The Capital Structure of Microsoft Corporation (Essay Sample)

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Capital Structure of Microsoft Corp.
Introduction:
Capital structure of a corporation involves the use of its relative debt and equity in order to finance its operation. The more the debt involved the higher the firm’s earnings stream riskiness. On the other hand, a very high return rate is expected, bearing in mind that stocks price will be lowered due to the huge debt. However since the expected return rate is generally high, this will facilitate stock investment to more investors and in turn increasing the stocks price. This clearly illustrates optimal capital structure which is the criteria approached to achieve maximum stock price by equating risk and return. The important factors that affect the capital structure of a corporation include national tax and local creditors’ rights.
Currently, the company’s capital structure is facing many challenges particularly the windows and windows live division. This has been facilitated by current development in the IT sector where “tablets and smart phones have been introduced in the market” (Charles, p., 34).
This has led to the retailing customers reaching for them rather than the old version of desktop. To catch up with the competition, Microsoft Corporation intends to release windows 8 beta. This will facilitate the corporation’s market development in an excellent manner (John et al, 43).For instance, the average debt ratio and interest rate for each S&P rating from AAA to B , derived from S&P(2006) by the use of standard and poor’s rating and ratios was as follows :
ROW
Bond rating
AAA
AA
A
BBB
BB
B
1
TD/(TD+E)
0.124
0.28
0.375
0.425
0.537
0.758
2
YIELD (%)
4.150
4.650
4.900
5.900
7.050
9.050
TABLE A (*Debt ratios taken from S&P)
Table A gives the average total debt ratios for ratings from AAA to B. with reference to the table it is true to claim that it is a tendency for a manufacturing company’s bond rating, such as Microsoft corp. to decrease as the financial leverage increases in the capital structure. As the company increases its financial leverage amount in the capital structure the bond rating drops and the cost of debt rises.
Microsoft Corporation’s capital structure has changed recently in a way that is not impressing and quick measures need to be put in place so as to avoid total fall down of this company. This is a fact proven by Territory Manager at Microsoft Corporation, Mr. Charles Clark.” Currently, the company’s capital structure is facing many challenges particularly the windows and windows live division”.
In summation, this kind of capital structure does not fit to a company of such class d