StudentShare solutions
Triangle menu

Critically discuss the sources of fundamental risk involved in investing in Microsoft stocks - Essay Example

Not dowloaded yet

Extract of sample
Critically discuss the sources of fundamental risk involved in investing in Microsoft stocks

The bottom-up approach works in the opposite way starting at the company level and then going up to industry and the overall economy. Fundamental analysis has its strengths in forecasting long-term trends, determining the company's fair value in terms of asset valuation, strong balance sheet, earnings stability, and staying power1.
There are certain risks involved in any stock investments. A company may face one or more of the several sources of fundamental risk, namely, business risk, financial risk, liquidity risk, exchange rate risk, country risk, interest rate risk, and credit risk2.
Domiciled in Seattle, US, Microsoft has its offices in 100 countries. As per the information excerpted from its annual report for the year 2006, Microsoft reported a net income of $12.5 billion. Such profitability, however, does not get achieved without taking risks. Investors need to be aware of what risks Microsoft tackles with in order to satisfy its stakeholders.
Microsoft, in its operations, encounters business risk which is the risk reflecting uncertainty in cash flows caused due to a number of reasons. Microsoft faces intense competition across all markets for its products and services.
Its competitors range from Fortune 100 companies to small, specialized single-product businesses. With low barriers to entry, this business segment is facing a fierce competition worldwide. These competitive pressures have the capability to threaten Microsoft's sales volumes and operating costs resulting in lower revenue. Microsoft faces a challenge in combating unlicensed use of its software and intellectual property rights3. It spends a fortune every year to educate the public regarding abuse of its software. However, continued educational efforts may not succeed in implementing Microsoft's desired security objectives and any reductions in the legal protection of its intellectual property rights can adversely affect revenue. 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 global presence.
Another challenge for Microsoft is to tackle with 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 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 ...Show more

Summary

Analyzing the risks involved in a company's stock requires a test of its fundamentals. Fundamental analysis is the technique used to conduct such a test. This particular analysis involves an examination of the underlying forces that affect the health of the economy, industry groups, and companies…
Author : clegros
Critically discuss the sources of fundamental risk involved in investing in Microsoft stocks essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"Critically discuss the sources of fundamental risk involved in investing in Microsoft stocks"
with a personal 20% discount.
Grab the best paper

Related Essays

Critically discuss the key issues involved in studying children and young people
Children are inquisitive because they want to know a good deal about things they have no knowledge about. They get attracted to colors and pictures, and thus understand how different figures and numbers are represented to them. What is most interesting about the children and young people is the fact that they are continuously evolving, and that they want to grab their own attention through different pieces of research which is manifested with color, figures and shapes.
4 pages (1000 words) Essay
Risk of Expropriation Involved in Pakistan
Many define it as a crude method for the re-distribution of wealth in the economy therefore companies working in such economic environments need to take care of that facts. Pakistan is a third world country with a violent present and past. Pakistan has in its neighborhood the countries like India, Afghanistan, China and Iran.
5 pages (1250 words) Essay
Investing in Microsoft Stocks
In our case study of investing in Microsoft, the business risk here is the variable order of Microsoft's output such as computers, micro chips, software and others as demanded by their customers. Another risk associated in this problem is the so called - financial risk, which is the ambiguity introduced by the manner of financing the firm.
4 pages (1000 words) Essay
Risk Involved In Investment And Portfolio Management
According to the essay, risk happens to be the most crucial and inevitable factor involved in financial investment. Investors at all stages are vulnerable to various types of risks associated with different investments. Shares are riskier than bonds because they do not bear any legal guarantee for the investors to recover their principal amount.
4 pages (1000 words) Essay
Stocks
(Maunder 3rd Ed)Also in the event of liquidation/insolvency the stockholders will be the last ones to have their claim to the capital satisfied (After the bondholders, Creditors, and preferred stockholders).(Maunder 3rd Ed) Generally the common stockholders will only be entitled to one vote per share to be able to nominate directors on the board of directors but this may not always be the case as sometimes the number of votes each director is entitled to may be proportional to the Common shareholders also receive voting rights regarding other company matters such as stock splits and company objectives.
4 pages (1000 words) Essay
International Finance and Financial Management
Just like any analysis, the objective is to derive a forecast and profit from any future price movements. At the company level, it involves examination of its financials, management, business strategy and the competitive forces encircling the company. There are various approaches to conducting a fundamental analysis; top down approach starts with the overall economy and works its way down to industry groups and then to companies.
7 pages (1750 words) Essay
Investment and protofolio risk for microsoft
In our case study of investing in Microsoft, the business risk here is the variable order of Microsoft’s output such as computers, micro chips, software and
4 pages (1000 words) Essay
Critically discuss the key issues involved in studying children and young people
They get attracted to colors and pictures, and thus understand how different figures and numbers are represented to them. What is most interesting about the children and young people is the fact
4 pages (1000 words) Essay
Critically discuss the use of covert human information sources within an investigation
uit Television (CCTV) is a part of such technologies used for scrutinising the premises of vital installations such as airports, railway stations, street corners, parking lots, shops and other sensitive premises. The use of CCTV is “one of the most common forms of video
12 pages (3000 words) Essay
Explain why individuals should specify investment goals and understand sources of risk and return Define basic investing terminology
A share is used to define the unit of ownership by an investor in a listed company. A share has a par value and market value. The difference between the par value and market value is a profit known as
1 pages (250 words) Essay
Get a custom paper written
by a pro under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
YOUR PRIZE:
Apply my DISCOUNT
Comments (0)
Rate this paper:
Thank you! Your comment has been sent and will be posted after moderation