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Why is Microsoft increasing is debt balance?
Expectations are that Microsoft’s debt balance will increase over time, as the company continues to fund stock repurchases and pay cash dividends and make acquisitions.
Microsoft is reducing costs through layoffs, but does it make sense for the company to increase debt?
Microsoft is reducing costs through layoffs, but does it make sense for the company to increase debt?
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I think it makes sense to increase your debt load if you expect the return on your debt will earn more than the interest rate you are paying out.
Microsoft has a AAA rating on their debt, so they can pay out very low interest rates (less than 4 percent, which isn't that much more than inflation). If they buy back their shares (which it sounds like they will be doing), they would only need the shares to appreciate by 4 percent a year in order to turn a profit on their debt.
Microsoft believes that their stock is undervalued. If that is true, then they will very likely earn far more than a 4 percent return on their investment.
Similarly, if they spend the money to grow the company (though I think that's less likely), it would not be too difficult to earn more of a return than that.
The company has well over $10 billion in cash. But they made the judgment that the money they borrow will turn a profit, so there was no sense in burning their cash on hand.
My guess is that it will turn out to be a good investment.
Microsoft has a AAA rating on their debt, so they can pay out very low interest rates (less than 4 percent, which isn't that much more than inflation). If they buy back their shares (which it sounds like they will be doing), they would only need the shares to appreciate by 4 percent a year in order to turn a profit on their debt.
Microsoft believes that their stock is undervalued. If that is true, then they will very likely earn far more than a 4 percent return on their investment.
Similarly, if they spend the money to grow the company (though I think that's less likely), it would not be too difficult to earn more of a return than that.
The company has well over $10 billion in cash. But they made the judgment that the money they borrow will turn a profit, so there was no sense in burning their cash on hand.
My guess is that it will turn out to be a good investment.
Voted as best: davepamn, tracebooks
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