Ntsb investigation process

A Preview of Capital Structure Issues of Apple Inc.
This paper highlights common problems in the capital structure of Apple. One, although it not yet clear whether or not they should be regarded as a debt, non-financial liabilities should not be regarded as equity, yet that is what Apple Company does. Apple uses financial-debt-to-asset ratio to measure their leverage thus committing the above-highlighted mistake (Welch, 2010). So apple should avoid using financial-debt-to-asset ratio in future so as to avoid this capital structure issue.

Two, the activity of issuing out equity should never be considered as equal to capital structure changes, yet that is what Apple management does. In reality, there is a weak correlation between the literature of capital issuing and capital structure, and so it is wrong to regard the two as equivalent to each other (Welch, 2010).

Business and financial risks related to capital-structure
The process of determining a company’s optimal capital structure requires firm’s managers to make critical decisions which involve a trade-off between profitability and risk. Financial risks refer to change in company’s cash flow as a result of overreliance on debt for finances. The risk arises because the debt may become too expensive for company bear, as a result, much of shareholders’ portion will be used to cater for the debts (Graham, 2015). Business risk, on the other hand, is the riskiness which faces the company as a result of not using debts to finance its operations. The rationale here is that interests on debts are taxable thus reducing the cost of firm raising money (Manawaduge, 2010).

Apple finances its operations using both debt and equity. In last financial year, Apple financed most of its operation using equity, thus having a lower leverage. As a result, the company realized incredibly high profits than when it relied heavily on debt for finances (low leverage). Simply put, Apple’s leverage is negatively related to its profitability (financial risk). High leverages usually create agency issues among Apple’s stakeholders and financial creditors who respond by withdrawing their investments. So apple’s management usually pays a lot of attention while financing its operations (avoid over-reliance on debts) in order to avoid upsetting the company’s creditors and shareholders.

Modigliani and Miller’s [MM] capital-structure theory
This theory states that valuation of a company is not affected by its capital structure (i.e., the level of leverage does not affect its market value). Instead, the firm’s value is determined by the level of its operating profits. Modigliani and Miller Approach also argue that the market value of a firm is not only affected by the risk associated with the investment but also its future growth prospect. So the firms with high future growth prospects usually have high market values; consequently, their stock attracts high prices.

This theory assumes that. One, the market is tax-free. Two, purchasing and selling security bear no transaction costs. Three, there is asymmetric flow of information among the investors. Four, both investors and firms incur the same borrowing costs. Finally, financing debts don’t affect the company’s EBIT.

Simply put, Modigliani and Miller’s [MM] capital-structure theory suggests that investing in leveraged and non-leveraged firm bears the same cost as long as then the two have equal future growth prospects and operating profits. In Apple Company, the valuation of the company is based future growth prospects and profitability, and not its leverage.

Criticisms Of The MM Model And Assumptions
MM model and assumptions have various flaws, as result, they are prone to a lot of criticism. One, the model assumes that there is no tax, yet in the real world there is a tax levied on firms. Two, the MM model assumes financing debts does not affect the company’s EBIT, yet, in reality, they do. In Apple Inc., a change in its debts usually have a significant influence on the firm’s EBIT. Finally, the MM model’s assumption that investing in leveraged and non-leveraged firms bear equal costs so long as they have similar prospects and profits is untrue. This is because, in leveraged firms, some of the profits are used to repay the debts’ interests, consequently, the cost is high.