Microsoft Analysis Report

Topics: Weighted average cost of capital, Finance, Corporate finance Pages: 7 (2079 words) Published: December 10, 2014

Analysis Report

Group 15
Student Number
Student Name
Ji Li
Kehan Xu
Weiyi Kong
Shaohua Huang
Ines Sierra
Sara Bernardo

2.Company Analysis3
2.1 Assessing capital expenditure3
2.2 Funding opportunities6
2.3 Dividend policy (past and future)8
2.4 Borrowing level and recommendations10

1. Introduction:
Microsoft is an American-based multinational computer technology corporation that develops, manufactures, licenses, and supports a wide range of software products for computing devices. As one of the top companies of the world in computer technology area, Microsoft is still developing well and it also needs improvement, especially in financing part that is of great importance for every corporation. In this company analysis report, we’ll focus on capital expenditure, funding opportunities, dividend policy and borrowing level of Microsoft according to both its annual report and stock price. In addition, some advice and expectations are provided based on our analysis of Microsoft.

2. Company Analysis:
2.1 Assessing capital expenditure:
In order to maintain production or value, companies are always incurring expenditures on new manufacturing plants, acquiring business or investment on new projects. These are called capital expenditures. People can learn about it from the statement of cash flows in the company’s annual report. For example, from the “Investing” part in Figure 1, we can see that in 2010, Microsoft has spent$ 1,977 million, $245 million, $30,168 million on additions to property and equipment, acquisition of companies and purchases of investments respectively. We will focus on how to use net present value method to assess these proposed capital expenditures. Basically this method has three procedures: i. Calculate annual free cash flow from the investment.

Free cash flow (FCF) refers to the amount of cash that the firm can pay out to investors who provide the capital, which is calculated by assuming the firm is all-equity financed. To calculate FCF, we need following inputs:

Revenue from the project
Relevant costs incurred
Annual Depreciation: Depreciation is a non-cash and tax-deductive expense, which we should deduct to get the profit and add back to the after-tax profit. Annual investment on the project: Though annual investment doesn’t influence profit, it does influence cash flows. We get it by comparing two years’ gross investment amount on the project. Annual investment in working capital: annual investment affects cash flows and needs to be included. The total amount of all the inputs above can be found in the Microsoft’s annual report; however, the specific amount of these inputs for a single project may not be available to outsiders. The formula for free cash flow is as follows:

FCF= (Revenue-costs incurred-depreciation) * (1- ) + depreciation – annual investment on project – annual investment in working capital ii. Estimate the discount rate.
Here we use company’s cost of capital to discount FCF, which is calculated by using weighted average cost of capital model (WACC). What should be mentioned is that if this project is more or less risky than company’s normal level, or if the financing method of this project will affect the company’s capital structure permanently, cost of capital got from WACC should be adjusted. According to Microsoft’s annual report, Microsoft is financed by common stock, long-term, short-term and convertible debt. Therefore the WACC formula shall be: WACC=

“r” refers to the cost of each financing method; V refers to the total market value of all the financing methods; VX/V stands for the proportion of total market value occupied by each method. Also, because interest payment is tax deductible, we adjust the formula by letting rD multiply (1-T). Inputs of WACC model are explained below: VE: it can be...
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