Project Part 3

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Project Part 3: Microsoft vs. Apple Bonds Aniko McClendon University of Maryland Global Campus FINC 330-6883 Business Finance Salma Asif September 28, 2023

Introduction Microsoft Corporation’s mission is to provide customers with technology that is consistent to their needs. They offer various products, that includes hardware devices, cloud- based solutions like Office 365, operating systems, and software applications, which is were their revenue stems from along with online advertising. They are committed to providing excellent products and services to help customers meet their needs, while continuing to enhance their services effectively. The purpose of this project is to help my client invest in bonds and stocks that I think are best, there will be an investigation for the bond and stock performance for Microsoft Corporation and its competitor Apple Corporation, then evaluating both company’s data stock performance for Microsoft for the last 3 years and its competitor Apple for the last year. Recommendations will be made to help the company strategize for the for the future, these suggestions can also help with the financial leverage of the company to increase shareholder wealth, we must consider that Microsoft’s financial health when considering these changes.

Bond Performance 1. 2. For the first bond the last price was 99.65 and for the second bond the last price was 99.79. Assuming that par value of the bond is $1,000, the investor would pay $996.50 for the last price for first bond. Because $996.50 x 1000/100 = 996.50. For the last price of the second bond, it came to 997.90. Because 99.7 x 1000/100 = 997.90.

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3. Assuming that par value of the bond is $1000. The annual coupon interest payment for the first bond would be 33. Because the coupon rate is 3.300% x 1000 = 33. For the second bond the annual coupon interest payment would be 52. Because the coupon rate is 5.200% x 1000 = 52. In this case to get the annual coupon interest payment you must multiply the coupon rate times 1000. 4. Assuming that par value of the bond is $1000. The current yield of bonds for the first bond shown would be 3.31, to get the answer you must divide the annual coupon interest payment by the last bond price which would be 33/996.5 = 3.31. For the second bond the current yield of bonds would be 5.21, 52/997.90 = 5.21. 5. According to the Business Insider website the YTM for the first bond is 5.03% and for the second bond the YTM was 5.10% 6. a. If I were to buy a bond issued by Microsoft, the bond that I would choose is the second bond and that is because even though it cost a little over a dollar more to purchase compared to the first bond, the second bond has a higher coupon interest payment which came to 52, in comparison to the first bond which was 13 lower, coming in at 33. The current yield of bonds for the second bond came in higher than the first bond as well by 1.90. And last reason as to why I think the second bond would be the best one to buy is because the YTM was 0.07% percent

higher than the first bond as well. b. Both bonds are callable since they can be paid to client before the maturity date. I think that in this case I will change my decision to buy them, even though with callable bonds you can get redeem them earlier than the mature date, Microsoft still has the right to pay the pre-agreed value. I think that it would be safer to have a non-callable that way you are certain to get the full bond amount. c. For both bonds, S&P Investors rating is AAA, Moody’s investors gave the company a rating of Aaa. The purpose of a bond rating is to measure how trustworthy and responsible the company is financially and how well the company is with paying bonds on time. d. If I was an investor who is looking for a bond to invest in, I would remain to invest in Microsoft, their financial health is persistent and based off their bond rating I trust them enough to make payments on time even though their bonds are callable. e. Microsoft’s debt/equity ratios support my decision still because over the last three years has decreased. This means that the company has earned enough to not have to borrow from others over years. They may have been more responsible with paying off debt or strategized ways to increase revenue to outweigh debt owed which is good either way. Microsoft’s financial leverage ratio however is a bit on the higher side, but improvement is shown over the past three years. Typically, a financial leverage ratio under one is consider acceptable, Microsoft’s ratio came to 2.55 but decreased slightly by 0.36 by 2022. This would be a cause of concern for potential Investors, but my stance still stays the same with my decision to invest into the company.

Market Ratios Apple 2022 Price/Earnings ratio 21.27 Price/Cash Flow ratio 17.37 Price/Book ratio 40.62 Price/Forward Earnings 21.28 PEG ratio 2.53 Dividends per share 0.91 After reviewing the market ratio results for Microsoft and its competitor Apple. For Microsoft’s Price/Earnings ratio it increased by 1.75 to 37.62 then in 2020 it decreased by 12.11 to 25.51. In comparison to Apple in 2022 their ratio came to 21.27. This may mean that even though Microsoft’s ratio dropped, they still have higher growth regarding their earnings in comparison to Apple whose P/E ratio came to 21.27. For the Price/Cash Flow ratio, again Microsoft experienced some growth then another drop from 2021-2022 bringing the ratio to 20.56, while Apple’s ratio came to 17.37, in this situation both companies have a good ratio, which shows that they both generating cash flow well. For Price/Book ratio Microsoft’s ratio came to 10.29, the two years prior it was a slight decline, Apple’s ratio however came to 40.62, four times higher than Microsoft’s ratio this shows that their competitor may be overvalued. For Price/Forward earnings ratio Microsoft didn’t have a record for 2022 but looking at the previous years, I predict that their ratio would still be higher than Apple which came to 21.28. Regarding the PEG ratio, Microsoft didn’t have a record for 2022 here as well, while looking at them competitor’s ratio for 2022 which came to 2.53, but from looking at Microsoft’s previous years you can tell that their ratio wouldn’t be far from Apple. For the dividends per share ratio Microsoft’s ratio increased over the past three years to 2.54, while Apple’s ratio came to 0.91, Microsoft 2022 2021 2020 Price/Earnings ratio 25.51 37.62 35.87 Price/Cash Flow ratio 20.56 31.15 25.76 Price/Book ratio 10.29 16.60 13.60 Price/Forward Earnings - 36.90 33.00 PEG ratio - 2.87 2.57 Dividends per share 2.54 2.30 2.09

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with their competitor’s ratio being so slow they don’t seem to be as competitive as Apple. Based upon Microsoft’s financial performance and sustainability explained, I think that common stockholders are receiving an adequate return on their investment, and I still find it reasonable to purchase stocks with the company. Recommendations After reviewing the results of my analysis for Microsoft, some specifics recommendations I must suggest help keep Microsoft in a positive financial standing would be to come out with a cost efficient but new hardware product, something that you haven’t produced before that would be helpful and useful for your consumer base to drive sales. I noticed that Microsoft is doing quite well will debt to equity my suggestion would be to stay consistent with paying off any debt, investors pay attention to factors like this when deciding a company to invest in. Another recommendation I would suggest is to reevaluate the cost of your products see where you may want to raise prices or lower them, sometimes when products are too costly it takes longer to sell that item however, when the cost for products are lower it might encourage more customers to buy it especially if the product or services is popular.

Reflection After completing this assignment, I learned how every factor with a company’s previous and current financial statements, valuation, dividends etc. are important things to research and investigate when deciding to invest into a company. I also learned that things could change financially as the world goes through changes everything is a chain reaction, so one year a company you decided to invest into could be performing very well and the next year you witness a decline, these are situations you must be prepared for. How I could apply this to everyday life is first when I’m ready to make my own investments in the future I’ll have better knowledge regarding how to read financial statements and charts and being able to evaluate previous years to make better investment decisions. Another way I can use this in the future is when I start me own business, I’ll be able to evaluate my own financial charts to see where I may need areas for improvement or to show where I’ve excelled.

References https://www.microsoft.com/investor/reports/ar13/financial-review/business-description/ index.html https://markets.businessinsider.com/bonds/5_200-microsoft-bond-2039-us594918ad65? miRedirects=1 https://markets.businessinsider.com/bonds/microsoft_corpdl-notes_201717-27-bond-2027- us594918by93

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