Microsoft Corporation Capital Structure - 50megs

Microsoft Corporation Capital Structure

Case Study

Ruben D. Cohen

1

Financial Statement

? Simplified financial statement as of 3Q2008 ? Market cap of $233B is used ? Debt of 0.01 is used so underlying program does not crash ? AAA Credit rating calculated at zero leverage

Ruben D. Cohen

2

Capital Structure Curve

Value

237,000

236,500

236,000

235,500

235,000

234,500

234,000

233,500

233,000

232,500

0.0

0.1

0.2

0.3

Model output shows the company's "value" curve based on the financial statement shown on the previous page. This is the inverse of the WACC curve.

Ruben D. Cohen

3

In the News

Ruben D. Cohen

4

Model Output ? Scenario 1

New capital structure curve after a $40B debt-financed equity buyback

Table III

234,500 234,000

Additional equity Additonal debt Total additional assets % Impact on EBIT

-40,000 40,000

0 -1%

233,500 233,000 232,500 232,000

231,500

Implied rating

BBB

231,000

230,500

230,000

0.0

0.1

0.2

0.3

The model shows that $40B will push the capital structure beyond the optimal, giving it a new rating of BBB (red point in graph). There is also a slight drop in the EBIT due to the debt-equity swap. Will Microsoft be happy with this? Not very likely!

Ruben D. Cohen

5

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