Question

For this assignment, you are not to discuss WACC, but concentrate on the amount of debt and equity financing of the firm that makes up its capital structure. Using Microsoft Co., determine the capital structure of the firm. Compare your industry capital structure to other firms in the same industry. Write a three-page paper (including the appendix) summary of the results of your analysis. Make sure you discuss any difference between your firm and the industry average and it is good or bad and why. Include your results and the industry in the appendix of your paper.

Answer 1

Microsoft Corporation is a leading US based software company, known for its Operating System and MS-Office applications like Excel, Word, Access, Powerpoint etc. It’s a flag-bearer of global digital transformation and innovation in Artificial Intelligence. It aims at providing cloud computing platform, endless data storage space and advanced technology to business organizations, governments and individuals across globe.

For the year 2017-2018, the company in its annual report disclosed the following data as regards its capital structure :-

Long Term Debt of $72,242.

Short Term Debt was Nil.

Stockholders’ Equity of $82,712.

The Stockholders’ Equity includes common stock and paid-up capital of $71,223, Retained Earnings of $13,682 and Accumulated Other Comprehensive Income (Loss) of $2,187.

The total Common Stock Repurchase this year has been $3,033, whereas fresh stock issued has only been $1,002.

The financial leverage measured by Debt-to-total capital ratio is an ideal tool for an investor to analyze the feasibility of the capital structure of the company over time and also with that of the other firms.

Total Capital = $(72,242 + 82,712)

                       = $154,954

Hence, financial leverage = 72,242/154,954

                                             = 0.47

This financial leverage is down from 0.49 of the last year end 2017 to 0.47. This is due to the fact that the company has paid back a part its existing debts this year and for fresh capital needs, has chosen issue of common stock as a source. Choice of common stock issue over raising of debt could be due company finding the cost of equity to be lower than the cost of debt.

This is a major shift from its earlier strategy. In year 2016 and 2017, the company had chosen debt as a major source of fund for its expansion.

Now, lets have a look at the biggest competitor Apple Inc.

Its Long Term outstanding Debt is $93,735 and Shareholders’ Equity is $107,147, grossing up the total capital to $200,882. The financial leverage is 0.47.

As can be seen, the financial leverage of both Microsoft and Apple Inc. comes out to be 0.47.

This implies that Microsoft’s risk perspective and capital financing strategy are quite in line with industry average.