Problem:
Microsoft Corporation has accumulated $40 billion in cash and short-term marketable securities; more than Ford, Exxon Mobil, and Wal-Mart combined. Despite an economic slowdown, the company's core business still generates about $1 billion per month in cash. With this much cash, Microsoft is almost as much an investment firm as it is a software company. As a matter of fact, Microsoft has a cash balance larger than the combined assets of all but four of the equity mutual funds in the United States. (Keep in mind this is before 2004).
1. What are the business motives for holding cash in general? Of these motives, which one is most likely driving Microsoft's accumulation of cash? Explain your answer in detail.
2. Financial management theory suggests that working capital should be maintained at levels no higher than necessary due to the lower returns typically earned on cash and short-term investments. If you were a Microsoft shareholder, would you support the accumulation of $40 billion in cash? Explain your answer in detail.