Reference no: EM132177529

Synopsis: Microsoft’s acquisition of Internet communications company Skype in an all-cash deal was worth $8.5 billion. The company financed the deal using cash stored overseas in countries with low corporate tax rates. Address the following questions:

1. What were the benefits to Microsoft’s shareholders of using cash held overseas to purchase Skype?

2. Microsoft notes that it would be taxed $9.2 billion, or 31 percent of its $29.5 billion in cash holdings if it repatriated its foreign earnings to the United States. The U.S. corporate tax rate is currently around 35 percent. Explain the discrepancy.

3. Why does Microsoft continue to hold so much cash overseas, rather than returning it to the United States? What do you think are the opportunity costs of holding tens of billions of dollars of cash in foreign locations? What potential benefits might accrue to Microsoft shareholders if it returned some of that cash to the United States?

4. Do you think it is ethical for companies like Microsoft to continue to hold cash overseas in order to avoid paying U.S. corporate income taxes? Is this practice always in the best interests of the company’s shareholders?

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