This case requires students to prepare an analysis of Microsoft Corporation's financial statements and footnotes to understand the impact of its use of stock options. In addition to a general analysis of Microsoft's use of stock options and their impact on the financial statements, students focus more specifically on Microsoft's April 2000 megagrant of 70 million options after a substantial decline in Microsoft's stock price. The primary issues that students must explore are (1) the differences in financial reporting under the intrinsic-value and fair-value methods, (2) the effect of stock options on the company's financial statements, (3) the income tax benefit from stock options, and (4) the net cost or benefit to Microsoft from granting stock options.
