Business Strategy Apple The Company is committed to bringing the best user experience to its customers through its

innovative hardware, software, peripherals, and services. The Companys business strategy leverages its ability to design and develop its own operating systems, hardware, application software, and services to provide its customers new products and solutions with superior ease-of-use, seamless integration, and innovative design. The Company believes continual investment in research and development, marketing and advertising are critical to the development and sale of innovative products and technologies. As part of its strategy the Company continues to grow its platform for the invention and delivery of third-party digital content and applications through the iTunes Store. Apples strategy also includes expanding its distribution network to effectively reach more customers and provide them with a high-quality sales and post-sales experience. Apple currently operates internationally with over 390 stores world wide, it is also considered to be the most valuable company in the world. The Company manages its business primarily on a geographic basis. Accordingly, the Company determined its reportable operating segments, which are generally based on the nature and location of its customers, to be the Americas, Europe, Japan, Asia-Pacific and Retail. The results of the Americas, Europe, Japan and Asia-Pacific segments do not include results of the Retail segment. The Americas segment includes both North and South America. The Europe segment includes European countries, as well as the Middle East and Africa. The Asia-Pacific segment includes Australia and Asian countries, other than Japan. The Retail segment operates Apple retail stores in 13 countries, including the U.S. Each operating segment provides similar hardware and software products and similar services. Net sales during 2012 increased by $48.3 billion (45%) compared to 2011. There are several factors that contributed to this increase, including the addition of a 14th week in the first quarter of 2012. All of the companys segments saw increase in sales. The Americas, which includes North and South America, saw an increase of $19.2 billion or 50% from the year before. The Europe segment, which includes European countries, Middle East and Africa and accounts for, saw an increase of 31% or $8.5 billion. The Japan segment increased $5.1 billion or 94%. Asia Pacific net sales increased by $10.7 billion or 47% and the Retail Segment increased $4.7 billion or 33% during 2012 compared to 2011. P/E Analysis In general, P/E ratios tend to be a sign of expected future growth. It is used as a measure of the value of the company taking into account the current price of the stock and projected growth of the company. Apples Price-Earnings ratio is a 12.2 compared to Microsofts 14.42. Decreases in the P/E ratio can be partially attributed to a riskier market. As risk in the market increases the required rate of return for an investment will increase and therefore the P/E ratio will drop. But what can be seen when comparing both companies is that the P/E of Apple has dropped in the past 26 weeks from 14.2 while Microsofts has increased from 10.8. Apple is currently the most valuable company in the world, with a market cap of $506.84 billion, following a 6.4% drop in the company stock on Wednesday December 5, which shed $30 billion from the companys value. This fall was attributed to a research report that said the companys share in the global tablet market was likely to slip to less than half by 2016. A

company as large as Apple can signal investors that growth could be slowing down. This projected growth decrease is a reason for a decreasing P/E ratio. But while Apple has come under fire because of supply contingencies, and increased competition, we believe this low P/E ratio to not be consistent with the financials of the company. Apple continues to show very promising expansion initiatives that could prove the current P/E ratio to be a sign of a currently undervalued company. Earnings per share have greatly increased from year to year, 82% increase from 2010 to 2011 and 59% from 2011 to 2012 while the stock price has actually decreased. The stock closed on Wednesday, December 6th at $538.79, which is considerably below its 52week high of $705.07. Apple could also be experiencing demand contractions due to its high share price. A stock split could reduce the price of each share outstanding while opening a bigger investor pool. Increased demand would drive up the price and therefore increase the P/E ratio. (Not sure if you want to include this) Microsofts increasing P/E ratio is a sign that investors see the company earnings growth to be higher than its industry. The company has a

Financial Leverage Apple did not have any long-term debt during the five years ended September 29, 2012. During 2012, 2011 and 2010, the company had no debt outstanding and accordingly did not incur any related interest expense. We believe this to be a negative sign because it means the company is using its own equity to finance its operations instead of investing that money in expansion or to yield higher returns on other projects. Apple is facing increased competition and this has affected the companys finances. Gross margin has decreased in recent years and is in fact projected to continue to decrease. Given current economic times and the low interest rates that are currently in the market, we see no reason for why Apple should continue to finance its operations with its own equity. Better management of the companys capital structure could increase Apples profits by aiding continued growth and increasing competitive advantage. Apple could issue very safe debt instruments that would attract many investors. Apple would not have any trouble paying interest payments and the companys liquidity will be a great sign for investors worried about default risk. Dividend Policy & Repurchase program Apple is a very liquid company with over $10.7 billion in cash and cash equivalents and for the first time in 17 years the company chose to give out dividends to its shareholders. Apples new divided policy could prove to be very beneficial to the company and its stock price. In March 2012, the Board of Directs of the Company approved a dividend policy in which it declared planned quarterly dividends of $2.65 a share, which translates to approximately $2.5 billion each quarter in conjunction with the quarterly declared dividends. Continued dividend growth could make Apples stock a lucrative investment on dividend yield alone. As stated in the Companys 10k, the Board of Directors instituted a program to repurchase up to $10 billion of the Companys common stock beginning in 2013. The repurchase program is implemented over three years with the primary objective of neutralizing the impact of dilution from future employee equity grants and employee stock purchase programs. The Company anticipates that it will utilize approximately $45 billion of domestic cash to pay dividends, repurchase shares, and to remit withheld taxes related to net share settlement of

restricted stock units in the first three years of the dividend and stock repurchase programs. Challenges Faced Apple has many challenges to face that come along with its increased production and global involvement. Global economic conditions play an important role and could adversely affect the company. The continued debt crisis, financial market volatility, and other factors that affect consumer confidence decrease spending and demand. In addition to that the upcoming fiscal cliff and how congress decides to manage the expected increase in taxes and decrease in government spending will greatly affect the economy come the end of the year. The highly competitive market in which the company competes will continue to be a challenge. The company must continually introduce new products and services to stimulate customer demand. Part of this challenge is the importance of inventory level management. Apple has had a lot of problems this year with its suppliers in Asia. There has been problems in meeting anticipated demand which have dampened sales and have raised red flags for investors. Substantially all of the companys manufacturing is performed in whole or in part by a few outsourcing partners located primarily in Asia. The company has also outsourced much its transportation and logistics management. These arrangements help lower operating costs, but they also reduce the companys direct control over production and distribution. This makes the firm vulnerable to unexpected changes that are out of its control. I can continue to add risks (i.e intellectual property litigation) but I first want to see how you want to put all this information together. Length is becoming an issue

Profitability When we analyze each company profitability ratios it is evident that Apple is a much more profitable company than Microsoft. Profit Margin, which calculates how much of every dollar in sales the company keeps in earnings, is 26.67% for Apple and 23.03% for Microsoft. This means that for every dollar in sales Apple is profiting an extra 3.64%. Return of Assets is a measure of how efficiently the company is utilizing its assets to generate earnings. Apples ROA is 23.70% compared to Microsofts 12.90%, thats a difference of 10.8%. Apple is also out performing Microsoft when it comes to return on equity. ROE measures the amount of profit generated with the money invested by shareholders. Apples ROE is 35.30% and Microsofts is 23.80%. Effectively Apple is generating 11.5% more revenue than Microsoft from every dollar invested by shareholders.