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Assumptions For Microsoft Financial Statements Projection

1607 words - 7 pages

1.SalesDue to the recent launch of new products, such as Windows Vista and Microsoft Office 2007, higher growth rates are predicted for 2007 and 2008. The sales growth rate for the next two years is also very close to some analysts' estimates. From 2008 to 2010, Microsoft will have no significant product going into the market, as Microsoft has just launched a big numbers of products in 2006 and 2007, including X-box, Zune, Windows Vista, etc. In addition, the competition in the high-tech industry will drive down the sales growth rate to 8% in these three years. Besides, as Microsoft's profit mostly comes from Operating system products, we expect them to launch a new version of Windows in 5 ...view middle of the document...

After that, the R&D/Sales will return to 15%, as usual.4.SG&AWindows Vista was launched on April 1st, 2007, which is in the fourth quarter of Microsoft's fiscal year 2007. Therefore, although the SG&A was pretty low in the first three quarters, it is predicted to get significantly higher at the end of the fiscal year. The SG&A/Sales ratio of the whole year might reach 35%, as Microsoft has to have intensive SGA expense to manage and sell their new product. The SG&A will then come back to 30% in the years from 2008 to 2011. Another big increase in SG&A will happen for the new launch in 2012.5.CashMSFT continues to use cash to repurchase their shares. This program will expire in 2011. However, because the new repurchase program is relatively smaller and longer than that in 2006, Microsoft will have a slightly increase in cash-to-sales ratio. But in general, we expect that MSFT can still maintain a pretty low amount of cash in the next 4 years. The cash balance in 2007 might increase to 25%, and then, decrease to 20% during the years of the program. In 2012, when the repurchase program expires, Microsoft will have a big cash amount on hand, which makes the ratio to reach 40% in that year.6.Accounts receivableIn the third quarter in fiscal year 2007, the Accounts Receivable/Sales ratio was 22%. The ratio is predicted to reach 25%, because of the launch of Windows Vista. Currently, the sales of Vista primarily come from companies and organizations, which usually purchase on account. Therefore, it is reasonable to make an assumption about an increase in that ratio at the end of the year. After 2007, the ratio will come back to 17.5%, before having an increase in 2012.7.InventoryMicrosoft is at risk of having insufficient amount of consoles for Xbox, as they only have one supplier. This is the reason why they are maintaining a really high inventory level to avoid a shortage in production. However, we can expect this problem to be fixed soon, and their inventory/sales will gradually be lower down to a more reasonable ratio. In 2010, the ratio might reach 2% and remain at least until 2012.8.Short- and Long-term Deferred Income TaxThe ratio of both short- and long-term deferred income tax-to-sales does not fluctuate much in the past five years. Also, no change in accounting principles is expected to happen in the next five year. Therefore, it is absolutely reasonable to assume short- and long-term deferred income tax-to-sales ratio to equal to the average of the past five years, which is 4.4% and 5.3%, respectively.9.Other Short-term assetsAlthough the short-term assets/sales ratio was pretty high in 2002, it was lower down to around 4% from 2003 to 2006. Therefore, we predict the ratio to be at 4.5%, slightly lower than the 5-year average, in the next five fiscal years.10.Net PPEIn an annual report in 2006, Microsoft committed to invest more on PPE, "including new facilities and computer systems for research and development, sales...

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