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At the end of the fiscal year ending June 30, 2003, Microsoft reported common equity of $64.9 billion on its balance sheet, with $49.0 billion invested in financial assets (in the form of cash equivalents and short term investments) and no financing debt. For fiscal year 2004, the firm reported $7.4 billion in comprehensive income, of which $1.1 billion was after-tax earnings on the financial assets.
This month Microsoft is distributing $34 billion of financial assets to shareholders in the form of a special dividend.
1. Calculate Microsoft's return on common equity (ROCE) for 2004.
2. Holding all else constant what would Microsoft's ROCE be after the payout of $34 billion?
3. Would you expect the payout to increase or decrease earnings growth in the future? Why?
4. What effect would you expect the payout to have on the value of a Microsoft share?
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