Your colleague picks up the 2012 annual report of Microsoft (that we showed in Chapter 6) and finds that Microsoft reports an effective tax rate of 23.8% for fiscal year 2012 and 17.5% for fiscal year 2011. He argues that Microsoft thus faces a low tax rate. It should not have much long-term debt in its capital structure, your colleague maintains, and it should have issued preferred stock and invested idle cash in taxable bonds, and it should be leasing assets.

a. Evaluate your colleagues argument?

b. Discuss how the effective tax rate is calculated in the financial statements. What about implicit taxes?