Problem: At the end of fiscal year 2006, Microsoft had the following account balances on its financial statements. (All figures $millions, source: MoneyCentral.com).
Revenues 44,282
EBIT 16,472
Interest Expense 0
Net Income After Taxes 12.599
Total Assets 69,597
Current Liabilities 22,442
Other Liabilities (Long Term) 7,051
Total Equity 40,104
Q1. Calculate Microsoft's debt to assets and times interest earned ratios.
Q2. Assume that, for the computer software industry, the average times interest earned ratio is 8:1. How much interest expense could Microsoft carry and still not exceed industry norms?
Q3. Assume that Microsoft can borrow at an interest rate of 8% per year. What amount of interest-bearing long term debt can they carry on their balance sheet without exceeding the industry-average times interest earned ratio? At this amount of debt, calculate their new long term debt to assets ratio.(Don't forget to add in the current long term debt of 7,051.)
Q4. Why do you suppose that Microsoft has such a low debt ratio?
Q5. As a Microsoft shareholder, would you favor the additional debt in the firm's capital structure? Why or why not?