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Long term financing

Using the Apollo Group Inc. (see the provided annual report) answer the following questions:

1. What are the company's long-term financing policies?

2. What are the firm's most recent long-term financing decision (e.g., debt, IPO, seasoned equity offering, secondary offering)?

3. Analyze the economic, business, and competitive background in which the financing occurred, and identify cost and risk trade-offs.

4. What was the motivation for using this financing and was it the correct path for the company?

You can usually find this information in the footnotes in the annual report (see attached PDF).


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Long term financing decision- A preview

Long term financing decision is about determining firm's optimum capital structure. A firm's optimal capital structure is that mixture of debt and equity than minimizes its weighted average cost of capital (WACC). Since the after-tax cost of debt is lower than equity for many corporations, why not use debt only or mostly? It turns out that, while debt reduces a company's tax liability because interest payments are deductible expenses, increasing amounts of debt raise both the cost of equity capital and the interest rate on debt because of the increasing probability of bankruptcy. In other words, higher amounts of debt raise the financial risk of a company, and this risk is reflected on the cost of all the types of capital the company uses. As such, the relationship between financial leverage and WACC is not a straight line, but more of a U-shaped curve, with a minimum WACC between the extremes of debt utilization. Yes, apart from the risk associated with a firm's fundamental operations, risk can be introduced by the use of financial instruments with fixed payments, more commonly known as debt. The firm issues debt, which changes its WACC, which changes value. The firm then uses debt proceeds to repurchase stock to reduce its WACC.

Case of Apollo
Apollo Group, Inc. NASDAQ: APOL is an S&P 500 corporation based in Phoenix, Arizona. The company owns and operates four higher-learning institutions: the University of Phoenix, Western International University, the College for Financial Planning, and the Institute for Professional Development. In 2004, the combined enrollment of the four was approximately 255,600 students (a 28% increase over 2003. Corporate revenues for the year ending August 31, 2005 were $1.8 billion, a 34% increase over the previous fiscal year. As of that date, the company's programs spanned 82 campuses and 137 learning centers in 39 states, Puerto Rico, and Canada.

Long term Financing Policies
Conversion of Phoenix online common stock to shares of Apollo Education conversion Group Class A

From October 3, 2000, to August 27, 2004, they had a class of stock, University of Phoenix Online common stock, outstanding, that reflected the separate performance of University of Phoenix Online, a campus within University of Phoenix. On August 6, 2004, our Board of Directors authorized the conversion of each share of University of Phoenix Online common stock to shares of Apollo Education Group Class. In accordance with the terms of our Articles of Incorporation, each outstanding share of University of Phoenix Online common stock was ...

Solution Summary

This solution discusses the Long term financing polcies of Appolo Inc.