Aswath Damodaran 457
More on Microsoft
! As we noted earlier, Microsoft had accumulated a cash balance of $ 43 billion
by 2003 by paying out no dividends while generating huge FCFE. At the end
of 2003 , there was no evidence that
- Microsoft was being penalized for holding such a large cash balance
- Stockholders were becoming restive about the cash balance. There was no hue and
cry demanding more dividends or stock buybacks.
! Why?
During that period, Microsoft also generated extraordinary returns on the
projects its took (ROE > cost of equity by more than 10%) and good returns for
its stockholders (Jensen’s alpha > 10%).... Stockholders felt comfortable
leaving their cash in the company. (The fact that Bill Gates and Steve Ballmer
had substantial investments in the company was probably a contributing factor)
