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Microsoft Stocks: Corporate Finance

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Due to its geographic dispersion, Microsoft is subject to tax risk. Tax risk affects investors because it affects net earnings4. Being accountable for tax in the US as well as numerous foreign jurisdictions, there is uncertainty over Microsoft’ s tax liabilities. Therefore, tax provisions may not be accurate which can significantly impair its earnings. Other examples of business risk that may affect Microsoft’ s revenue are delays in product development, lawsuits and claims, changes in accounting standards, and maintaining uniformity in pricing structures due to a global presence. Another challenge for Microsoft is to tackle with the market risk that comprises of foreign exchange risk and interest rate risk.

It is quite obvious that having operations worldwide Microsoft is deemed to face the risk of foreign currency losing value relative to its domicile currency. However, as mentioned in its annual report, Microsoft manages this risk by hedging its foreign exchange exposure and constantly monitoring it to maximize its overall effectiveness. The principal currencies hedged are euro, Japanese yen, British pound, and Canadian dollar. Similarly, interest rate risk affects fixed-income securities in Microsoft’ s portfolio which are diversified to minimize credit risk.

Generally, interest rate, or inflation, risk can have an adverse impact on its stock. When rates go up, its stock can lose value. Therefore, fundamental analysis helps in determining the health of the economy to check if it is due for a correction by controlling the monetary policy. Microsoft stock is prone to a country, or political, risk. Having operations in numerous countries, Microsoft has to have a high tolerance for an abrupt political change, or a terrorist activity, or even an armed conflict in affected countries.

Such mishaps warrant immediate remedial measures like tightening of security or shutting down operations temporarily. These measures can dramatically increase operating costs.

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