Problem:
Analysis of selected liquidity, activity, finanacial leverage, and profitability measures of Microsoft Corporation. (Refer to our Web site for future updates to this problem.) Presented here are summarized data from the balance sheets and income statements of Microsoft Corporation, a computer software company:
2003 2004
Revenue $32,187 $36,835
Operating expenses:
Cost of revenue 6,059 6,716
Research and development 6,595 7,779
Sales and marketing 7,562 8,309
General and administrative 2,426 4,997
Total operating expenses $22,642 $27,801
Operatinhg income $9,545 $9,034
Investmemt income 1,509 3,162
Income before income taxes $11,054 $12,196
Provision for income taxes 3,523 4,028
Net income $7,531 $8,168
Earnings per share:
Basic $0.70 $0.76
Diluted $0.69 $0.75
Market pride per share at year-end $27.37 $26.72
Assests
Current assests: $6,438 $15,982
Cash and equivalents 42,610 44,610
Short-term investments
Total cash and short-term investments $49,048 $60,592
Accounts receivable, net 5,196 5,890
Inventories 640 421
Deferred income taxes 2,506 2,097
Other 1,583 1,566
Total current assets $58,973 $70,566
Property and equipment, net 2,223 2,326
Equity and other investments 13,692 12,210
Goodwill and intangible assets, net 3,512 3,684
Deferred income taxes 2,161 1,829
Other long-term assets 1,171 1,774
Total assets $81,732 $92,389
Liabilities and Stockholders' equity
Current liabilities:
Accounts payable $1,573 $1,717
Accured compenstation 1,416 1,339
Income taxes 2,044 3,478
Short-term unearned revenue 7,225 6,514
Other 1,716 1,921
Total durrent liabilites $13,974 $14,969
Long-term unearned revenue 1,790 1,663
Other long-term liabilities 1,056 932
Stockholders' equity:
Common stock and paid-in-captial-shares
Authorized 24,000: shares issued and
outstanding 10,771 and 10, 862 $49,234 $56,396
Retained earnings, inculding accumulated other
comprehensive income of $1,840 vand $1,119 15,678 18,429
Total stockholders' equity $64,912 $74,825
Total liabilities and stockholders' equity $81,732 $92,389
At June 30,2002, total assets were $67,646, total liabilities were $15,466, and total stockholders' equity was $52,180 (in million).
a. Calculate Microsoft's working captial, current ratio, and acid-test ratio at June 30, 2004, and at June 30, 2003.
b. Calculate Microsoft's ROE for the years ended June 30, 2004 and 2003.
c. Calculate Microsoft's ROI, showing margin and turnover, for the years ended June 30, 2004 and 2003.
d. Calculate Microsoft's price/earnings ratio at June 30, 2004 and 2003.
e. Calculate the following activity measures for microsoft at June 30, 2004 and 2003:
1. Accounts receivable turnover.
2. Number of days' sales in accounts receivable.
f. Calculate the following financial leverage measures for microsoft at June 30, 2004 and 2003:
1. Debt Ratio
2. Debt/equity ratio.
g. For the first time in the company's history, Microsoft paid cash dividends on its common stock in 2003 ($0.08 per share, for a total of $857 million). In fiscal 2004, dividends were increased to $0.16 per share, for a total of $1,729 million. What do you think was the primary reason for Microsoft's "no dividends" policy, and why has that policy been changed in recent years?
h. Write a conclusion about the appropriateness of an investment in the common stock of Microsoft Corporation for a young, single professional with funds to invest in common stock.