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Microsoft's debt to assets and times interest earned ratios

At the end of fiscal year 2006, Microsoft had the following account balances on its
financial statements. (All figures \$millions, source: MoneyCentral.com).
Revenues 44,282

EBIT 16,472

Interest Expense 0

Net Income After Taxes 12.599

Total Assets 69,597

Current Liabilities 22,442

Other Liabilities (Long Term) 7,051

Total Equity 40,104

i) Calculate Microsoft's debt to assets and times interest earned ratios.

ii) Assume that, for the computer software industry, the average times interest
earned ratio is 8:1. How much interest expense could Microsoft carry and still
not exceed industry norms?

iii) Assume that Microsoft can borrow at an interest rate of 8% per year. What amount of interest-bearing long term debt can they carry on their balance sheet without exceeding the industry-average times interest earned ratio? At this amount of debt, calculate their new long term debt to assets ratio.(Don't forget to add in the current long term debt of 7,051.)

iv) Why do you suppose that Microsoft has such a low debt ratio?

v) As a Microsoft shareholder, would you favor the additional debt in the firm's capital structure? Why or why not?

Solution Preview

At the end of fiscal year 2006, Microsoft had the following account balances on its
financial statements. (All figures \$millions, source: MoneyCentral.com).
Revenues 44,282

EBIT 16,472

Interest Expense 0

Net Income After Taxes 12.599

Total Assets 69,597

Current ...

Solution Summary

This provides the steps to calculate the Microsoft's debt to assets and times interest earned ratios

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