ever-increasingprofitsontheonehandandhighstockreturns
ontheother.Wewouldaddthecashbalanceatfacevalueto
the value of Microsoft’s operating assets.
Themoreinterestingcomponentisthe$17.7billionin 2000
that Microsoft shows as investments in riskier securities.
Microsoft reports the following information about these
investments (in millions of dollars):
Microsofthasgeneratedapaperprofitofalmost$3billionon
itsoriginalcostof$14.745billionandreportsacurrentvalue
of$17.726billion.Mostoftheseinvestmentsaretradedinthe
marketandarerecordedatmarketvalue.Theeasiestwayto
deal with theseinvestments is to add the market value of
thesesecuritiestothevalueoftheoperatingassetsofthefirm
to arrive at firm value. The most volatile item is the
investment in common stock of other firms.
Thevalueoftheseholdingshasalmostdoubled,asreflected
intherecordedbasisof$9,773million.Shouldwereflectthis
at current market value when we value Microsoft? The
answeris generallyyes.However,if theseinvestments are
overvalued, we risk building this overvaluation into the