Microsoft Finance and Operations Analysis

FINANCE

Contents
Microsoft history........................................................................................................ 2
WACC..................................................................................................................... 2
Market value of equity (E)............................................................................................. 4
Market value of Debt (D).............................................................................................. 5
Total Market value (V)................................................................................................. 5
Cost of Equity (RE)...................................................................................................... 5
Cost of debt (Rn)......................................................................................................... 7
Gearing ratio analysis................................................................................................... 8
Recommendation........................................................................................................ 9
References.............................................................................................................. 12

Microsoft history
Microsoft is a renowned multinational innovation-based company. Headquarter of this
organization is established in Washington, United States. This company was incorporated in
4th April 1975. It was founded by Paul Allen and bill Gates. Some of the best-selling products
of this company includes Windows operating system, MS- office suite of productivity
software, a series of entertainment games, video, music, and a chain of search engines.
Microsoft affiliated with IBM in 1980 to enable different programs on Microsoft`s computer
system which was combined with computing devices that provides a royalty for each sales
agreement. According to IBM, Microsoft produces edge-cutting computer system for IBM`s
computing devices known as OS/2. Microsoft has created a computer system but on the same
side it keep promoting their own computer systems that groomed out to be in straight wiring
competition with the Microsoft`s OS/2. At some point of time, Microsoft dominated the
market through OS/2 when it comes to sell the products. At the time, when Microsoft
launched a wide variety of Microsoft windows versions in 1990 and they were recorded for
more than 90 percent of stock market share in the world`s computers.
During 30 June 2015, the company has attained a worldwide sale of $86.83 billion each year
as well as 128,076 workforce all over the globe. The company undertakes to develop, license,
and produce and support a wide variety of software programs for computer.
WACC
WACC (weighted average cost of capital) is average rate of interest in terms of investment
return, which an organisation plans to pay each individual shareholder. The weight is the rate
at which the company is expected to pay on average of all the security holders to sponsor the
assets. It is an average cost of raising money from each available resource. The weight
signifies the amount of each financing method in the company`s final equity configuration. It
is important and mandatory to measure and analyse the weighted average (cost of capital)

with an aim to assess the budget of total and long run investments. Lesser is the company`s
WACC, the necessity for financing through new other innovative activities is less.
In order to incur less cost, an organisation look for other methods to reduce their WACC.
This implies that company can make use of less costly resources. For example- Organisation
“X” may probably distribute bonds rather than stock because it will incur less finance cost.
This will also improve debt-equity proportion in the capital structure of the company because
debt will cost less than equity. Ultimately, the company’s cost of capital will be reduced.
Formula interpretation of WACC
WACC= (E/V) * RE + (D/V) * (Rd)*(1-Tc)
Wherein-
Items Full forms
RD Cost of debt
Tc Corporate tax rate
E Total market value of the company’s equity
V Total market value of the company (E+D)
RE Cost of equity
D Total market value of the company’s debt
Total equity of Microsoft: 74,810 million United States dollar
items Amount in million
Short-termdebt 9,072
Current portion of long-termdebt 1,049
Non- current portionof long- termdebt 76073
total 86,194
Microsoft’s total market value: Total equity + total debt = 74,810 million + 86,194 million =
161,004million United States dollar
Cost of equity of Microsoft-
=Rf + β (Rm-Rf)