPhone’s new models is approximately $200 million (Dormehl, 2016). In this instance, Apple can also rely on the concepts of equity financing, but it can also use loans from recognized banks such as Bank of America and Wells Fargo, but this tool should not be discovered as a priority since Apple is currently spending $100 billion in debt and has other projects to finance (Niu, 2017). Apart from shares, it can utilize bonds, and it gives Apple time to stabilize its economic condition (Niu, 2017). Thus, equity financing along with loans should be enough to cover these expenses. Overall, it will be rational to use the concepts of equity financing, as it will assist the company in maintaining cash flows and shares to increase the value of the company while debt will require paying interest. Finally, giving priority to equity financing along with 40% debt has to be regarded as logical.
AP. (2017). Apple’s growing cash stash spurs talk of huge acquisition attempt on the horizon. News.com.au. Web.
Dormehl, L. (2016). Apple’s latest secret its advertising budget. Cult of Mac. Web.
MarketWatch. (2017). Apple Inc. Web.
Nasdaq. (2017). Netflix, Inc. Common stock quote & summary data. Web.
Niu, E. (2017). Apple, Inc. is now approaching $100 billion in debt. The Money Fool. Web.