CHAPTER 11
Dividends and Stock Repurchases (Apple Inc.)

This chapter will look at why and how firms return cash to their stockholders in the form of dividends and stock repurchases. We will first discuss the theory and empirical facts regarding dividends. Then we will use Apple Inc. (Apple) as an example to discuss corporate dividend policy. Next, we will discuss stock repurchases and Apple's recent use of repatriated funds to repurchase shares.

THE THEORY OF DIVIDEND POLICY

To discuss the theory behind corporate dividends, we begin (as we often do) with M&M (Miller and Modigliani). With dividends we start with M&M (1961). Let's assume an M&M world with efficient markets (there is no information asymmetry; i.e., everyone knows everything, and everyone knows it at the same time, zero transaction costs, zero taxes, and costless arbitrage). Remember that we lived in this world when we discussed capital structure in Chapter 6.

In an M&M world, dividend policy does not matter. M&M (1961) shows that dividends are a zero net present value (NPV) transaction (i.e., paying or not paying dividends does not change the value of the firm or the stock). The logic for why dividends don't matter in an M&M world is simple: an investor in this world is indifferent between owning a stock worth $50 and owning a stock worth $48 plus $2 in cash because the investor can costlessly arbitrage.

The arbitrage argument is that if an individual prefers dividends and the stock she owns does not pay dividends, the individual can simulate her own dividends by selling part of her stock. To obtain a 5% dividend, an individual simply needs to sell off 5% of her stock every year. Remember, in an M&M world, there are no transaction costs, no information costs, and no taxes—the individual merely creates the equivalent of a dividend by selling stock. Similarly, if an individual does not want a dividend but receives one, she can undo the dividend by buying additional stock with the cash dividend.

Thus, in an M&M world with no transaction costs, no taxes, and efficient markets, an individual can alter her stock/dividend mix to achieve the equivalent of whatever dividend policy she desires, regardless of the actual dividend payments made by the firm. In this world dividends and stock buybacks are equivalent.

In our chapter on capital structure theory (Chapter 6) we listed five things to consider as we moved from the M&M world to the real world:

  1. The impact of taxes
  2. The costs of financial distress
  3. Signaling
  4. Information asymmetry
  5. Agency problems

We will now discuss how each of these five factors affects optimal dividend policy. The first two of the five criteria that determine capital structure policy (taxes and the costs of financial distress) are not as important in determining dividend policy. The last three factors on our list are the most important ones in deciding dividend policy. Signaling is particularly important, with information asymmetry and agency costs being less so.

Making the Theory on Dividend Policy More Realistic

  1. Taxes

    Just as taxes matter to capital structure policy, they also matter to dividend policy—although not as much. Equity returns to stockholders come in two forms: dividends and capital gains. These two forms of distribution to stockholders are not necessarily taxed at the same rate or at the same time. The tax rates on dividends and capital gains have changed over time (see the box below). Complicating the difference in tax rates is the timing of when the taxes are paid. Dividends are taxed immediately upon receipt, while taxes on capital gains are postponed until realization (which partially mitigates or exacerbates any differences in the effective tax rates). These differences in tax rates and timing impacts a firm's choice of dividend policy.

  2. Financial distress

    When discussing how to make capital structure decisions more realistic, our second consideration is the costs of financial distress. This plays a large role in determining capital structure policy. Financial distress does not play as large a role in dividend policy as it does in capital structure decisions. What happens if financial distress causes a firm to fail to make its interest payments to its lenders? The lenders can force a firm to declare bankruptcy (and realize the related costs). What happens if financial distress causes a firm to fail to make dividend payments to its shareholders? Shareholders have no process through which they can penalize the firm. If a firm fails to pay dividends, shareholders can go to the annual meeting and complain, or they can sell their shares. However, not paying a dividend does not, by itself, allow stockholders to force a firm into bankruptcy.1 So the costs of financial distress are not as important when considering dividend policy as they are when considering debt policy.

  3. Signaling

    The signaling theory for dividends can be summarized as follows: one of the things firms can do with excess cash flow is to pay it out to its stockholders. Firms that need cash can't. (We discussed this in the chapters on Marriott, AT&T, and MCI.) Dividends and stock repurchases are the two major ways a firm can return cash to its stockholders. So if a firm pays a dividend or repurchases shares, it sends a signal to the market that the firm has enough cash flow to pay shareholders. If a firm wants to send a positive signal and pays dividends or does a repurchase without actually having excess cash flows, then the firm will incur a cost, and it will need to find the cash elsewhere, usually through additional financing.

    Why all the emphasis on cash flows when we discuss signaling? Because cash is a wonderful signal. It is credible, it is simple, it is visible, and there is a cost to false signals regarding cash flows.

    Imagine that in their annual report management says, “We had a great year last year, we are having a very good year this year, and we expect an exceptional year next year.” Is that credible? What does it mean? Who knows? We don't know if management is telling the truth. If this year and next year turn out not to be good years, management can just say, “Whoops, we made a mistake in our original predictions.” Management statements are just that—statements—and their accuracy and veracity are impossible to determine in advance.

    Imagine instead that management announces an increase in its dividends. Is an increase in dividends credible? Yes. Dividend increases are real and represent a cost to the firm. The firm will have to use cash to pay the higher dividends, and if it doesn't have the cash, the firm will have to take out additional financing in the future just to pay the higher dividends.

    Are dividends simple? Yes. Although management may say they had a great year last year, investors don't know what “great” means. “Great” is not easy to calibrate. In contrast, if management paid a dividend of $1.00 last year and increased it to $1.20 this year, this is both simple and clear. The increase of 20% is easy to calibrate and implies the firm is having a good year.

    Are dividends visible? Yes. Dividends are a lot more visible than management pronouncements or security filings. An investor may not keep track of every news release a firm makes. However, a dividend check is difficult to ignore; investors can see and touch it.2

    Finally, there is a cost to false signaling with dividends. Because of information asymmetry, we don't know if management is accurate or not in their forecasts, and there is usually little or no consequence to management for being wrong. However, with dividends, if management's dividend policy for the future is not sustainable, there are financial consequences.

    In Chapter 10, we discussed whether MCI should pay a dividend. Had MCI paid a dividend of $1.00 a share, this would have required $585 million over five years (since MCI had approximately 117 million shares outstanding). If MCI paid that dividend because it incorrectly forecasted higher cash flows (or had been trying to send a false signal), MCI would have had to finance an additional $585 million.

    What about share repurchases as a signal? Share repurchases, as the reader may remember from the discussion in Chapter 8 (on Marriott), are another method for a firm to return cash to its shareholders.

    Are share repurchases also credible, simple, and visible? Share repurchases are credible, similarly to dividends, since they also represent a use of cash and a cost to the firm. They are simple in a different way. A change in dividends can be compared to the old dividend. A share repurchase involves a purchase price and an amount. It is also visible—shareholders will rarely be unaware of a tender offer or share repurchase program.

    So, if share repurchases and dividends are alternative methods of returning cash to stockholders, and share repurchases are taxed as capital gains, which often have lower tax rates for shareholders than dividend income does, why not have more frequent repurchases? One reason is that there are IRS rules against a firm substituting dividends with repurchases. If a firm does a regular stock repurchase (e.g., every quarter), the IRS may treat the repurchases as dividends and thereby void any tax benefits from using repurchases instead of dividends.

    So, are share repurchases as reliable a signal as dividends? Not really, since share repurchases are not as regular as dividends. They are usually infrequent events. Also, as we'll discuss, dividends are sticky (once paid, rarely reduced) while stock repurchases are not (e.g., management can announce a repurchase program and then delay it).

    Thus, regular quarterly dividends3 are consistent with, and fit well into, signaling theory. They are simple, visible, and credible. Paying dividends without sufficient cash flow to support them is costly. This is why signaling is the primary theoretical explanation for dividend policy.

  4. Information Asymmetry

    Information asymmetry is the idea that management knows more about the firm's true value than outside investors. This is, of course, the reason signaling exists. Investors react to management actions, particularly those involving cash flows in or out of the firm, in determining their own view of a firm's future prospects, which in turn affects the current stock price. Thus, dividends serve as a signal because of the perceived existence of information asymmetry.

  5. Agency

    Another explanation for why firms pay dividends is an agency theory explanation called the “cash flow hypothesis.”4 The argument is that management and stockholders' interests often do not align, and if the firm has excess cash, management may use the cash for their own purposes rather than the stockholders'. Retaining excess cash allows management to engage in activities like empire building, undertaking negative NPV projects, consuming excessive perks, and so on. Dividends are a way to take some of the excess cash away from management and return it to stockholders.

    The cash flow hypothesis usually entails increasing a firm's debt, and thus its interest payments, to limit the management's discretionary use of cash flow. Although dividends can also be used for this purpose, debt and its corresponding interest payments are a better choice, since interest payments on debt are mandatory, while dividends are not.

EMPIRICAL EVIDENCE

Turning now to the empirical academic research,5 we know the following: First, dividends are sticky. That is, once a firm starts to pay a dividend, it tends to keep the dividend payment constant—dividends don't fluctuate much year to year. For example, if a firm pays a $0.20 dividend in one year, it will probably maintain the dividend the next year, even if earnings go up (or down) substantially.

Second, when dividends do change, they tend to follow a step function. They will be flat for a number of years, then go up, then stay flat for a number of years, then go up, and so on.

Third, not only do firms tend to have sticky dividends, they also rarely cut dividends. Remember a firm does not have to pay dividends, and thus dividends can be reduced. However, dividend reductions are rare, and if a firm does reduce its dividends, it sends a very strong negative signal to the market—empirically, we find that the firm's stock price falls dramatically. Thus, dividends are generally stable, and firms are very reluctant to cut them.

Importantly, the empirical results on dividends have held over time. It is an area of study that has been investigated repeatedly, always with the same results: dividends tend to be sticky. Studies have shown that if a firm increases its dividends by 1%, its stock price rises about 3% on average. If a firm cuts its dividends by 1%, its stock price falls about 7% on average. Thus, the market penalizes a cut in dividends more than it rewards an increase. One way to explain this is that the market believes that firms only cut dividends when they are in trouble. Cutting dividends signals the market that the firm has insufficient cash flow to maintain the dividend, and as dividends are typically not that large a part of the cash flow, the market views the reduction as a very negative signal.

There are alternative explanations proposed for why firms pay dividends, including the cash flow hypothesis (discussed above) and, more recently, a catering theory (which postulates that firms pay dividends when market investors want them and don't pay dividends when the market does not want them).6 However, none of these theories work as well as the signaling theory. Additionally, remember that dividends used to be taxed differently from capital gains, and your co-authors feel that tax-based explanations may also play a part in explaining dividend policy.7

A final note on the signaling theory: some researchers claim that the dissemination of information to the market has improved with the Internet. As such, today's investors presumably have much more information about firms. Thus, the importance of dividends as a signal may be reduced. While this is an interesting idea, our own research shows that while there has been a reduction over time in the size of the market reaction to new dividends, there is still a significant reaction.

The bottom line: M&M (1961) is a solid theory but it does not hold under real-world conditions. Empirically, we find that a lot of firms pay dividends and that when dividends are initiated or increased, the firm's stock price increases. In addition, when firms cut their dividends, their stock prices decrease. Your co-authors believe that the best theory we currently have for dividends is signaling. Unfortunately, signaling does not explain why the percentage of firms paying dividends has fallen so sharply.

Dividend Policy and Cash Flow

Signaling theory implies that dividends are paid by firms with excess cash flow. It is not the only way to use excess cash, however. As we saw in Chapter 7 on Marriott, there are five alternatives to handling excess cash:

  1. Grow faster
  2. Acquire other firms
  3. Pay down debt
  4. Pay dividends
  5. Repurchase shares

The first two are product market solutions. The last three are financial policy solutions. Paying dividends is only one of the five options for a firm with excess cash flow.

APPLE INC. AND THE DECISION ON WHETHER TO PAY DIVIDENDS

Now that we have outlined the theoretical basis for dividends and the empirical facts, let's examine a real-life dividend decision. Apple Inc. did not pay a dividend in fiscal 2011 but was considering paying one in 2012. Let us look at this decision, beginning with a brief history of the firm.8

Steve Jobs and Steve Wozniak incorporated Apple Computer in California on January 3, 1977. The firm's first product, the Apple I computer, had a retail price of $666.66. The Apple II, which came out in April 1977, helped create the personal computer market for business applications by being able to use the software spreadsheet program VisiCalc. During its first four years of operations and prior to going public on December 12, 1980, Apple's revenues doubled every four months. The firm went public on December 12, 1980, at $22 per share ($0.39 per share adjusted for stock splits through June 2014).9 The firm formally changed its name from Apple Computer to Apple Inc. in January 2007.

Despite experiencing rapid early success, Steve Jobs left Apple in May 1985 after losing an internal power struggle with new management. Apple continued to do well through 1995 but then experienced two years of losses in 1996 and 1997. In December 1996, Apple announced it would buy NeXT, a company founded and run by Steve Jobs, for $425 million. The purchase of NeXT returned the flamboyant former founder to Apple, and Jobs became CEO (again) in July 1997.

The firm perhaps hit bottom, financially, shortly after Jobs's return. In October 1997, Michael Dell, founder of one of Apple's competitors, was quoted as saying that if he was in charge of Apple, he would “shut it down and give the money back to the shareholders.”10

Steve Jobs clearly had other ideas, and Apple started to roll out new products. The iMac was released in 1998, the iPod launched in 2001, the iTunes store opened in 2003, the MacBook came out in 2006, and then the iPhone's success completely transformed the firm in 2007. The AppStore was launched in 2008, the iPad came out in 2010, and the iCloud was introduced in 2011. During this time, Apple's share price increased from a split-adjusted low below $0.50 a share at the start of 1998 to slightly above $1.50 at the start of 2004, and then it soared to $100 in September 2012.11 A 20,000% return in 15 years! (The stock continued its rise to $237.07 on October 3, 2018.)

Steve Jobs died on October 5, 2011, at the age of 56, after a long illness with pancreatic cancer. He had previously announced his resignation on August 24, 2011. Trading in the stock (after hours) was temporarily halted on the news of his resignation, and when trading resumed the stock price fell 5% to $357 ($51 split adjusted).12 Since Apple had close to 930 million shares outstanding, this was a drop of about $17.5 billion in market capitalization. The market, while still enamored of Apple's product lines and profitability, was clearly worried that Apple could not maintain its success without its founder and chief spokesman.

Apple, to quote its 2014 Annual Report, “designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players, and sells a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications. The Company's products and services include iPhone®, iPad®, Mac®, iPod®, Apple TV®, a portfolio of consumer and professional software applications, the iOS and OS X® operating systems, iCloud®, and a variety of accessory, service and support offerings. The Company also sells and delivers digital content and applications through the iTunes Store®, App Store™, iBooks Store™, and Mac App Store.” In 2014, the Apple brand was considered more valuable than the Coca-Cola brand.

Apple after Steve Jobs

Tables 11.1 and 11.2 show Apple's Income Statements and Balance Sheets for the period 2007–2011. During that time, Apple grew rapidly, continuously increasing sales and profits. In fiscal 2011, Apple earned profit of $25.9 billion on revenue of $108.2 billion (a 24% net profit margin) and had a gross profit margin of 40.5% ($43,818 divided by $108,249). The firm, despite its already large size, sales grew 66% in 2011 (after growing 79% in 2010). During this time, Apple also spent heavily on research and design, which totaled $2.4 billion in 2011 (2.2% of revenue or 9.3% of net profits).

TABLE 11.1 Apple Inc. Income Statements, 2007–2011

($ millions) 9/29/2007 9/27/2008 9/26/2009 9/25/2010 9/24/2011
Net sales 24,006 32,479 36,537 65,225 108,249
Cost of sales 15,852 21,334 23,397 39,541 64,431
Gross profit 8,154 11,145 13,140 25,684 43,818
Research and development 782 1,109 1,333 1,782 2,429
Selling and operating 2,963 3,761 4,149 5,517 7,599
Operating income 4,409 6,275 7,658 18,385 33,790
Other income (loss) 599 620 326 155 415
Income before income tax 5,008 6,895 7,984 18,540 34,205
Income tax 1,512 2,061 2,280 4,527 8,283
Net income 3,496 4,834 5,704 14,013 25,922
EPS 4.04 5.48 6.39 15.41 28.05
Dividends 0 0 0 0 0
Sales growth 35% 12% 79% 66%

TABLE 11.2 Apple Inc. Balance Sheets, 2007–2011

($ millions) 9/29/2007 9/27/2008 9/26/2009 9/25/2010 9/24/2011
Cash and short-term investments 15,386 22,111 23,464 25,620 25,952
Accounts receivable, net 1,637 2,422 3,361 5,510 5,369
Inventories 346 509 455 1,051 776
Other 4,587 7,269 8,985 9,497 12,891
Current assets 21,956 32,311 36,265 41,678 44,988
Long-term marketable securities — 2,379 10,528 25,391 55,618
Property, plant, and equipment 1,832 2,455 2,954 4,768 7,777
Goodwill, intangible and other 1,559 2,427 4,104 3,346 7,988
Total assets 25,347 39,572 53,851 75,183 116,371
Accounts payable 4,970 5,520 5,601 12,015 14,632
Accrued expenses 4,329 3,719 3,376 5,723 9,247
Deferred revenue    — 4,853 10,305 2,984 4,091
Current liabilities 9,299 14,092 19,282 20,722 27,970
Long-term debt — — — — —
Other noncurrent liabilities 1,516 4,450 6,737 6,670 11,786
Total liabilities 10,815 18,542 26,019 27,392 39,756
Contributed capital 5,368 7,177 8,210 10,668 13,331
Retained earnings 9,101 13,845 19,538 37,169 62,841
Other     63      8     84    (46)    443
Total shareholders' equity 14,532 21,030 27,832 47,791 76,615
Total liabilities and equity 25,347 39,572 53,851 75,183 116,371
Equity/Total assets 57% 53% 52% 64% 66%

Apple's Balance Sheets reflect the firm's profitability. The firm literally has no short- or long-term debt, and shareholders' equity to total assets averaged 58% over the period (66% in 2011). By 2011, Apple had a lot of cash (over $81 billion, including both short- and long-term marketable securities), a lot of equity, and no debt. Importantly, despite its cash and marketable securities hoard, Apple in 2012 was not paying a dividend or providing any other form of cash distribution to its stockholders.

While it appears that Apple should have been a hot stock, it was not. On September 26, 2011 (the start of Apple's fiscal 2012 year), Apple shares opened at $399.86 ($57.12 split adjusted), a P/E multiple of only 14.3 ($399.86/$28.05).13 By comparison, the P/E for the S&P 500 was about 15. This means Apple shares were selling at a lower multiple than the overall market despite its high growth rate.

Why was Apple not a hot stock in 2012? After all, Apple was making money, lots of money. One factor affecting Apple's valuation was that the market was worried that increased competition would cause Apple to lose market share in a number of different product lines, particularly the new product lines of tablets and smartphones. For example, smartphones using Google's Android operating system (e.g., Samsung's Galaxy line, which had features similar to those of the iPhone at a lower price) had increased their market share to 50% by 2012 while the iPhone held steady at 20% of the total market.14 Apple also faced new competition from Amazon in the market for tablet computers. So what was the stock market worried about? The market was worried that Apple's competitors would not only reduce Apple's market share but would also reduce Apple's margins if Apple lowered its prices to compete.

Product Market Strategy and New Product Pricing

Place yourselves in the shoes of Apples management in 2012: What should Apple's pricing policy be given its competition? Should Apple lower its prices to retain market share, or should Apple maintain its current margins? For example, should Apple lower the price for the new iPhone 4S (released in October 2011) below the $660 it charged for the iPhone 4 (released in April 2011)?15 Can Apple lower prices enough to drive out the competition? It is not clear that Apple had enough of a cost advantage to do this. If Apple lowers prices, what happens to its profit margins?

Apple's situation is known as a nondurable monopoly. It is a classic problem in economics: a firm has a monopoly but knows it is not going to last. What should the firm do? The firm can charge the full monopoly price and get it for a short period of time or the firm can charge a lower price and get it for a longer period of time. That is the trade-off that Apple faces. This problem is treated in economics texts fairly well, and we are not going to take the time to solve it precisely here. Apple decided not to lower its prices.

So, what were Apple's other strategies to deal with its competitors? One thing Apple did was sue its competitors and Samsung in particular. What did Apple's lawsuit claim? Infringement of patented technology. Did Apple win this suit? Samsung was found liable in 2012. In 2018, a jury determined that Samsung should pay $539 million in damages. A settlement was reached on June 27, 2018, avoiding an appeal. The final amount was not disclosed.

More important, Apple's response was to continue to innovate even faster, wherever possible. The idea was to create a first-mover advantage by continually creating new, more-powerful, more-useful, and better-designed products. That is, to create new nondurable monopolies either with new products and/or better features than the old ones. This strategy allows Apple to continue charging high prices.

Apple also engaged in heavy advertising and continued to create intense hype over its new product releases. Apple's reputation as an innovative firm with well-designed, cutting-edge, “cool” products was important. Was Apple successful in its product market strategy? To date, they seem to have been more successful than their competitors. When a new Apple computer or phone is initially released, people are lined up at the Apple store, often for days before. Why? Because everyone “has to have” the new Apple gadget.

Are there any problems with this strategy? Is there a downside to innovating very quickly? Yes. Apple has enormous research and design (R&D) expenses and by innovating rapidly is not able to obtain the full return from the prior product. Typically, a firm that generates a new product wants to realize as high a return on its initial investment as possible. Does Apple's strategy do this? No. Apple releases its next generation of products before having maxed out the potential profit on the last generation. Apple's competitors are not innovating as much as Apple: they wait for Apple to innovate and then copy Apple's engineering. This gives Apple's competitors significantly lower R&D costs.

In addition, Steve Jobs was an important part of Apple's innovation and image. His death left many questioning whether Apple could continue to innovate and lead the market. As such, did his death signal it was time for a change in strategy (e.g., to lower prices)? Apple's initial answer, at the time of this writing, is no.

What Were Apple's Financial Policies at the Start of Fiscal 2012 and Should Apple Change Them?

Given this background on Apple's product market strategy, let's now turn to Apple's financial policies. As we discussed, financial policies include target debt and dividend policies. What was Apple's target debt policy? What debt? Apple had no debt. In fact, because of its huge amount of excess cash, Apple had negative debt. If Apple issues debt, do they want long- or short-term debt? Fixed-rate or floating-rate debt? Domestic or foreign? Straight or convertible? None of these financial policy choices were relevant to Apple because it had no debt.

What was Apple's dividend policy? The firm paid no dividends as of the end of fiscal 2011. What was Apple's equity policy? While Apple had issued new equity in the past, from 2007 to 2011 they had only issued employee stock options (in the total amounts of $365, $483, $475, $665, and $831 million, respectively).

So let's review.

At the start of fiscal 2012, Apple made the following choices regarding its debt:

  • Percentage of debt?
  • 0%
  • Fixed or floating rate?
  • n/a
  • Long or short term?
  • n/a
  • Public or private issue?
  • n/a
  • U.S. or European market?
  • n/a

Furthermore, Apple made the following choices regarding its equity:

  • Public or private equity?
  • Public equity
  • Common or preferred stock?
  • Common stock
  • Straight or convertible?
  • Straight
  • Stock splits?
  • Yes

Apple's decision regarding its dividend policy was to not pay any.

  • Dividend or not?
  • Not
  • Payout level?
  • 0%
  • DRP16 program?
  • No

The one financial policy Apple had historically instituted was stock splits. As noted above, the shares were priced at $22 per share during the firm's initial public offering (IPO) but were split two for one several times (on May 15, 1987; June 21, 2000; and February 18, 2005) and then seven for one on June 2, 2014.

This brings us to our central question: Did Apple's policies make sense?

We contend that Apple really had only one financial policy, and that was to pile up cash (much of it off shore). The firm maintained a gross margin of 34% to 40% over the 2007–2011 period and was enormously profitable. There were no financial policies in place to distribute the cash. In a similar but reverse sense, in Chapter 10 MCI had only one financial policy: get cash any way it could in order to survive.

What are the principle disadvantages of having a pile of cash? One is that a firm's cash balance may make a firm a takeover target. Was Apple a takeover candidate? No, Apple was not a takeover target. Cash alone does not make a firm a takeover target. A firm is a takeover candidate if it is worth more to a bidder than it is to the current owners. Cash coupled with poor management and a lack of investment opportunities make a firm a likely takeover target. Apple's stock price and its high market-to-book value reflected its strong growth opportunities. It is not clear that another firm could have realized any additional value from Apple above what the stock market already gave it.17

Another disadvantage of cash is that it creates a suboptimal capital structure. Apple had $81 billion in cash (including short-term and long-term marketable securities) and no tax shields. (We spent a lot of time in Chapter 6 discussing why leverage is valuable, which we then examined in Chapters 7–10. And, if you recall, excess cash is equivalent to negative debt.)

A third disadvantage of having excess cash are agency costs. Apple's management could have gone down to the company vault whenever they wanted and rolled around in the cash (translation: management can use excess cash for “perks” or suboptimal investments).

What are the main advantages of having a pile of cash? Ultimate flexibility. Apple wanted to protect its R&D, and it was absolutely protected. (Remember, the first goal of financial policies is to protect the firm's product market policies.) How much was Apple spending every year on R&D? Huge amounts ($0.8, $1.1, $1.3, $1.8, and $2.4 billion from 2008 to 2012, respectively). Remember, Apple's product market strategy in 2012 was dependent on the firm's being the first mover, so it had to always worry about creating the next generation of its product. This required having the cash flow—which Apple had.

For Apple and certain other international firms, in 2012, there was also a significant tax advantage to holding cash overseas. The U.S. tax code did not tax foreign income until it was repatriated back to the United States. This meant that Apple and others, could defer their taxes on overseas profits by keeping their cash overseas, which they did. Essentially, in the past a U.S. firm had to pay the higher of the U.S. or foreign rate, which was typically the U.S. rate. However, the U.S. firm could defer the U.S. tax until it repatriated the earnings—at which time it would pay the difference between the U.S. and foreign rate (getting a credit for the amount paid in the foreign country). This created a large incentive to hold large amounts of cash as long as they represented foreign earnings.

The 2018 Tax Cuts and Jobs Act changed this as the U.S. adopted a “territorial system” like most of the world where a firm only pays tax on the income in the country where it is earned. In addition, the new law imposed a one-time repatriation rate of 15.5% on existing cash and cash equivalents and 8% on existing illiquid assets. This, coupled with the drop in the U.S. corporate tax rate from 35% to 21%, means that much of the advantage for holding cash overseas has now been eliminated.

What about using excess cash to engage in predatory pricing? That is, Apple could have cut its prices and forced its competitors to lose money. There is no evidence that Apple engaged in any such practice or that predatory pricing even works. Remember, Apple's cost structure was not below that of its competitors (partly due to its R&D expenses). If Apple had cut prices to the levels required to make its competitors lose money, Apple would have lost money as well. Apple's product market strategy was to charge a premium price for new products and to maximize profits from its new-product line. In sum, Apple was (and is) a profitable firm generating a lot of cash flow in an industry with high R&D requirements.

As an aside, let's now look at Apple's sustainable growth. We have discussed sustainable growth in earlier chapters, so this is both a review and an application to a different situation. Sustainable growth affects a firm's financing and dividend policies since it defines how much cash a firm generates internally and whether it will need external financing. What is the sustainable growth rate for a firm? It is ROE times one minus the dividend payout. What is Apple's dividend payout? Zero. This means Apple's sustainable growth rate is the firm's ROE.

What was Apple's ROE (and thus sustainable growth) in 2011? Most people would compute it as net income of $25.9 billion divided by net worth of $76.6 billion, or 33.8%.

equation

The problem with this calculation, as we noted in Chapter 2, is that we are using the end-of-year value for net worth. To properly calculate ROE, we really should use Apple's start-of-year net worth, which was $47.8 billion. This gives us an ROE of 54.2%.18

equation

So, Apple's ROE and sustainable growth rate in 2011 (with no dividends) is really 54.2%.

As shown in Table 11.3, between 2008 and 2011, Apple had a four-year average annual ROE of 41.2%. This is a very high ROE. It is also Apple's sustainable growth rate because Apple paid no dividends. At the same time, Apple's sales growth rate averaged 48.1% a year over the same four years, while the firm's assets grew at 46.7% a year. Thus, from the perspective of sustainable growth, Apple was in balance (refer to Chapter 9 for our previous discussion on sustainable growth rates and the importance of balance).

TABLE 11.3 Apple Inc., Selected Ratios, 2008–2011

Year 9/27/2008 9/26/2009 9/25/2010 9/24/2011
ROE (NI/OEend-of-year) 23% 20% 29% 34%
ROE (NI/OEstart-of-year) 33% 27% 50% 54%
Sales growth 35% 12% 79% 66%
Total asset growth 56% 36% 40% 55%

Thus, Apple has a product market strategy of innovating, being a first mover, and charging premium prices. As of 2012, this strategy had worked well for Apple: the firm had been extremely profitable and had piled up over $81 billion in excess cash by the start of fiscal 2012. This meant Apple had enough funds to finance new R&D for many years to come. However, Apple's financial policies were not as well defined as its product market strategy and consisted of piling up cash, maintaining a capital structure of negative leverage, and a dividend policy of zero payout. While Apple's sales and asset growth rates were enormously high, they were in balance with its sustainable growth rate, and thus Apple did not have to raise external financing.

What Should Apple's Financial Policies Be Going Forward?

So, an important question for Apple (and its financial staff) was: What should Apple do with all its cash? Another way to parse this question is to ask: What are the correct financial policies of this firm?

Let's discuss Apple's debt and dividend policies. How much debt should Apple have? If you recall in Chapter 6, we discussed that debt policy differs by industries. Although there are tax advantages to additional debt, there are also additional risks if a firm's cash flows can't always support the debt payments (on top of the firm's product market requirements).

We mentioned that firms in industries with stable cash flows, such as utilities, tend to have higher debt levels than industries with unstable cash flows, such as pharmaceuticals and technology firms. In an industry where product innovation is key and a competitor's new product can replace a firm's current product, and thus its sales, it is important not to have a capital structure that is susceptible to large or variable cash flows. In addition, in high-tech industries with high innovation, R&D expenditures are vital. If your product line is suddenly antiquated, you must have the ability to withstand a drop in sales and still be able to innovate for the next generation of products. In this case, cash on hand is a valuable asset.

If we compare Apple to other firms in its industry, many firms had similar Balance Sheets. At the end of 2011, Microsoft had $68.6 billion in cash, marketable securities, and investments with debt of $11.9 billion. Similarly, Google had $45.4 billion in securities and investments with debt of $3.0 billion. Pharmaceutical firms, which are also high-tech, high-innovation, high-R&D firms, had similar high cash balances. At the time, Merck had $19.3 billion in cash and investments versus $17.5 billion in debt, while Pfizer had $36.3 billion versus $34.9 billion of debt.19 Essentially, all these firms share similar product market strategies: high R&D, high product turnover, constant new-product innovation and development, and rapid obsolescence. They also all had high cash balances and very low debt (and remember, since excess cash is negative debt, their debt ratios were in fact negative).

Apple's capital structure looked similar to those of the firms above: Apple had created many new product lines and was under constant attack from competitors seeking to displace Apple products with better technology and/or pricing. As such, Apple's cash flows, while growing substantially, couldn't be considered stable or guaranteed. This means that a low debt ratio was probably correct for Apple, and indeed throughout the industry almost all the major players had extremely low debt levels (as noted earlier).

So, in 2011, Apple has no debt and sufficient piles of cash (i.e., financing capability) to fund future R&D. How much excess cash is enough? To be very safe, Apple should have enough to fund R&D for several years. In fact, Apple had much more than that; it had enough for 33 years of R&D at the current rate of expenditure ($81 billion of cash/$2.4 billion of annual R&D). Even by the standards of the high-tech, innovative, expensive R&D industry, Apple had substantial amounts of excess cash.

As stockholders in 2011, our concern should be: Will Apple use its cash wisely?

Recall from Chapter 7 on Marriott, we listed five things firms can do with excess cash. They are:

  1. Pay down debt
  2. Pay a higher dividend
  3. Invest more in the current businesses
  4. Acquire other firms
  5. Buy back stock

One possibility, therefore, is for Apple to begin paying a dividend. Should it? Sure. Since Apple has no need for all its cash, it should return most to the stockholders. How much of a dividend should they pay? Let's consider a simple scenario. Assume Apple decides to pay $2.00 a share. It has 924 million shares outstanding, so dividends of $2.00 a share translates to a cash payment of about $1.85 billion per year. Is this a lot of money? Not for Apple, with $81 billion in cash (this amount would be enough to pay the $1.85 billion a year in dividends for 40 years). Note that much of Apple's $81 billion in cash is held overseas for tax purposes.

In addition to providing a positive signal to the market, paying dividends probably increases the number of potential Apple investors. One reason is that some investors, individual as well as institutional, limit their investments in stocks to those firms that pay dividends.

Let's briefly compare Apple's dividend policies to those of MCI (Chapter 10) and AT&T (Chapter 9). When we considered MCI's dividend policies, we argued that MCI should not pay a dividend in 1983 because MCI needed the cash for capital expenditures going forward. Apple also needs cash for R&D going forward, but Apple has piles of cash because of its profitability (while MCI was struggling with low cash flow). Thus, Apple can afford to start paying a dividend.

In contrast, AT&T had paid a regular cash dividend for years, even though it sometimes had to raise external funds to do so. It was able to do so because AT&T's sustainable growth rate was in balance with its capital expenditure needs prior to the divestiture. This balance (and the reader can review Chapter 9 if necessary) allowed AT&T to pay a regular cash dividend without jeopardizing its capital expenditures or product market strategy. MCI could not. Apple can because of its huge amount of excess cash.

Let's consider another one of the five options for a firm with excess cash: share repurchases. Should Apple repurchase (buy back) some of its shares? Recall that firms normally consider repurchasing shares when management believes the stock price is too low. Is Apple's share price too low? Given our belief that there is asymmetric information in the market, your authors do not know. However, it is a question Apple's management should ask themselves, and maybe they have. (Note, Apple's share price on October 1, 2011, was $50.68.20 As of December 1, 2014, it was $120.)

If Apple decides to undertake a stock buyback, how should Apple implement the buyback program? Remember our discussion on share repurchases in the Marriott chapter: we said there were three principal methods for a firm to repurchase its shares. First, the firm could make open-market purchases (where the firm buys stock at any time). However, if large amounts of shares are bought over a short period of time, the firm must announce the buyback program ahead of time. (Specifically, if a firm repurchases greater than 25% of the average daily trading volume in the prior four weeks, the SEC stipulates that it must announce the program.)

Second, the firm could do a fixed-price tender. When a firm makes a fixed-price tender, the firm must state the terms, both price and number of shares, that it will repurchase shares at. The firm may specify that it will purchase a minimum number of shares, with the possibility of purchasing more. The firm is then obligated to buy at least that minimum number of shares if that many shares are tendered, and it has the option to purchase more than that.

Finally, firms can use a Dutch auction tender, where the firm fixes either the number of shares or the price per share but not both. The firm can fix the minimum number of shares it will purchase and let the stockholders choose the prices at which they will tender, or the firm can fix the minimum price and let the shareholders determine how many shares they will tender. Typically, firms undertaking a Dutch auction tender fix the minimum number of shares.

Should Apple issue any long-term debt to fund the dividend and/or share repurchase program? Maybe. Why would Apple not simply use up some of its excess cash? The primary reason involves taxes. Much of Apple's excess cash is outside the United States and would have been subject to U.S. taxes had Apple repatriated it. By issuing debt to raise the cash used inside the United States, Apple avoided the tax burden from repatriating the funds.

From a stockholder's point of view, what should Apple's financial policies be? Your authors' recommendations for Apple to maximize shareholder value in 2011 would have been as follows:

  1. Apple should have a bank line of credit of at least several $ billion. A bank credit line is standard advice for any firm.
  2. Apple should keep enough cash for at least two generations of technological innovation, and maybe three.
  3. Apple should pay a dividend.
  4. Apple should buy back some stock, provided management believes the stock price is too low.
  5. Apple should have a Balance Sheet with little or no debt (remember to a finance person, excess cash is really negative debt).
  6. Apple should continue to hold foreign earnings overseas if it expects U.S. tax policy to change favorably.

Justification for Our Recommendations

Early on in this book we mentioned that finance does not have a single right answer (but it does have wrong answers). The recommendations above are not as definitive as some of our other advice in this book. But let us briefly justify these recommendations:

  1. The line of credit means that if Apple runs out of cash (if the next iPhone, tablet, etc., does not work), the bank must extend a loan for at least the maximum line of credit, giving Apple one more shot at success. How much does this option to borrow cost Apple? At the time of the case (October 2011), Apple is in such good financial shape that a large bank line of credit would be relatively cheap for the firm (maybe 25 basis points a year). This is low-cost insurance. Trying to borrow the funds after the next generation of product does not work would be much more difficult and expensive. (The time to buy insurance is before you become ill.)
  2. Apple should keep enough cash for at least two generations of innovation, maybe three. Note, we don't want Apple to have more cash than this. We want the excess cash to be paid out to shareholders. If Apple loses its edge and can't produce a competitive product with two or three tries, we don't want the firm using shareholders' money for more tries.
  3. Apple should pay a dividend to return cash to shareholders and expand Apple's investor base. The firm has excess cash: it doesn't need 33 years of R&D in cash.
  4. Apple may want to buy stock, but not necessarily. If management expects Apple's stock prices to rise in the future, then the firm should buy back stock. (Apple has enough excess cash to do this.) The issue of asymmetric information in technology industries is huge. Management knows what is in the firm's R&D pipeline, while investors don't. Apple will not make its pipeline public information ahead of time because it doesn't want its competitors to know what it is doing technologically. Note that some analysts read firms' patent applications to determine what is in a firm's development pipeline. Further, it is also not only analysts who look at patent applications, but competitors as well.21

    How should Apple buy back its stock? Apple should do a tender offer or open-market purchases. If the stock price is expected to go up rapidly, then the tender offer would look better. If the stock price is expected to stay flat or go up slowly, then the open-market purchases would be better. (See Chapter 8 for a more complete discussion on share buybacks.) Still, whether and how Apple wants to buy back stock depends on what management believes will happen to the stock price.

  5. Apple has so much cash that it is hard to justify any debt. However, as explained, tax considerations might justify some debt.
  6. Lastly, if Apple expects the U.S. tax policy on foreign income to change, or if it expects a tax holiday on foreign income similar to the one enacted in 2004 (where foreign income could be repatriated at a 5.25% tax rate), it makes sense to borrow funds locally to pay dividends rather than pay tax at the current 35% rate.

Our view is that Apple should have the financial capability to undertake two or three attempts at developing new products. This is based on its track record of successful innovations. If a new product does not work or a competitor is there first, Apple should have one or two additional chances. If the firm fails two or three times in a row, then it is time, from the stockholders' point of view, to cut off the cash flow and invest in another firm. The stockholders don't want to fund five or six failures in a row, because if Apple does, it potentially uses up all its excess cash.22 Investors ultimately want a return on their investment: they need to have dividends or share repurchases. At the same time, a successful firm should have more than one shot at success.

WHAT DID APPLE DO ABOUT DIVIDENDS?

Apple paid a dividend from 1987 to 1995 ($0.12, $0.32, $0.40, $0.44, and then $0.48 per share from 1991 to 1995, respectively) but stopped in the second quarter of 1996 after suffering losses. (Apple still paid the first quarter dividend of $0.12 in 1996 before stopping.) Apple did not pay any dividends through the end of 2011.

On Monday March 19, 2012, Apple announced it would start paying a quarterly dividend of $2.65 per share in the fourth quarter of fiscal 2012 (costing the firm $2.5 billion a quarter or $10 billion a year). The firm also said it would start a share repurchase program. Apple's stock price rose 2.7% ($15.53) to a price of $601.10 on the announcement.23

The quarterly dividend was increased to $3.05 per share in 2013 (costing the firm $2.9 billion a quarter or $11.6 billion a year), and $3.29 (pre-split) in 2014 (a total of $12.4 billion a year). Apple also had a seven-for-one stock split in 2014. Finally, Apple also repurchased $22.9 billion of stock in 2013 and $35.0 billion of stock in 2014. The share buyback program is being conducted in privately negotiated and open-market transactions (complying with Rule 10b5–1 of the Exchange Act).

As an aside, how do you feel about Apple when it announces it is giving back $10 billion a year in cash? We imagine you feel pretty good about the firm. See, signaling works.

Finally, the firm issued $17 billion of long-term debt in 2013 (due from 2016 to 2043). Apple also issued $6.3 billion of commercial paper in 2014. The firm's capital structure remained, however, at zero debt once the excess cash is considered.

Note: Back on September 17, 1992, Intel (a tech firm similar to Apple) began paying a cash dividend. An analyst, Richard Shafford, wrote in Technology Computer Review, “When a high-tech company starts paying a dividend, that indicates the company believes shareholders can make higher returns going elsewhere. If I were an Intel shareholder, I'd rather they put my 40 cents a year back into innovation.” What does this quote tell you? It tells you that the analyst never read this book. If he had, he would know that paying a dividend is a positive signal for the market. When Intel announced its first dividend, Intel's stock price rose 1.2% on that day.24

WHAT HAPPENED NEXT

In 2012, Apple's sales and earnings were up sharply to $156.5 billion and $41.7 billion (as shown in Table 11.4). As noted above, in 2012 Apple began paying a quarterly dividend of $0.38 (the actual dividend was $2.65; the $0.38 is adjusted for the 7 for 1 stock split on June 9, 2014). After that, Apple's growth slowed. Sales grew from $156.5 billion to $229.2 billion, while net income grew from $41.7 billion to $48.4 billion over the 2012–2017 period. Dividends, however, continued to increase to $2.40 a share by 2017. This represented an annual payout of $12.8 billion in 2017.

TABLE 11.4 Apple Inc. Income Statements, 2012–2017

($ millions) 9/29/2012 9/28/2013 9/27/2014 9/26/2015 9/24/2016 9/30/2017
Net sales 156,508 170,910 182,795 233,715 215,639 229,234
Cost of sales 87,846 106,606 112,258 140,089 131,376 141,048
Gross profit 68,662 64,304 70,537 93,626 84,263 88,186
Research and development 3,381 4,475 6,041 8,067 10,045 11,581
Selling and operating 10,040 10,830 11,993 14,329 14,194 15,261
Operating income 55,241 48,999 52,503 71,230 60,024 61,344
Other income (loss) 522 1,156 980 1,285 1,348 2,745
Income before income tax 55,763 50,155 53,483 72,515 61,372 64,089
Income tax 14,030 13,118 13,973 19,121 15,685 15,738
Net income 41,733 37,037 39,510 53,394 45,687 48,351
EPS 5.81 5.72 6.49 9.28 8.35 9.27
Dividends per share 0.38 1.64 1.82 1.98 2.18 2.40
Sales growth 45% 9% 7% 28% −8% 6%
Total share repurchases — 22,860 45,000 35,253 29,722 32,900
Total dividend payment 2,488 10,564 11,126 11,561 12,150 12,769
Issuance of debt — 16,896 11,960 27,114 24,954 28,662
Repayments of term debt — — — — 2,500 3,500

Apple also repurchased $22.9 billion of stock in 2013 (having repurchased none over the period 2008–2011 and only $3 million in 2007). From 2013 through 2017, as shown in Table 11.4, stock repurchases totaled $165.7 billion. Adding the stock repurchases to the $60.7 billion in total dividends that were paid from 2012 through 2017, Apple returned $226.4 billion to shareholders over the 2012–2017 period.

Even with this $226.4 billion in dividends and stock repurchases, Apple's total cash balance (i.e., cash and marketable securities both short and long term) grew from $121.3 billion in 2012 to $268.9 billion in 2017, as shown in Table 11.5. The amount of overseas cash grew from $82.6 billion (or 68% of the total) to $252.3 billion (or 94% of the total).

TABLE 11.5 Apple Inc. Balance Sheets, 2012–2017

($ millions) 9/29/2012 9/28/2013 9/27/2014 9/26/2015 9/24/2016 9/30/2017
Cash and marketable securities 29,129 14,259 25,077 41,601 67,155 74,181
Accounts receivable, net 10,930 26,287 17,460 16,849 15,754 17,874
Inventories 791 13,102 2,111 2,349 2,132 4,855
Other 16,803 19,638 23,883 28,579 21,828 31,735
Current assets 57,653 73,286 68,531 89,378 106,869 128,645
Long-term marketable securities 92,122 106,215 130,162 164,065 170,430 194,714
Property, plant, and equipment 15,452 16,597 20,624 22,471 27,010 33,783
Goodwill, intangible and other 10,837 10,902 12,522 14,565 17,377 18,177
Total assets 176,064 207,000 231,839 290,479 321,686 375,319
Accounts payable 21,175 22,367 30,196 35,490 37,294 49,049
Accrued expenses 11,414 13,856 18,453 25,181 22,027 25,744
Deferred revenue 5,953 7,435 8,491 8,940 8,080 7,548
Commercial paper — — 6,308 8,499 8,105 11,977
Current portion of debt    —    —    — 2,500 3,500 6,496
Current liabilities 38,542 43,658 63,448 80,610 79,006 100,814
Long-term debt — 16,960 28,987 53,463 75,427 97,207
Other noncurrent liabilities 19,312 22,833 27,857 37,051 39,004 43,251
Total liabilities 57,854 83,451 120,292 171,124 193,437 241,272
Contributed capital 16,422 19,764 23,313 27,416 31,251 35,867
Retained earnings 101,289 104,256 87,152 92,284 96,364 98,330
Other 499 (471) 1,082 (345) 634 (150)
Total shareholders' equity 118,210 123,549 111,547 119,355 128,249 134,047
Total liabilities and equity 176,064 207,000 231,839 290,479 321,686 375,319
Equity/total assets 67.1% 59.7% 48.1% 41.1% 39.9% 35.7%
Total cash & securities 121,251 144,761 155,239 205,666 237,585 268,895
Amount held overseas 82,600 111,300 137,100 186,900 216,000 252,300
% held overseas 68.1% 76.9% 88.3% 90.9% 90.9% 93.8%

How did Apple's cash balance grow so much if it was paying out so much in dividends and stock repurchases? In addition to its earnings, Apple's cash balance also grew because Apple issued debt. How much debt? Table 11.5 shows that Apple issued long-term debt of $97.2 billion. What? Why would Apple issue debt when it had so much cash? Apple decided it was cheaper to issue debt to pay dividends and repurchase stock than to repatriate its overseas cash. (Note, this is not the first time we have seen a firm issue debt to pay dividends. If you recall from Chapter 9, AT&T also did it.)

At fiscal year-end 2017 (i.e., the last Saturday in September for Apple), Apple had sales of $229.2 billion, net income of $48.4 billion, a stock price of $154, and a total cash balance of $252.3 billion, of which 94% was held overseas.

Apple's bet on future tax rates/tax holiday, which we discussed above in recommendation 6, paid off in 2018. As mentioned earlier the Tax Cuts and Jobs Act not only decreased the corporate tax rate from 35% to 21% but it also changed corporate taxation from a worldwide situation to a territorial system. Importantly for Apple, it also levied a one-time tax of 15.5% on existing overseas liquid assets and 8% on illiquid assets. This meant that Apple can now repatriate its $252.3 billion of overseas cash and marketable securities, paying roughly $39.1 billion (at a rate of 15.5%) instead of $88.3 billion (at a rate of 35%).

What should Apple do with these repatriated funds? On May 1, 2018, Apple announced a 16% increase in dividends from $2.52 a year to $2.92 a year. It also announced that it expected to use at least $100 billion of the funds for share repurchases. What will actually happen? By the time you read this book, we will have an answer.

SUMMARY

In this section of the book, we have explained capital structure and financial policies. We have done so both theoretically (using M&M) and empirically by examining different firms with contrasting product market policies (e.g., Massey, Marriott, AT&T, MCI, etc.). We then derived the optimal financial policies for these firms. In this chapter, we examined dividends and other cash distributions to stockholders using Apple; a firm in an industry with rapid product market innovation, high profits and rapidly growing excess cash.

  1. This chapter began by explaining that dividends don't matter in an M&M world. Thus, there is no need for a dividend policy in an M&M world. We then relaxed the M&M assumptions and examined the tax implications and bankruptcy costs of dividends. We found that taxes and the costs of financial distress only have a small effect. In contrast, we found strong empirical evidence that dividends have a signaling effect: firms that initiate dividends and/or increase dividends experience an increase in their stock price. Firms that decrease dividends experience a drop in their stock price.
  2. Turning to Apple, we found a high-tech firm with extensive R&D expenditures, rapid sales growth, innovative new products, and no clear financial policies. At the same time Apple was generating large amounts of excess cash.
  3. Apple's barrier to entry was R&D innovation (that is a first-mover advantage). Furthermore, Apple's product market strategy was predicated on this barrier. Apple's goal was to have the newest product, the best technology, and the highest price. This made the firm highly successful financially.
  4. Your authors' recommendations for Apple's financial policies are: enough cash reserves for several rounds of technology coupled with cash dividends and low debt. A high dividend makes no sense if it takes cash away from R&D. But a reasonable dividend and/or share repurchases, given Apple's cash balances, makes sense.
  5. Although not emphasized in the chapter, it is hard to price a stock like Apple with high R&D expenditures in an innovative industry leading to large information asymmetries. This is why the good analysts in innovative industries follow patent filings, FDA approvals, and so on.

Coming Attractions

In the next chapter, we will review capital structure theory and add dynamics to the static model presented in Chapter 6.

NOTES