Financial Analysis of Microsoft Corporation The WritePass Journal

Financial Analysis of Microsoft Corporation Financial Analysis of Microsoft Corporation IntroductionBACKGROUND OF MICROSOFTDESCRIPTION AND ANALYSIS OF MICROSOFT’ PERFORMANCE OVERTIME  Balance sheet for Microsoft Corporation as at 30th June 2011. (Annually)COMPARISON OF MOCROSOFT PERFORMANCE WITH SP 500 (MARKET) USING T-TESTConclusion:ANALYSIS OF MICROSOFT PERFORMANCE WITH CAPMBIBLIOGRAPHYRelated Introduction BACKGROUND OF MICROSOFT Microsoft is the most prominent technology corporation in the world that deals with computers according to posts from big history.net. ’’ With annual revenues of more than $32 billion, Microsoft Corporation is more than the largest software company in the world: it is a cultural phenomenon. The companys core business is based on developing, manufacturing, and licensing software products, including operating systems, server applications, business and consumer applications, and software development tools, as well as Internet software, technologies, and services’’. fundinguniverse.com/company-histories/Microsoft-Corporation-Company-History.html ‘’The name of the famous person – Bill Gates comes in one’s mind with mention of   the name of Microsoft. He is the founder of the company and is believed to be the smartest programmers ever.’’ bighistory.net/microsoft-a-short-history/. Led by him, Microsoft had witnessed its heydays and has been able to have its product on almost every personal computer in the world, and in the process creating standards in the technology industry as well as market re-definition. ‘’Gates was first exposed to computers at school in the late 1960s with his friend Paul Allen, the son of two Seattle librarians. By the time Gates was 14; the two friends were writing and testing computer programs for fun and profit. In 1972 they established their first company, Traf-O-Data, which sold a rudimentary computer that recorded and analyzed traffic data. Allen went on to study computer science at the University of Washington and then dropped out to work at Honeywell, while Gates enrolled at Harvard. Inspired in 1975 by an issue of Popular Electronics that showed the new Altair microcomputer kit just released by MITS Computer, Gates and Allen wrote a version of BASIC for the machine. Later that year Gates left college to work full time developing programming languages for the Altair, and he and Allen relocated to Albuquerque, New Mexico, to be near MITS Computer, where Allen took a position as director of software development. Gates and Allen named their partn ership Micro-soft’’. fundinguniverse.com/company-histories/Microsoft-Corporation-Company-History.html. The word Microsoft was developed from two different words, micro from microcomputer and soft from software. The name was registered in New Mexico with the secretary of state in November 1976. On November 1978, the first international office of Microsoft was established in Japan and its name was ASCII (American Standard Code for Information Interchange). It is now known as Microsoft Japan. In January 1979 the company’s headquarters was moved to Bellevue Washington. bighistory.net/microsoft-a-short-history/. In the early 80’s, Microsoft witnessed a period of great success when IBM contracted the company to develop an operating system for its personal computers (PC), which was underway. In the late 80’s Microsoft issued IPOs (initial public offering) of over two million shares and in the space of one year the price or the shares tripled and in the process making Gates a billionaire at about thirty years of age. Nonetheless, the company had lots of critics and legal cases against it from competitors and the likes. Microsoft success was further heightened by the tech bubble of the 2000 following the release of the windows XP, windows 2000,the acquisition of Visio corporation which stood as the largest acquisition in the life of Microsoft so far   with transaction value of about One and half a billion dollars. The company also spread its tentacles into the world of gaming with their popularly known X-BOX which has remained a success till date. DESCRIPTION AND ANALYSIS OF MICROSOFT’ PERFORMANCE OVERTIME   Key Dates: 1975: Microsoft is founded by Bill Gates and Paul Allen; they sell BASIC, the first PC computer language program to MITS Computer, Microsofts first customer. 1981: Microsoft, Inc. is incorporated; IBM uses Microsofts 16-bit operating system for its first personal computer. 1982: Microsoft, U.K., Ltd. is incorporated. 1983: Paul Allen resigns as executive vice-president but remains on the board; Jon Shirley is made president of Microsoft (he later becomes CEO); Microsoft introduces the Microsoft Mouse and Word for MS-DOS 1.00. 1985: Microsoft and IBM forge a joint development agreement. 1986: Microsoft stock goes public at $21 per share. 1987: The Company’s first CD-ROM application, Microsoft Bookshelf, is released. 1990: Jon Shirley retires as president and CEO; Michael R. Hallman is promoted in Shirleys place; the company becomes the first PC software firm to surpass $1 billion of sales in a single year. 1992: Bill Gates is awarded the National Medal of Technology for Technological Achievement. 1993: The Company introduces Windows NT. 1995: Bill Gates publishes his first book, The Road Ahead. 1996: The Company acquires Vermeer Technologies and its software application, FrontPage. 1997: The Justice Department alleges that Microsoft violated a 1994 consent decree concerning licensing the Windows operating system to computer manufacturers. 1998: The U.S. Department of Justice files two antitrust cases against Microsoft, alleging the company had violated the Sherman Act. 2000: The Company acquires Visio Corporation, its largest acquisition to date. 2001: Microsoft Windows XP is released internationally. 2003: Microsoft launches Windows Server 2003. 2007: Microsoft launches Windows vista 2009: Microsoft launches windows 7 Source: fundinguniverse.com/company-histories/Microsoft-Corporation-Company-History.html Balance sheet for Microsoft Corporation as at 30th June 2011. (Annually) Assets [+] in Millions of Dollars 06/2010 06/2009 06/2008 06/2007 06/2006 Cash and Equivalents 5,505 6,076 10,339 6,111 6,714 Restrictable Cash Marketable Securities 31,283 25,371 13,323 17,300 27,447 Accounts Receivable 13,014 11,192 13,589 11,338 9,316 Loans Receivable Other Receivables Receivables 13,014 11,192 13,589 11,338 9,316 Inventories, Raw Materials 172 170 417 435 465 Inventories, Work in Progress 16 45 31 148 Inventories, Purchased Components Inventories, Finished Goods 552 502 537 544 1,013 Inventories, Other Inventories, Adjustments Allowances Inventories 740 717 985 1,127 1,478 Prepaid Expenses Current Deferred Income Taxes 2,184 2,213 2,017 1,899 1,940 Other Current Assets 2,950 3,711 2,989 2,393 2,115 Total Current Assets 55,676 49,280 43,242 40,168 49,010 Land and Improvements 526 526 518 428 362 Buildings and Improvement 8,187 7,824 6,030 4,247 3,146 Machinery, Furniture and Equipment 7,546 6,732 5,996 4,691 3,715 Construction in Progress Fixed Assets, Other Fixed Assets, Total 16,259 15,082 12,544 9,366 7,223 Gross Fixed Assets 16,259 15,082 12,544 9,366 7,223 Accumulated Depreciation (8,629) (7,547) (6,302) (5,016) (4,179) Net Fixed Assets 7,630 7,535 6,242 4,350 3,044 Intangibles 1,158 1,759 1,973 878 539 Cost in Excess 12,394 12,503 12,108 4,760 3,866 Non-Current Deferred Income Taxes 279 949 1,389 2,611 Other Non-Current Assets 9,255 6,532 8,279 11,626 10,527 Total Non-Current Assets 30,437 28,608 29,551 23,003 20,587 Total Assets 86,113 77,888 72,793 63,171 69,597 Liabilities [+] in Millions of Dollars 06/2010 06/2009 06/2008 06/2007 06/2006 Accounts Payable 4,207 5,008 4,034 3,247 2,909 Short Term Debt 1,000 2,000 Notes Payable Accrued Expenses Accrued Liabilities 3,283 3,156 2,934 2,325 1,938 Deferred Revenues 13,652 13,003 13,397 10,779 9,138 Current Deferred Income Taxes 1,557 Other Current Liabilities 4,005 3,867 9,521 7,403 6,900 Total Current Liabilities 26,147 27,034 29,886 23,754 22,442 Long Term Debt 4,939 3,746 Deferred Income Tax 229 Other Non-Current Liabilities 8,623 7,550 6,621 8,320 7,051 Minority Interest Capital Lease Obligations Preferred Securities of Subsidiary Trust Preferred Equity Outside Shareholders Equity Total Non-Current Liabilities 13,791 11,296 6,621 8,320 7,051 Total Liabilities 39,938 38,330 36,507 32,074 29,493 Preferred Shareholders Equity Common Shareholders Equity 46,175 39,558 36,286 31,097 40,104 Common Par 62,856 62,382 62,849 Additional Paid in Capital 60,557 59,005 Cumulative Translation Adjustments 149 Retained Earnings (16,681) (22,824) (26,563) (31,114) (20,130) Treasury Stock Other Equity Adjustments 1,505 1,229 Total Capitalization 51,114 43,304 36,286 31,097 40,104 Total Equity 46,175 39,558 36,286 31,097 40,104 Total Liabilities Shareholders Equity 86,113 77,888 72,793 63,171 69 Closing price =$25.51 Volume sold =25.16m Source:answers.com/main/dsdata?dsid=2940templateid=0cid=27590212qm_page=30703. [Accessed 4 April 2011]. With more descriptive statistics, we can also examine the performance of Microsoft on a monthly basis from the year 1988- 2009 using returns (unit%) See excel for descriptive statistics. Microsoft return (unit %) Market return (unit %) Mean 0.021622876 Mean 0.857870722 Standard Error 0.00618845 Standard Error 0.269942879 Median 0.022084196 Median 1.41 Mode 0.064221396 Mode 1.78 Standard Deviation 0.100359793 Standard Deviation 4.377737838 Sample Variance 0.010072088 Sample Variance 19.16458858 Kurtosis 1.421423202 Kurtosis 1.709578314 Skewness 0.366537791 Skewness -0.812673531 Range 0.751310392 Range 29.51 Minimum -0.343529412 Minimum -18.46 Maximum 0.40778098 Maximum 11.05 Sum 5.686816298 Sum 225.62 Count 263 Count 263 From the descriptive statistics above, Microsoft has a positive skewness unlike the market whose skewness is negative, this indicates that Microsoft has a better flow or return than the market. It could also be noted that Microsoft is (1) standard deviation away from its mean whereas the market is (4) standard deviation away from its mean, this means that the returns of Microsoft had not been too volatile over the years and return on stocks are less risky. COMPARISON OF MOCROSOFT PERFORMANCE WITH SP 500 (MARKET) USING T-TEST See t-test on Excel   Ã‚  Ã‚   H0: Microsoft did not outperform the market   Ã‚  Ã‚   H1: Microsoft outperformed the market t-Test: Paired Two Sample for Means    Variable 1 Variable 2 Mean 0.021622876 0.857870722 Variance 0.010072088 19.16458858 Observations 263 263 Pearson Correlation 0.539530773 Hypothesized Mean Difference 0 df 262 t Stat -3.136067434 P(T=t) one-tail 0.000953757 t Critical one-tail 1.650690284 P(T=t) two-tail 0.001907515 t Critical two-tail 1.969059657 Conclusion: From the t-Test above, since the t-stats is greater in value than the   t -critical (irrespective of the -ve sign), we need to accept the alternative hypothesis (H1) which says that Microsoft outperformed the market and reject the Null hypothesis (H0) which says that Microsoft did not outperform the market. We can also infer this conclusion by looking at the P- value, here we can see that the p- value is less than the significance level of .05, therefore we need to accept the alternative hypothesis (H1). ANALYSIS OF MICROSOFT PERFORMANCE WITH CAPM Regression Statistics Multiple R 0.258985259 R Square 0.067073365 Adjusted R Square 0.063498933 Standard Error 0.185690508 Observations 263 ANOVA    df SS MS F Significance F Regression 1 0.647027164 0.647027164 18.764764 2.11102E-05 Residual 261 8.999531777 0.034480965 Total 262 9.646558942    Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept -0.32415329 0.011530623 -28.1123831 6.17385E-81 -0.346858177 -0.30145 -0.34686 -0.30145 X Variable 1 0.011371441 0.002625088 4.331831484 2.11102E-05 0.006202393 0.01654 0.006202 0.01654 CAPM :- E(R)=RF+ÃŽ ²[RM-RF] By substituting the CAPM formula into the regression, we have Y= ÃŽ ±+ÃŽ ²x+e Y = dependent variable ÃŽ ± = intercept ÃŽ ² = co-efficient of independent variable e =error When x=0, ÃŽ ± is an estimate of Y, then excess return of Microsoft would be given as: Excess return= -0.32415329+0.011371441+0.185690508 Adjusted R Square = 0.063498933 The adjusted R Square indicates that 6.3% of the variability in the excess return of Microsoft is explained by the market. I.e. for every percentage change of return in the market, Microsoft’s return changes by 6.3%.    BIBLIOGRAPHY Andrews, Paul. How the Web Was Won: Microsoft from Windows to the Web: The Inside Story of How Bill Gates and His Band of Internet Idealists Transformed a Software Empire. New York: Random House, 1999. Consuming, Michael A., Microsoft Secrets: How the Worlds Most Powerful Software Company Creates Technology, Shapes Markets, and Manages People, New York: Free Press, 1995, 512 p. Desmond, Edward W., Microsofts Big Bet on Small Machines, Fortune, July 20, 1998, pp. 86-90. EU, Microsoft Clash Over Monopoly Ruling, Associated Press, April 29, 2004. Evers, Joris, Ballmer: Windows Server 2003 Does More with Less, IDG News Service (San Francisco Bureau). France, Mike, Microsoft: The View at Halftime, Business Week, January 25, 1999, p. 78. Hamm, Steve, No LetupAnd No Apologies: Antitrust Scrutiny Hasnt Eased Microsofts Competitiveness, Business Week, October 26, 1998, p. 58. 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