Comparison of Intel and Microsoft’s debt and equity securities Essay
Comparison of Intel and Microsoft’s debt and equity securities
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As of the year ended June 30, 2007, Microsoft does not have any bonds payable outstanding, or any long term debt security for that matter - Comparison of Intel and Microsoft’s debt and equity securities Essay introduction. Among the reasons why Microsoft doesn’t borrow is in the nature of its industry—technology companies usually plough back their earnings from previous years to finance their research and development expenses.
Intel has a different story. As of December 29, 2007, the company has $140 million in short term non-interest bearing drafts payable with $2 million of the portion of long-term debt classified as current. Its long term-debt meanwhile consists of junior subordinated convertible debentures at 2.95% due in 2035, with the embedded conversion option qualified as a derivative under SFAS no. 133. EITF 00-19, “Accounting for Derivative Instruments Potentially Settled in, a Company’s own Stock,” also qualifies the derivative as a part of stockholders’ equity if it was freestanding, thus it is not accounted for separately. The debentures also have a contingent interest provision that will depend on certain events on December 15, 2010, the fair value of which derivative was not considered significant as of balance sheet dates.
In 2005 and 2007 Intel guaranteed the principal and interest of bonds issued by the City of Chandler, Arizona which at $159 and $125 million dollars respectively constitute a general obligation of Intel. Both the bonds are subject to mandatory tender on November 30, 2010 and December 1, 2012 respectively. The 2007 bonds are interesting in that Intel has entered into an interest rate swap agreement from a fixed rate to a floating LIBOR-based return. Another unique thing is the application of SFAS no. 159 to the 2007 Arizona bonds, which is a relatively new standard for US companies to measure their financial instruments at fair value.
Intel also has euro denominated debt maturing due 2008-2018 at 7%-11% which it used to finance facilities in Ireland. The choice of currency reduces risk of the currently weak exchange rates between the US dollar and the euro. (Intel 2008).
Although also a technology company, Intel is in the hardware business, and as such is in a better position to borrow because of its huge research and development and manufacturing costs, which sometimes cannot be offset by cash flows from sales alone.
Both Microsoft and Intel have common stock as their sole equity security, with $0.01 and $0.001 par value respectively. Both are traded on the NASDAQ and both companies are indexed on the Dow Jones. Both companies are also actively repurchasing their shares, a sign that both are more willing to buy back their own stock than borrow to increase returns on equity.
Microsoft announced in its June 30, 2007 that $15.14 billion still remained of the $36.16 approved repurchase amount. The firm has been steadily decreasing its stockholders equity, going from $10.71 billion in 2005 to $9.38 billion in 2007. (Microsoft 2007). Intel has an outstanding repurchase amount of $25 billion, $14.5 billion of which is still outstanding, but the company increased its total equity to $42.76 billion at the end of 2007 from $36.75 billion the year before. (Intel 2008). Both companies are issuing additional shares because of employee incentive plans, and to prevent dilution the firms are buying the shares back.
R E F E R E N C E S
Intel Corporation. (2008). 2007 Annual Report, 54, 71-73. Retrieved May 3, 2008 from http://media.corporate-.net/media_files/irol/10/101302/2007annualReport/common/pdfs/
Microsoft Corporation. (2007). 2007 Annual Report, 34, 50-51. Retrieved May 3, 2008 from http://www.microsoft.com/msft/reports/ar07/downloads/MS_2007_AR.doc