At the end of its June 30, 2008, fiscal year, Microsoft Corporation reported $23.7 billion in short-term interest-bearing investments and cash equivalents. The firm had no debt obligations. Subsequently, in September of that year, the firm announced a $40billion stock repurchase and its intention to raise the annual dividend to 52 cents a share, from 44 cents, or to a total of $4.7 billion. Cash flow from operations for fiscal year 2009 was projected to be $23.4 billion, up from $21.6 billion for 2008; interest receipts were expected to be $702 million; and the firm was expected to maintain cash investment at the 2008 level of $3.2 billion. Cash receipts from the issue of shares to employees (including tax benefits) were expected to be $2.5 billion. The firm's tax rate is 36 percent.
a. By applying the treasurer's rule, lay out the strategy for Microsoft's treasurer for managing cash flows.
b. Microsoft is actively looking for acquisitions to enhance its presence in the Web search and Web applications area. What would be the effect on the treasurer's plan if Microsoft decided to make a $4.2 billion cash acquisition?
c. For many years, Microsoft has carried no debt (obligations). At the time of the share repurchase announcement, Microsoft also said that it had received authorization from its board of directors for debt financing up to $6 billion. Why would the management seek such authorization at this stage?