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Microsoft - a Review of Capital Structure and Internal External Analysis

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Microsoft Corporation (NASDAQ: MSFT)
--A Review of Capital Structure and Internal/External Analysis

Bill Gates and Paul Allen had founded Microsoft in 1975 to develop and sell computer languages and microcomputers in Redmond, Washington State. The company had pioneered in operating system business and had been able to invent new technology and acquiring subsidiaries in order to produce a large range of personal computer solutions. Microsoft is currently reporting a rate of return on book assets of 13.41% last year. IPO of the company started in 1986 and has been trading on NASDAQ.

Internal Financial Analysis
The capital structure of Microsoft Corporation in the past 5 years have been selected and shown as in Appendix figure 1. With regards to the company’s current financial performance, the debt ratio has been reducing in the past 5 years and currently at 45.28%. That indicate a reducing risk associated with Microsoft’s operation. Compare to its competitor Apple Inc, which have a ratio of 32.86 with a similar rate of reduction, this may also indicating Microsoft have a lower borrowing capacity, which will affect the corporation’s financial flexibility.

On the investor’s side, currently the stock price is $28.15, which expected return is at 3.1%. Weighted Average Cost of Capital is 11.49%. WACC considers Debt (taxable), Preferred stock and Common stock (Equity). If Microsoft’s borrowing increases, the lenders would demand a higher rate of interest on the debt. On the other hand, the risk of common stock will also increase with the increase of borrowing, the company will accordingly give a higher return to shareholders. Conversely, if Microsoft does not increase the borrowing, the assets has been increasing each year, that would reduce the debt ratio and increase its financial flexibility.

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