Financial report for Microsoft--美国Assignment代写范文

美国Assignment代写范文:“Financial report for Microsoft”，这篇论文主要描述的是微软公司在目前世界的技术行业上处于领先的水平，微软为人们提供者操作系统及商业软件服务，微软目前主要涉及的领域包括window操作系统、Xbox游戏设备、服务器产品、企业服务等，通过对微软的财务报告分析，我们可以发展在2014年时微软公司的盈利保持着增长的趋势，而大部分的收入则是来源于windows操作系统和office系列产品的销售。

Microsoft Corporation is a world-leading company in the technology industry, aiming to provide the best business software and services. The main areas that Microsoft Corporation involves are Windows operating system and related software, Xbox gaming devices and video games, smartphones, server products and enterprise services. Microsoft Corporation is ranked the fifth most innovative companies in the world according to the latest data of United States Patent and Trademark Office.(USA TODAY, 2015)

In year 2014, under the direction of the new CEO, Satya Nadella, Microsoft Corporation has achieved great improvement, the share price of which has increased 24% over the year and the P/E ratio is currently around 18, and has the potential for further improvement in the future. According to the financial report of Microsoft Corporation, Windows and Office products are still the main source of revenue. However, the revenue generated by fast-growing areas has doubled compared with last year’s figure. In fact, Microsoft Corporation has invested significantly in these segments, namely the commercial cloud services, Office 365 and Azure, the latter having the ability to compete with the market leaders. Although it still needs time for the new investments to generate revenue accounting for more percentage of the total revenue, Microsoft Corporation has the opportunity to gain from these. It is anticipated that the stock price of the company could well increase for more than 10%, along with the high dividend rate of 2.7%, making Microsoft Corporation a good choice for investors.

From the yahoo finance, we get the data of total liabilities= $82,600,000 and total assets=$172,384,000. Thus the debt ratio=total liabilities/total assets=(82,600,000/172,384,000)*100%=47.92 %. And this is less than 50%.

It can be seen from the debt ratio that the majority of the capital of Microsoft Corporation isfinanced through equity. The interest expenses incurred by debt financing tend to erode the profit of the company, thus reducing the amount of capital that could be used for further investment and hence the flexibility of the company’s operation. Since the debt ratio is less than 50%, the interest expenses will not be a main threat to the flexibility of the company, so that the company is more flexible than the companies with higher debt ratio.

At the same time, the creditors concern with the stability of the business, as they will receive the principal and the interests provided that the company is not broke. However, the stockholders are more willing to bear the risk in order to achieve higher investment return. Based on the fact that the stockholders contribute more capital to the company, with debt ratio less than 50%, the stockholders have more influence on the operation of the company, so that the company will be more flexible regarding the willingness to take risk and adopt new projects.

Cost of Equity and Cost of Debt

(1).The costofequity is the return that stockholders require for their investment in a company(Berk, and DeMarzo, 2013). GGM model provides a method to calculate the cost of equity based on the dividend for the next year and growth of dividend. The 5-year history of past dividends is based on the data provided by Yahoo Finance. $48.74 is the closing price of Microsoft Corporation’s stock on the day the last dividend was paid, which will be used as the current stock price.

According to the GGM model,

The quarterly growth rate of dividend is:  4.44%

Therefore, the annualized growth rate of dividend is:gannual= (1+ 4.44%)^4 – 1 = 18.98%

The current dividend for MSFT is:

Thus, the cost of equity is: 1.24(1+18.98%)/ 48.74 + 18.98% = 22.01%

(Detailed calculation process is illustrated in Appendix B)

(2).Cost-of-debt is the market interest rate that the company is paying on its debt, whereas the tax rate is the legally imposed rate that the business is taxed. The data used to calculate cost-of-debt and tax rate can be found in the financial statement of Microsoft Corporation.

Tax rate: 

Cost-of-debt:  

(Detailed calculation process is illustrated in Appendix C)

Debt is from Yahoo Finance. And interest expense, income tax expense and income before tax are from income statement.

(3).The alternative way used by investors to calculate the cost of equity is the Capital Asset Pricing Model (CAPM): .

r = the return from the investment

rf = the risk free rate of return

? = the beta value of the investment, a measure of the systematic risk of the investment

rm= the return from the market

(Matos, 2001)

The advantages of CAPM are as follows: From the theoretical point of view, the rate calculated by CAPM is the rate required to cover the extra risk born by the investors of investing in a particular portfolio instead of investing in a market portfolio, whereas the rate calculated by GGM model is the return that is expected to be generated by the investment. Thus, this return is more consistent with the definition of cost of equity.

The disadvantages of CAPM are as follows: The calculation requires calibration of more parameters, such as the market return, the beta and the risk-free interest rate, so that there will be heavier calculation involved in this method. Furthermore, different investors may have different point of view on the parameters, and hence the result will be inconsistent among the investors.

(4).Based on the calculation that has been done, the Weighted Average Cost of Capital (WACC) of the firm can be calculated according to the formula.

We exclude the tax rate when computing required return of debt, because the interest of debt is tax-deductible. Therefore, the WACC of the company is equal to 20.83%

(Detailed calculation process is illustrated in Appendix D)

Firm Valuation

(1).Free cash flow is the cash that could be adopted by the company to compensate for the stockholders, or to further invest in the operation. It’s the maximum amount of cash that could be allocated to stockholders (and creditors) without intervening with the operation of the company. (Damodaran, 1996)

For year 2014, the data required to calculate the free cash flow of Microsoft Corporation can be found in the financial statement. According to the formula, Free Cash Flow=profit after tax+ depreciation- change in working capital- capital expenditures + interest paid= 390,110,000,000dollars.

(Detailed calculation process is illustrated in Appendix E)

There is a constant growth which is 3.5%, so we can use the free cash flow number multiply by 1+3.5%, then we can get next 5 years free cash flow figures.

(2).Projection of the Free Cash Flows for the next 5 years:

$403,763,850,000

$417,895,584,800

$432,521,930,200

$447,660,197,800

$463,328,304,700

The limitation of the projection is that there are plenty of uncertainties regarding the free cash flows of a company, for example, the fluctuation in the profit after tax, so that the assumption that the free cash flows will increase at a constant rate of 3.5% is unrealistic. Different investors have different views on the rate of increment, thus leading to inconsistency among the investors.

(3).Assuming that the FCF growth is equal to 5% after year 5, the terminal value of the firm can be calculated using the formula:

The free cash flow is$390,110,000,000,the constant growth rate for the next 5 years is 3.5%, andthe WACC is 20.83%, the growth rate equals to 5% after year 5, hence the terminal value is $307,269,144,310.55

(4).The enterprise value can be calculated by the following formula:

$244,826,981,740.15

$287,337,207,740.15

$263,417,207,740.15

$31.97

Based on the calculation under the assumptions, it is recommended that the investors better sell the stocks of Microsoft Corporation. The current stock price of the company is 48.74$, higher than value per share, indicating that the stock is currently overpriced. The market price is likely to go down to meet the intrinsic value of the share. The current high price may be caused by the irrationality among the investors.

(5).Figure 1TheSensitivity of the Value per Share to the FCF Growth

It can be seen from the graph that the value per share of the company is almost linear to the FCF growth. This is also intuitive, since higher growth rate of FCF means that the company will generate more free cash flow in the future, making the company more valuable. Thus, the value per share will increase with FCF growth.

(Detailed calculation process is illustrated in Appendix F)

Investment Appraisal

(1).To evaluate whether the company should develop the new software, various indicators need to be calculated, namely NPV, payback period, internal rate of return and NPV/initial investment. (Kieso, Weygandtand Warfield, 2007)

The first step is to calculate the cash flow that the project could bring to this company. At present, there is an initial cash outflow of 175,000$ for the performance server. Note that 4000$ incurred in customer survey should not be counted into the initial cash outflow, as it is the sunk cost that has been spent, not depending whether to execute the project. At the end of the first year, 6000 licenses will be sold, each sold at a price of 90$ with a variable cost of 20$. At the same time, a cash outflow of 50,000$ for advertising campaign will occur, along with fixed cost of 30000$. The profit before tax for the first year will be 305000$ and profit after tax will be 236375$. After that, depreciation of the software marker, 35000$, will be added back so that the cash flow of the first year will be 271375$. The same will happen for the following years with changes on the price and variable cost of licenses, except that at the end of year 5, a cash inflow of 15000$ will occur from the selling of the server and tax will be paid on that gain.

The overall cash flow is demonstrated in the following table.

Table 1 Cash Flow of the Project

Year 0 1 2 3 4 5

Cash Flow -175000 271375 261610 200599.7 144482.8 104042.1

Based on the cash flow of the project, the important values for determining the worthiness of the project could be calculated. 

$450653.73

Thus, the project is profitable under the current cost of capital. Furthermore, the initial investment will be paid back just in one year, so that the company will not lose much capital liquidity in this project. The internal rate of return of the project is 143%, much higher than the weighted average cost of capital, meaning that the capital is used with great efficiency. In fact, the net present value of the project accounts for 258% of the initial investment. This figure tells the fact that investment of 1 dollar into the project will generate 2.58 dollar’s capital.

Overall, the net present value is more than zero, so that this company should invest in the new project, and purchase the high performance server.

(Detailed calculation process is illustrated in Appendix G)

(2).The break-even point is that the cash flow generated by the sales of licenses and other expenses lead to the net present value of the project to be 0. If more licenses are sold, then the project will be profitable, otherwise the project will prove to be a loss of capital. The break-even point can be calculated in Excel with the following steps: Quick Access Bar – DATA - ‘What-if Analysis’ - ‘Goal Seek’, and set the goal to be ‘NPV = 0’ and changing cell to be ‘annual production’. The company has to sell more than 2534 licenses for the project to be profitable.(Benninga, 2010).

(Detailed calculation process is illustrated in Appendix H)

(3).From the calculation in part 2, the cost of equity is 22.01%, and the cost of debt is 2.50%. Thus, an increase of the debt in the company’s capital structure affects the firm‘s WACC in the way that the WACC will be reduced. Therefore, the rate used to discount the future cash flow generated by the project will be lower, resulting in a higher net present value of the project and thus the project will be of more value and more attractive to the company.

On the other hand, a decrease of the debt in the company’s capital structure will lead to the increment of the firm‘s WACC. Hence, the discount rate of the project will increase and the net present value of the project will decrease. However, even if the WACC is increased to the maximum level (the company’s capital is all financed by equity), which is 22.01%, the project will have a positive NPV and be profitable for the company.

The change in the capital structure of the company will also change the flexibility of the operation. As a new project, there will be risk involved in the investment of the project. If the annual sales of the licenses are lower than 2534, as calculated previously, the net present value of the project will be lower than 0, so that the project is not worth investment. Since the creditors are more risk averse than the stockholders, the increase in the debt financing will reduce the flexibility of the operation and hence the possibility that the project will be approved. However, as have said before, the increase in debt financing will reduce the WACC and raise the NPV of the project, making it more attractive. Thus, the effect of the change of capital structure on the value of the project is determined on which of the two forces is stronger. Therefore, the project value is highest when the company under the optimal capital structure.

Conclusion

This report analyses the financial status of Microsoft Corporation, and calculate important parameters of the company, such as the capital structure and enterprise value, by using the financial model , according to the financial data of Microsoft Corporation.

Based on the result of investment appraisal, the project has positive net present value, and is worth investment for Microsoft Corporation.

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