analysis and valuation project

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Analysis and Valuation Project Thu Pham Tucker Hess Tung Do Uriel Ramirez

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Page 1: Analysis and Valuation Project

Analysis and Valuation Project

Thu Pham Tucker Hess Tung Do Uriel Ramirez

Page 2: Analysis and Valuation Project

TABLE OF CONTENTS

MICROSOFT ANALYSIS A PART 1: COMPANY DESCRIPTION AND BACKGROUBUSINESS SUMMARY DOMESTIC AND FOREIGN MARKETS BUSINESS RISKS AND OUTSTANDING

PART 2: BUSINESS MODEL SWOT ANALYSIS REVENUE DRIVERS EXPENSE DRIVERS PART 3: RECENT FINANCIAL PERFORMANC PART 4: PEER GROUP ANALYSISCOMPARATIVE DATA PORTER’S FIVE FORCES RATIO ANALYSIS PART 5: FUTURE PERFORMANCE ANALYSISLIST OF ASSUMPTIONS PROJECTING FINANCIAL STATEMENTS

PART 6: WEIGHTED AVERAGE COSWACC FORMULA MSFT WACC CALCULATION CAPITAL STRUCTURE ANALYSIS PART 7: COMMON SHARES VALUATIONFREE CASH FLOW TO EQUITY DIVIDEND DISCOUNT MODEL DISCOUNTED CASH FLOW INTRINSIC VALUE PE RATIO PART 8: CONCLUSION AND RECOMMENDATION PART 9: TABLES AND SPREADSHEETSHISTORICAL FINANCIAL STATEMENTS

FORECAST OF FUTURE FINANCIAL STATEMENTS

EARNINGS PER SHARE

PART 10: BIBLIOGRAPHY

MICROSOFT ANALYSIS AND VALUATION PROJECT

RIPTION AND BACKGROUND

UTSTANDING LITIGATION

FINANCIAL PERFORMANCE ANALYSIS

NALYSIS

RMANCE ANALYSIS

TATEMENTS

WEIGHTED AVERAGE COST OF CAPITAL ANALYSIS

S VALUATION

ND RECOMMENDATION

PREADSHEETS TATEMENTS

TATEMENTS

ND VALUATION PROJECT

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Page 3: Analysis and Valuation Project

PART  1:  COMPANY  DESCRIPTION  AND  BACKGROUND      

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  1  

COMPANY  DESCRIPTION  AND  BACKGROUND    

Business  Summary    Founded  in  1975,  Microsoft  Corporation  develops,  licenses,  markets,  and  supports  software,  services,  and  devices  worldwide,  and  is  based  in  Redmond,  Washington.  The  company  is  comprised  of  the  following  segments:    

 Company   Microsoft  Sector   Business  Software  

and  Services  Industry   Computer  Software  

and  Hardware  Ticker   MSFT  Exchange   NASDAQ  Price   $41.42  52  Week  Low   $38.51  52  Week  High   $50.04  Market  Cap   340.70B  Shares   8.20B  Beta   1.08  P/E   16.71  EPS   2.63    

• Devices  and  Consumer  (D&C)  Licensing  Segment:  licenses  Windows  operating  system  and  related  software;  Microsoft  Office  for  consumers;  and  Windows  Phone  operating  system.    

• Computing  and  Gaming  Hardware  segment:  provides  Xbox  gaming  and  entertainment  consoles  and  accessories.  

• Phone  Hardware  segment:  produces  Lumia  Smartphones  and  other  non-­‐Lumia  phones.    

• D&C  Other  segment:  provides  Windows  Store,  Xbox  Live  transactions,  and  Windows  Phone  Store;  search  advertising;  display  advertising.  

• Commercial  Licensing  segments:  licenses  server  products,  including  Windows  Server,  Microsoft  SQL  Server,  and  Visual  Studio.

Microsoft  markets  and  allocates  its  products  through  original  equipment  manufacturers,  distributors,  resellers,  and  online  retailers.    Domestic  and  Foreign  Markets    In  FY  2014,  Microsoft’s  revenue  was  $86.8  billion  in  total.  Revenue  generated  from  foreign  countries  accounts  for  49.9%  while  revenue  generated  domestically  is  50.1%.    

Page 4: Analysis and Valuation Project

PART  1:  COMPANY  DESCRIPTION  AND  BACKGROUND      

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  2  

 Assets:  $40.1B  Nearly  half  of  the  company  assets  are  located  in  the  United  States  (44.0%),  while  the  rest  in  Finland  (24.5%),  Luxembourg  (17.2%),  and  other  countries  (14.2%).

   Business  Risks  and  Outstanding  Litigation    

• Execution  and  competitive  risks  brought  by  the  cloud-­‐based  computing  model.  Microsoft  is  in  its  transition  to  a  computing  environment  to  provide  cloud-­‐based  services  for  smart  devices.  The  company  has  to  invest  a  huge  amount  of  resources  in  software  development  and  infrastructure,  while  its  competitors  are  also  rapidly  developing  and  delivering  these  services  to  customers.  This  might  decrease  the  revenues  and  operating  margins  that  have  been  previously  achieved.    In  addition,  it  is  still  uncertain  whether  the  strategies  used  could  successfully  attract  customers  or  generate  required  revenue.  

Page 5: Analysis and Valuation Project

PART  1:  COMPANY  DESCRIPTION  AND  BACKGROUND      

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  3  

• Intense  competition  Microsoft  faces  intense  competition  across  all  markets  for  its  products  services,  with  competitors  range  from  Fortune  100  companies  to  small  businesses.  Software  vendors  are  devoting  enormous  efforts  to  building  software  that  mimics  the  features  of  Microsoft  products  and  even  violates  its  intellectual  property  rights  and  then  sell  at  little  to  no  cost.  In  response  to  competition,  Microsoft  continues  to  develop  its  products  with  basic  functions  and  sell  them  at  lower  prices  than  the  standard  versions.  These  competitive  pressures  can  reduce  sales  volume,  price,  and  increase  operating  costs,  which  would  decrease  margins  and  revenues.  

• Intellectual  property  rights  Protecting  intellectual  property  rights  globally,  especially  in  countries  where  laws  are  less  protective  of  these  rights,  is  challenging  and  Microsoft  might  now  be  able  to  adequately  do  this.    As  a  result,  this  problem  will  decrease  revenue  in  those  countries  and  hence,  negatively  affect  Microsoft’s  revenue  in  total.  In  addition,  the  company  needs  to  spend  more  money  and  efforts  to  educate  customers  and  lawmakers  about  the  benefits  of  promoting  licensing  products.  

• Security  vulnerabilities  Hackers  might  develop  viruses  that  attack  Microsoft  products,  networks,  and  data  centers.  Even  though  this  is  an  industry-­‐wide  problem,  Microsoft  endures  the  highest  risk  since  it  is  one  of  the  most  popular  operating  systems.  The  company  might  also  experience  outages  and  data  losses  if  it  fails  to  implement  an  adequate  operations  infrastructure.                        

Page 6: Analysis and Valuation Project

PART  2:  BUSINESS  MODEL        

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  4  

BUSINESS  MODEL    

SWOT  Analysis  

 

Strengths  –  Brand  loyalty  and  reputation:  globally,  Microsoft  has  always  been  the  most  popular  OS  and  software  provider  and  accounts  for  over  90%  of  market  share.  –  Simple  software:  Microsoft  products  are  easy  to  use  and  still  maintain  great  quality.  –  Strong  distribution  channels:  Microsoft  works  with  all  major  computer  hardware  producers  and  computer  retailers  to  sell  pre-­‐installed  Windows  software  computers.  –  Acquisition  of  Skype:  With  300  million  users,  Skype  boosts  Microsoft’s  online  presence  and  advertising.  –  Strong  hinancial  performance:  Increased  revenue  and  a  large  amount  of  cash  to  use  for  investments  and  acquisitions.  

Weaknesses  –  Poor  investments  and  acquisitions:  Many  acquisitions  made  by  Microsoft  soon  fail  and  shut  down;  very  few  are  successful.  –  Security  hlaws:  Window  OS  is  the  least  protected  against  virus  attacks  compared  to  other  OS.  –  Mature  PC  and  mobile  markets:  Microsoft  only  entered  these  sectors  recently  and  thus,  will  grow  revenues  at  a  slower  rate  than  its  competitors.  –  Slow  to  innovate:  The  company  spends  many  resources  on  R&D  for  innovative  products,  but  for  the  most  part  has  failed  in  this  area.  

Opportunities  –  Cloud  based  services:  Microsoft  has  the  resources  needed  to  develop  and  expand  its  cloud  computing  system    for  the  increasing  demand.  –  Mobile  industry:  Smartphones  and  tablets  markets  are  growing  fast,  Microsoft  can  utilize  this  opportunity  to  develop  its  devices  and  mobile  OS.  –  Acquisitions:  With  a  huge  amount  of  cash,  the  company  can  invest  and  acquire  startups  to  grow  bigger.  

Threats  –  Intense  competition:  Microsoft  is  facing  many  competitors  such  as  Google  and  Apple  in  both  PC  and  mobile  OS.  –  Change  in  customers  habits:  Customers  are  shifting  to  mobile  markets,  in  which  Microsoft  just  enters  recently.  –  Lawsuits:  Microsoft  has  been  sued  and  lost  in  some  large  cases,  which  are  expensive.  If  the  company  does  not  come  up  with  solutions  in  a  timely  manner,  there  will  be  more  to  come.  

Page 7: Analysis and Valuation Project

PART  2:  BUSINESS  MODEL        

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  5  

Revenue  Drivers  

   Microsoft’s  revenue  is  increasing  and  reaches  $86.8  billion  in  FY  2014.  Commercial  Licensing  accounts  for  the  largest  proportion,  which  accounts  for  48.2%;  followed  by  D&C  Licensing  (21.6%),  D&C  Computing  and  Gaming  hardware  (11%),  Commercial  other  (8.8%).  D&C  –  Phone  hardware  segment  is  still  new  and  accounts  for  only  2.3%  of  the  total  revenue.    Expense  Drivers    Most  of  the  company  expenses  are  on  Cost  of  Goods  Sold  (31%),  Selling  and  Administrative  (23.8%),  and  R&D  (13.1%).  Although  revenue  growth  continues  to  increase  over  the  past  years,  gross  margin  is  gradually  decreasing  from  80.2%  in  2010  and  reaches  69%  in  2014.  This  trend  is  the  same  for  profitability  ratios.    

 

Page 8: Analysis and Valuation Project

PART  3:  RECENT  FINANCIAL  PERFORMANCE  ANALYSIS      

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  6  

RECENT  FINANCIAL  PERFORMANCE  ANALYSIS    

 

 

 

• Microsoft’s  growth  rates  over  the  last  ten  years  have  fluctuated  tremendously.  The  last  five  years  have  not  seen  a  great  change  either,  and  it  is  due  to  new  products  and  the  emphasis  that  the  company  puts  in  the  particular  sales.    An  example  would  be  the  sales  of  their  Surface  tablets,  which  sales  have  had  an  increase  of  24%  to  hit  $1.1B  in  the  most  recent  quarter  while  PC  sales  have  declined.  

 • Although  revenues  have  increased,  

even  with  the  constantly  changing  growth  rates  over  the  last  several  years,  their  gross  profit  has  steadily  decreased  for  the  past  five  years  and  the  likelihood  of  that  trend  continuing  is  high  because  their  costs  continue  to  rise  with  new  developments  more  than  their  revenues.    

 • Microsoft’s  acquirement  of  Nokia’s  

Cellphone  division  was  a  $243M  expense.  They  will  attempt  to  have  a  greater  impact  in  the  development  as  their  Windows  phones  have  drastically  lagged  the  competition  from  Samsung,  Apple,  and  other  cellphone  giants.  These  higher  initial  costs  cause  Microsoft’s  profit  to  decline  year  over  year.  

 • Long  Term  debt  has  more  than  

quadrupled  from  2010  to  2014.  In  2014  alone  there  was  a  63.84%  increase  from  the  year  before.    This  could  be  because  Microsoft  is  taking  advantage  of  low  interest  rates  to  become  more  leveraged.    They  could  also  be  trying  to  reach  their  optimal  capital  structure  by  doing  so.  

-­‐5%  

0%  

5%  

10%  

15%  

20%  

25%  

2004   2006   2008   2010   2012   2014   2016  

Growth  Over  Prior  Year  

68.00%  

70.00%  

72.00%  

74.00%  

76.00%  

78.00%  

80.00%  

82.00%  

2009   2010   2011   2012   2013   2014   2015  

Gross  ProRit  

0  

5000  

10000  

15000  

20000  

25000  

2009   2010   2011   2012   2013   2014   2015  

Long  Term  Debt  

Page 9: Analysis and Valuation Project

PART  4:  PEER  GROUP  ANALYSIS        

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  7  

PEER  GROUP  ANALYSIS    Comparative  Data    Microsoft  started  out  with  software  and  is  still  the  leading  OS  and  software  provider.  Microsoft  is  extremely  popular  for  its  Microsoft  Office  products  and  doesn’t  seem  to  have  any  big  competitors,  besides  possibly  Google  Docs.    Once  Microsoft  further  develops  its  cloud  computing  system,  it  will  be  in  a  better  position.    What  differentiates  Microsoft  is  that  its  products  are  simple  and  easy  to  use.  Together  with  its  long  history  of  Commercial  Licensing,  D&C  Licensing,  and  D&C  Computing  and  Gaming  hardware,  the  company  has  successfully  built  up  its  brand  loyalty  and  reputation.    Porter’s  Five  Forces    

 

Industry  Rivalry:  Moderate  

Threat  of  entrants:  Low  Microsoft  has  the  majority  share  of  operating  systems  now  and  it  can  take  years  and  many  resources  for  an  

entrant  to  build  a  successful  OS.  

Bargaining  power  of  Buyers:  

Moderate  In  the  PC  

segment,  the  power  is  low.  However,  in  the  game  and  mobile  segments,  the  power  is  

relatively  high.  Threat  of  substitute:  Moderate  Threat  of  

substiture  for  Windows  is  low;  threat  of  substitute  for  the  gaming  segment  is  high  with  two  potential  players  Sony  and  

Nintendo.    

Bargaining  power  of  

Suppliers:  Low  Resoucres  that  Microsoft  needs  are  available  from  a  large  

number  of  hirms.    

Page 10: Analysis and Valuation Project

PART  4:  PEER  GROUP  ANALYSIS        

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  8  

Ratio  Analysis    Competitors  in:  

• Operating  systems:  Oracle  • Internet  services:  Google  • Entertainment  and  devices:  Sony    

 

   

• Microsoft’s  total  asset  turnover  (0.6)  is  somewhat  higher  than  the  industry  average,  indicating  that  its  ability  to  manage  assets  is  rather  effective.  This  is  also  similar  to  the  situation  of  return  on  assets  ratio    

• The  company’s  liquidity  is  in  a  good  shape,  with  the  current  ratio  not  too  low  and  not  too  high;  total  debt/equity  is  25.9%,  lower  than  Oracle  (51%)  and  Sony  (34.1%).  

• Profit  margin  has  been  decreasing  over  the  past  five  years  and  was  4%  in  2014.  Compared  to  Google  and  Sony,  the  growth  is  rather  slow.  This  indicates  negative  trends  in  the  company’s  earnings  such  as  bad  acquisitions  and  investments.  

     

10.9  

0.4  3.3  

51  

3.2  

8.7  

0.5  4.8  

7.7  

21.4  

0.6   0.5   0.9  

34.1  

20  

11.1  

0.6   2.5  

25.9  

4  

Prohitability  -­‐  Return  on  Assets  %  

Total  Asset  Turnover  

S-­‐T  Liquidity  -­‐  Current  Ratio  

L-­‐T  Liquidity  -­‐  Total  Debt/Equity  (%)    

Growth  -­‐  Gross  Prohit  (%)  

Peer  Analysis  (2014)  Oracle   Google   Sony   Microsoft  

Page 11: Analysis and Valuation Project

PART  5:  FUTURE  PERFORMANCE  ANALYSIS      

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  9  

FUTURE  PERFORMANCE  ANALYSIS    List  of  Assumptions    

Profit  margin  from  2014  will  be  maintained  for  the  next  5  years   Interest  will  be  paid  at  same  rate  as  2014  for  the  next  5  years   EBIT  margin  will  be  kept  for  next  5  years   Effective  tax  rate  for  Microsoft  will  be  kept  at  21.03%     Dividend  payout  will  remain  at  40.22%  for  5  years   SG&A  and  R&D  will  grow  at  the  percentage  of  sales  from  2014  for  5  years     All  other  non-­‐operating  items  will  grow  at  the  percentage  of  sales  from  2014  for  5  

years   Short  Term  Investments  will  grow  at  same  rate  from  2014   Accounts  Receivables/Sales  ratio  will  be  used  for  the  next  5  years   Inventory  and  other  CA/Sales  ratio  will  be  used  for  the  next  5  years   Gross  fixed  assets  will  be  kept  at  same  rate  for  next  5  years   Quick  ratio  will  be  used  for  the  next  5  years   Debt/Equity  ratio  will  be  used  for  the  next  5  years  

 Projecting  Financial  Statements    

Microsoft  growth  rate  has  been  fluctuating  between  5.4%  and  12%  for  the  past  five  years,  leaving  the  average  growth  rate  at  8.26%.  Having  these  various  growth  rates,  we  used  the  average  of  8.26%  for  2015  and  lowered  it  to  4.99%  for  2016  due  to  past  trends.  After  that,  growth  rate  will  increase  and  decrease  for  2017,  2018,  and  2019  to  6.65%,  4.53%,  and  5.06%  respectively.  Every  line  item  on  Microsoft’s  financials  have  fluctuated  at  different  rates  just  like  the  sales  growth  for  the  past  five  years  due  to  changing  ideas  and  products  introduced.    However,  with  respect  to  the    forecast,    line  items  were  increased  using  the  percent  of  sales  method.        

Page 12: Analysis and Valuation Project

PART  6:  WEIGHTED  AVERAGE  COST  OF  CAPITAL  ANALYSIS      

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  10  

WEIGHTED  AVERAGE  COST  OF  CAPITAL  ANALYSIS    Weighted  Average  Cost  of  Capital  Formula    

𝑊𝐴𝐶𝐶 = 𝑟!× 1− 𝑇! ×𝐷𝑉 + 𝑟!×

𝐸𝑉  

Where:  • rD  =  cost  of  debt  • TC  =  corporate  tax  rate  • E  =  market  value  of  the  firm’s  equity  • D  =  market  value  of  the  firm’s  debt  • V  =  E  +  D  • D/V  =  percentage  of  financing  that  is  debt  • rE  =  cost  of  equity  • E/V  =  percentage  of  financing  that  is  equity  

 MSFT  WACC  Calculation    Effective  Tax  Rate  Tc  =  21.03%    Market  Value  of  Firm’s  Equity  (In  Millions)  Market  Capitalization  is  used  for  common  equity  weighting:  Market  Cap  =  340,703.2  Market  Value  of  Firm’s  Debt  (In  Millions)     2013   2014  Short  Term  Debt   2,999   2,000  Long  Term  Debt   12,601   20,645  Average  Short  Term  Debt  =  (2,999  +  2,000)/2  =  2499.5  Average  Long  Term  Debt  =  (12,601  +  20,645)/2  =  16,623.0  Total  Book  Value  of  Debt  =  16,623  +  2499.5  =  19,122.5  Weight  of  Equity  and  Weight  of  Debt  E/V  =  340,703.2/(340,703.2  +  19,122.5)  =  0.947  D/V  =  19,122.5/(340,703.2  +  19,122.5)  =  0.053  Cost  of  Equity  Capital  Asset  Pricing  Model  (CAPM)  Formula:  Cost  of  Equity  =  Risk  Free  Rate  +  Beta  *  (Expected  Return  on  Market  –  Risk  Free  Rate)  Risk  Free  Rate:  1.92%  Beta:  1.08  Expected  Return  on  Market:  10%  rE  =  1.92%  +  1.08  *  (10%  –  1.92%)  =  10.65%  

Page 13: Analysis and Valuation Project

PART  6:  WEIGHTED  AVERAGE  COST  OF  CAPITAL  ANALYSIS      

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  11  

Cost  of  Debt  2014  Interest  Expense:  597.0  Total  Book  Value  of  Debt:  19,122.5  rD  =  597.0/19,122.5  =  3.12%  MSFT  WACC  

𝑊𝐴𝐶𝐶 = 𝑟!× 1− 𝑇! ×𝐷𝑉 + 𝑟!×

𝐸𝑉  

𝑊𝐴𝐶𝐶 = 3.12%× 1− 21.03% × 0.053 + 10.65%× 0.947 = 10.21%  WACC  Comparison  

Microsoft’s  WACC  is  well  among  its  competitors.  Therefore,  its  ability  to  accept  or  reject  a  new  project  will  likely  be  in  the  same  league  with  the  industry  average.    

  Google   Microsoft   Apple   Oracle  WACC   9.90%   10.21%   10.08%   11.88%  

   Capital  Structure  Analysis    

  Google   Microsoft   Apple   Oracle  Total  Common  

Equity   92.90%   79.50%   76%   65.50%  

Total  Debt   7.10%   20.50%   24%   33.80%  Total  Minority  

Interest         0.80%  

0.00%  

5.00%  

10.00%  

15.00%  

20.00%  

Google   Apple   Microsoft   Oracle  

WACC  

WACC  

Page 14: Analysis and Valuation Project

PART  6:  WEIGHTED  AVERAGE  COST  OF  CAPITAL  ANALYSIS      

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  12  

   Within  the  group  of  competitors,  Google  and  Microsoft  have  the  lowest  percentage  

of  debt  in  the  capital  structure  (7.10%  and  20.5%  respectively).    Keeping  the  percentage  of  debt  low  means  that  the  firm  is  paying  a  lot  of  attention  to  keeping  financing  activities  under  control.    It  also  shows  that  the  firm  is  not  making  the  best  out  of  its  capital  power.  The  weight  of  debt  (20.5%)  is  way  under  the  optimal  capital  structure  of  30%  debt,  and  thus  makes  MSFT’s  capital  structure  rely  a  lot  on  equity.  To  be  specific,  a  change  in  stock  market  price  will  most  likely  make  the  capital  fluctuate  more  than  it  should  do  for  other  competitors.                        

0%  10%  20%  30%  40%  50%  60%  70%  80%  90%  100%  

Google   Microsoft   Apple   Oracle  

Total  Minority  Interest  

Total  Debt  

Total  Common  Equity  

Page 15: Analysis and Valuation Project

PART  7:  COMMON  SHARES  VALUATION        

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  13  

COMMON  SHARES  VALUATION    Free  Cash  Flow  to  Equity    Fiscal  Year   2010   2011   2012   2013   2014  Net  Income    $18,760.00      $23,150.00      $16,978.00      $21,863.00      $22,074.00    Depreciation  and  Amortization    $2,507.00      $2,537.00      $2,758.00      $3,339.00      $4,245.00    Cap  Ex    $1,977.00      $2,355.00      $2,305.00      $4,257.00      $5,485.00    NWC  (Current  Year)    $29,529.00      $46,144.00      $52,396.00      $64,049.00      $68,621.00    NWC  (Previous  Year)    $22,246.00      $29,529.00      $46,144.00      $52,396.00      $64,049.00    Change  In  NWC    $7,283.00      $16,615.00      $6,252.00      $11,653.00      $4,572.00    Net  Debt  (Current)    $30,405.00      $38,233.00      $49,269.00      $59,924.00      $61,726.00    Net  Debt  (Previous)    $22,335.00      $30,405.00      $38,233.00      $49,269.00      $59,924.00    Change  In  Net  Debt    $8,070.00      $7,828.00      $11,036.00      $10,655.00      $1,802.00                            FCFE    $20,077.00      $14,545.00      $22,215.00      $19,947.00      $18,064.00    #  Of  Shares  Outstanding   8,668   8376   8381   8328   8239  FCFE  Per  Share:   2.316   1.737   2.651   2.395   2.192                Discounted  Cash  Flow  

Free  Cash  Flow  To  Equity       Cost  Of  Capital   10.21%  

Year   Growth  Rate   FCFE   Terminal  Price   Cash  Flow  2014       2.192499       2.192499  2015   8.26%   2.373599515       2.373600  2016   5%   2.49227949       2.492279  2017   6.65%   2.658016076       2.658016  2018   5%   2.778424205       2.778424  2019   5.06%   2.919012469   45.02500605   2.919012  2020   3.50%   3.021177906          

Vcs   $36.07     FCFE                        

Page 16: Analysis and Valuation Project

PART  7:  COMMON  SHARES  VALUATION        

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  14  

Dividend  Discount  Model         2014  

     Dividends  Paid  (Millions)    $8,879.00          Shares  Outstanding  

(Millions)   8239        Dividend  Per  Share    $1.08          Required  Return   10.21%        

         Year   Growth   Dividend  

Terminal  Price   Cash  Flow  

2014       1.08       1.08  2015   8.26%   1.169208       1.169208  2016   4.99%   1.227551479       1.227551479  2017   6.65%   1.309183653       1.309183653  2018   4.53%   1.368489672       1.368489672  2019   5.06%   1.437735249   22.17669125   23.6144265  2020   3.50%   1.488055983          

Vcs   $17.77     DDM            Discounted  Cash  Flow    

       Cost  Of  Capital   10.21%              

Year   2014   2015   2016   2017   2018   2019  EBIT    $28,586.00      $30,189.00      $31,696.00      $33,772.00      $35,302.00      $37,088.00    Less  Tax    $(5,746.00)    $(6,348.75)    $(6,665.67)    $(7,102.25)    $(7,424.01)    $(7,799.61)  NOPAT    $22,840.00      $23,840.25      $25,030.33      $26,669.75      $27,877.99      $29,288.39    NOWC    $68,621.00      $74,289.00      $77,996.00      $83,105.00      $86,870.00      $91,265.00    TNOWC    $81,632.00      $88,375.00      $92,785.00      $98,862.00      $103,341.00      $108,569.00    NIOC    $(7,592.00)    $(6,743.00)    $(4,410.00)    $(6,077.00)    $(4,479.00)    $(5,228.00)  FCF    $15,248.00      $17,097.25      $20,620.33      $20,592.75      $23,398.99      $24,060.39    NWC  (2013)    $64,049.00                        NFA  (2013)    $9,991.00    

   $10.33     FCF      

TOWC  (2013)    $74,040.00                        ROIC   27.98%                      EVA    $14,505.37      $23,840.25      $25,030.33      $26,669.75      $27,877.99      $29,288.39          

Page 17: Analysis and Valuation Project

PART  7:  COMMON  SHARES  VALUATION        

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  15  

Intrinsic  Value    Valuation  Method   Intrinsic  Value  Calculation   Weight  FCFE    $36.07     70%  DDM    $17.77     20%  FCF    $10.33     10%  Target  Price    $29.84          Price  Earnings  Ratio    

Market  Comparison   P/E  (TTM)  

P/E  (Forward  12  Months)   PEG  

1  Year  EPS  Growth  

5  Year  EPS  Growth  

Microsoft  Corp   16.8   15.9   2.3   1.82%   10.17%  Software  &  IT  Services  Industry   74.8   4.7   5.9   13.00%   22.25%  Technology  Sector   50.4   11.8   4.1   35.29%   24.13%  S&P  500   19.7   17.7   4.1   2.34%   15.98%    Microsoft's  PE  ratio  is  one  of  the  lowest  of  any  stock  in  the  Software  &  IT  Services  industry.    This  could  mean  that  investors  have  not  been  willing  to  pay  a  premium  for  the  company's  business  prospects.    During  the  past  year,  earnings  growth  has  lagged  behind  its  historical  five-­‐year  growth  rate,  most  likely  due  to  decreasing  margins.

Page 18: Analysis and Valuation Project

PART  8:  CONCLUSION  AND  RECOMMENDATION      

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  16  

CONCLUSION  AND  RECOMMENDATION    FCFE,  FCF,  and  DDM  models,  weighted  at  70%,  20%,  and  10%  respectively,  are  utilized  to  estimate  the  intrinsic  value  of  Microsoft’s  stock  price.  Because  of  heavy  fluctuation  in  the  growth  of  free  cash  flow,  FCF  cannot  be  relied  on,  and  thus  was  weighted  at  10%.  In  addition,  DDM  was  only  weighted  at  20%  because  the  dividend  growth  rate  fluctuates,  and  at  some  periods,  the  growth  rate  was  greater  than  the  cost  of  capital.    All  of  these  reasons  make  DDM  become  unstable  overtime.    FCFE  is  chosen  to  be  the  best  method  to  valuate  MSFT  because  it  is  more  relevant  to  the  company.  Hence,  most  of  the  weight  is  assigned  to  FCFE.    

Valuation  Method   Intrinsic  Value  Calculation   Weight  FCFE    $36.07     70%  DDM    $17.77     20%  FCF    $10.33     10%  Estimated  Price   $29.84    

   MSFT  stock  is  now  priced  at  $41.42.  The  intrinsic  price  is  estimated  at  $29.84.    Therefore,  we  conclude  that  MSFT  is  overpriced  and  is  expected  to  come  down.  We  recommend  that  owners  of  MSFT  stock  sell.  

70%  

20%  

10%  

Weight  

FCFE  

DDM  

FCF  

Page 19: Analysis and Valuation Project

PART  9:  TABLES  AND  SPREADSHEETS        

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  17  

TABLES  AND  SPREADSHEETS    Historical  Financial  Statements  

       

Income Statement

For$the$Fiscal$Period$EndingReclassified12$months

Jun9309201012$months

Jun9309201112$months

Jun9309201212$months

Jun9309201312$months

Jun93092014Currency USD USD USD USD USD$Revenue &&&&&&62,484.0& &&&&&&69,943.0& &&&&&&73,723.0& &&&&&&77,849.0& &&&&&&86,833.0&Other&Revenue 5 5 5 5 5$$Total$Revenue $$$$$62,484.0$ $$$$$69,943.0$ $$$$$73,723.0$ $$$$$77,849.0$ $$$$$86,833.0$

Cost&Of&Goods&Sold &&&&&&12,395.0& &&&&&&15,577.0& &&&&&&17,530.0& &&&&&&20,249.0& &&&&&&26,934.0&$$Gross$Profit $$$$$50,089.0$ $$$$$54,366.0$ $$$$$56,193.0$ $$$$$57,600.0$ $$$$$59,899.0$

Selling&General&&&Admin&Exp. &&&&&&17,277.0& &&&&&&18,162.0& &&&&&&18,426.0& &&&&&&19,692.0& &&&&&&20,632.0&R&&&D&Exp. &&&&&&&&8,714.0& &&&&&&&&9,043.0& &&&&&&&&9,811.0& &&&&&&10,411.0& &&&&&&11,381.0&Depreciation&&&Amort. 5 5 5 5 5Other&Operating&Expense/(Income) 5 5 5 5 5

$$Other$Operating$Exp.,$Total $$$$$25,991.0$ $$$$$27,205.0$ $$$$$28,237.0$ $$$$$30,103.0$ $$$$$32,013.0$

$$Operating$Income $$$$$24,098.0$ $$$$$27,161.0$ $$$$$27,956.0$ $$$$$27,497.0$ $$$$$27,886.0$

Interest&Expense &&&&&&&(151.0)&& &&&&&&&(295.0)&& &&&&&&&(380.0)&& &&&&&&&(429.0)&& &&&&&&&(597.0)&&Interest&and&Invest.&Income &&&&&&&&&&&843.0& &&&&&&&&&&&900.0& &&&&&&&&&&&800.0& &&&&&&&&&&&677.0& &&&&&&&&&&&883.0&$$Net$Interest$Exp. $$$$$$$$$$$692.0$ $$$$$$$$$$$605.0$ $$$$$$$$$$$420.0$ $$$$$$$$$$$248.0$ $$$$$$$$$$$286.0$

Currency&Exchange&Gains&(Loss) &&&&&&&&&&(64.0)&& &&&&&&&(336.0)&& &&&&&&&(465.0)&& &&&&&&&(223.0)&& &&&&&&&(490.0)&&Other&Non5Operating&Inc.&(Exp.) &&&&&&&&&&(73.0)&& &&&&&&&&&&&167.0& &&&&&&&&&&&&&70.0& &&&&&&&&&&&131.0& &&&&&&&&&&(99.0)&&$$EBT$Excl.$Unusual$Items $$$$$24,653.0$ $$$$$27,597.0$ $$$$$27,981.0$ $$$$$27,653.0$ $$$$$27,583.0$

Restructuring&Charges 5 5 5 5 5Merger&&&Related&Restruct.&Charges 5 5 5 5 &&&&&&&(127.0)&&Impairment&of&Goodwill 5 5 &&&&(6,193.0)&& 5 5Gain&(Loss)&On&Sale&Of&Invest. &&&&&&&&&&&360.0& &&&&&&&&&&&474.0& &&&&&&&&&&&479.0& &&&&&&&&&&&132.0& &&&&&&&&&&&364.0&Legal&Settlements 5 5 5 &&&&&&&(733.0)&& 5Other&Unusual&Items 5 5 5 5 5$$EBT$Incl.$Unusual$Items $$$$$25,013.0$ $$$$$28,071.0$ $$$$$22,267.0$ $$$$$27,052.0$ $$$$$27,820.0$

Income&Tax&Expense &&&&&&&&6,253.0& &&&&&&&&4,921.0& &&&&&&&&5,289.0& &&&&&&&&5,189.0& &&&&&&&&5,746.0&$$Earnings$from$Cont.$Ops. $$$$$18,760.0$ $$$$$23,150.0$ $$$$$16,978.0$ $$$$$21,863.0$ $$$$$22,074.0$

Earnings&of&Discontinued&Ops. 5 5 5 5 5Extraord.&Item&&&Account.&Change 5 5 5 5 5$$Net$Income$to$Company $$$$$18,760.0$ $$$$$23,150.0$ $$$$$16,978.0$ $$$$$21,863.0$ $$$$$22,074.0$

Minority&Int.&in&Earnings 5 5 5 5 5$$Net$Income $$$$$18,760.0$ $$$$$23,150.0$ $$$$$16,978.0$ $$$$$21,863.0$ $$$$$22,074.0$

Pref.&Dividends&and&Other&Adj. 5 5 5 5 5

$$NI$to$Common$Incl$Extra$Items $$$$$18,760.0$ $$$$$23,150.0$ $$$$$16,978.0$ $$$$$21,863.0$ $$$$$22,074.0$

Payout&Ratio&% &24.4%& &22.4%& &37.6%& &34.1%& &40.2%&

Page 20: Analysis and Valuation Project

PART  9:  TABLES  AND  SPREADSHEETS        

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  18  

 

Balance'SheetBalance'Sheet'as'of:

Jun13012010 Jun13012011 Jun13012012 Jun13012013 Jun13012014Currency USD USD USD USD USDASSETSCash%And%Equivalents %%%%%%%%%%%%5,505.0% %%%%%%%%%%%%9,610.0% %%%%%%%%%%%%6,938.0% %%%%%%%%%%%%3,804.0% %%%%%%%%%%%%8,669.0%Short%Term%Investments %%%%%%%%%%31,042.0% %%%%%%%%%%41,761.0% %%%%%%%%%%55,096.0% %%%%%%%%%%72,392.0% %%%%%%%%%%76,255.0%Trading%Asset%Securities %%%%%%%%%%%%%%%%%%12.0% E %%%%%%%%%%%%%%%%%%10.0% %%%%%%%%%%%%%%%%%%18.0% %%%%%%%%%%%%%%%%%%17.0%''Total'Cash'&'ST'Investments ''''''''''36,559.0' ''''''''''51,371.0' ''''''''''62,044.0' ''''''''''76,214.0' ''''''''''84,941.0'

Accounts%Receivable %%%%%%%%%%13,014.0% %%%%%%%%%%14,987.0% %%%%%%%%%%15,780.0% %%%%%%%%%%17,486.0% %%%%%%%%%%19,544.0%''Total'Receivables ''''''''''13,014.0' ''''''''''14,987.0' ''''''''''15,780.0' ''''''''''17,486.0' ''''''''''19,544.0'

Inventory %%%%%%%%%%%%%%%%740.0% %%%%%%%%%%%%1,372.0% %%%%%%%%%%%%1,137.0% %%%%%%%%%%%%1,938.0% %%%%%%%%%%%%2,660.0%Deferred%Tax%Assets,%Curr. %%%%%%%%%%%%2,184.0% %%%%%%%%%%%%2,467.0% %%%%%%%%%%%%2,035.0% %%%%%%%%%%%%1,632.0% %%%%%%%%%%%%1,941.0%Other%Current%Assets %%%%%%%%%%%%3,179.0% %%%%%%%%%%%%4,721.0% %%%%%%%%%%%%4,088.0% %%%%%%%%%%%%4,196.0% %%%%%%%%%%%%5,160.0%''Total'Current'Assets ''''''''''55,676.0' ''''''''''74,918.0' ''''''''''85,084.0' ''''''''101,466.0' ''''''''114,246.0'

Gross%Property,%Plant%&%Equipment %%%%%%%%%%16,259.0% %%%%%%%%%%17,991.0% %%%%%%%%%%19,231.0% %%%%%%%%%%22,504.0% %%%%%%%%%%27,804.0%Accumulated%Depreciation %%%%%%%%%(8,629.0)%% %%%%%%%%(9,829.0)%% %%%%%%(10,962.0)%% %%%%%%(12,513.0)%% %%%%%%(14,793.0)%%''Net'Property,'Plant'&'Equipment ''''''''''''7,630.0' ''''''''''''8,162.0' ''''''''''''8,269.0' ''''''''''''9,991.0' ''''''''''13,011.0'

LongEterm%Investments %%%%%%%%%%%%7,754.0% %%%%%%%%%%10,865.0% %%%%%%%%%%%%9,776.0% %%%%%%%%%%10,844.0% %%%%%%%%%%14,597.0%Goodwill %%%%%%%%%%12,394.0% %%%%%%%%%%12,581.0% %%%%%%%%%%13,452.0% %%%%%%%%%%14,655.0% %%%%%%%%%%20,127.0%Other%Intangibles %%%%%%%%%%%%1,158.0% %%%%%%%%%%%%%%%744.0% %%%%%%%%%%%%3,170.0% %%%%%%%%%%%%3,083.0% %%%%%%%%%%%%6,981.0%Other%LongETerm%Assets %%%%%%%%%%%%1,501.0% %%%%%%%%%%%%1,434.0% %%%%%%%%%%%%1,520.0% %%%%%%%%%%%%2,392.0% %%%%%%%%%%%%3,422.0%Total'Assets ''''''''''86,113.0' '''''''108,704.0' ''''''''121,271.0' ''''''''142,431.0' ''''''''172,384.0'

LIABILITIESAccounts%Payable %%%%%%%%%%%%4,025.0% %%%%%%%%%%%%4,197.0% %%%%%%%%%%%%4,175.0% %%%%%%%%%%%%4,828.0% %%%%%%%%%%%%7,432.0%Accrued%Exp. %%%%%%%%%%%%3,283.0% %%%%%%%%%%%%3,575.0% %%%%%%%%%%%%3,875.0% %%%%%%%%%%%%4,117.0% %%%%%%%%%%%%4,797.0%ShortEterm%Borrowings %%%%%%%%%%%%1,182.0% %%%%%%%%%%%%1,208.0% %%%%%%%%%%%%%%%%814.0% %%%%%%%%%%%%%%%%645.0% %%%%%%%%%%%%2,558.0%Curr.%Port.%of%LT%Debt %%%%%%%%%%%%%%%%%%33.0% %%%%%%%%%%%%%%%%%%%%9.0% %%%%%%%%%%%%1,248.0% %%%%%%%%%%%%3,044.0% %%%%%%%%%%%%%%%%%%12.0%Curr.%Income%Taxes%Payable %%%%%%%%%%%%1,074.0% %%%%%%%%%%%%%%%580.0% %%%%%%%%%%%%%%%%789.0% %%%%%%%%%%%%%%%%592.0% %%%%%%%%%%%%%%%%782.0%Unearned%Revenue,%Current %%%%%%%%%%13,652.0% %%%%%%%%%%15,722.0% %%%%%%%%%%18,653.0% %%%%%%%%%%20,639.0% %%%%%%%%%%23,150.0%Def.%Tax%Liability,%Curr. E E E E %%%%%%%%%%%%%%%%125.0%Other%Current%Liabilities %%%%%%%%%%%%2,898.0% %%%%%%%%%%%%3,483.0% %%%%%%%%%%%%3,134.0% %%%%%%%%%%%%3,552.0% %%%%%%%%%%%%6,769.0%''Total'Current'Liabilities ''''''''''26,147.0' ''''''''''28,774.0' ''''''''''32,688.0' ''''''''''37,417.0' ''''''''''45,625.0'

LongETerm%Debt %%%%%%%%%%%%4,939.0% %%%%%%%%%%11,921.0% %%%%%%%%%%10,713.0% %%%%%%%%%%12,601.0% %%%%%%%%%%20,645.0%Unearned%Revenue,%NonECurrent %%%%%%%%%%%%1,178.0% %%%%%%%%%%%%1,398.0% %%%%%%%%%%%%1,406.0% %%%%%%%%%%%%1,760.0% %%%%%%%%%%%%2,008.0%Def.%Tax%Liability,%NonECurr. %%%%%%%%%%%%%%%%229.0% %%%%%%%%%%%%1,456.0% %%%%%%%%%%%%1,893.0% %%%%%%%%%%%%1,709.0% %%%%%%%%%%%%2,728.0%Other%NonECurrent%Liabilities %%%%%%%%%%%%7,445.0% %%%%%%%%%%%%8,072.0% %%%%%%%%%%%%8,208.0% %%%%%%%%%%10,000.0% %%%%%%%%%%11,594.0%Total'Liabilities ''''''''''39,938.0' ''''''''''51,621.0' ''''''''''54,908.0' ''''''''''63,487.0' ''''''''''82,600.0'

Common%Stock %%%%%%%%%%62,856.0% %%%%%%%%%%63,415.0% %%%%%%%%%%65,797.0% %%%%%%%%%%67,306.0% %%%%%%%%%%68,366.0%Additional%Paid%In%Capital E E E E ERetained%Earnings %%%%%%(17,736.0)%% %%%%%%%%(8,195.0)%% %%%%%%%%%%%%(856.0)%% %%%%%%%%%%%%9,895.0% %%%%%%%%%%17,710.0%Treasury%Stock E E E E EComprehensive%Inc.%and%Other %%%%%%%%%%%%1,055.0% %%%%%%%%%%%%1,863.0% %%%%%%%%%%%%1,422.0% %%%%%%%%%%%%1,743.0% %%%%%%%%%%%%3,708.0%''Total'Common'Equity ''''''''''46,175.0' ''''''''''57,083.0' ''''''''''66,363.0' ''''''''''78,944.0' ''''''''''89,784.0'

Total'Equity ''''''''''46,175.0' ''''''''''57,083.0' ''''''''''66,363.0' ''''''''''78,944.0' ''''''''''89,784.0'

Total'Liabilities'And'Equity ''''''''''86,113.0' '''''''108,704.0' ''''''''121,271.0' ''''''''142,431.0' ''''''''172,384.0'

Page 21: Analysis and Valuation Project

PART  9:  TABLES  AND  SPREADSHEETS        

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  19  

 

   

Cash%FlowFor%the%Fiscal%Period%Ending 12%months

Jun9309201012%months

Jun9309201112%months

Jun9309201212%months

Jun9309201312%months

Jun93092014Currency USD USD USD USD USD%Net%Income %%%%%%%%18,760.0% %%%%%%%%23,150.0% %%%%%%%%16,978.0% %%%%%%%%21,863.0% %%%%%%%%22,074.0%Depreciation+&+Amort. ++++++++++1,800.0+ ++++++++++2,000.0+ ++++++++++2,200.0+ ++++++++++2,600.0+ ++++++++++3,400.0+Amort.+of+Goodwill+and+Intangibles ++++++++++++++707.0+ ++++++++++++++537.0+ ++++++++++++++558.0+ ++++++++++++++739.0+ ++++++++++++++845.0+Depreciation%&%Amort.,%Total %%%%%%%%%%2,507.0% %%%%%%%%%%2,537.0% %%%%%%%%%%2,758.0% %%%%%%%%%%3,339.0% %%%%%%%%%%4,245.0%

Other+Amortization ++++++++++++++++97.0+ ++++++++++++++114.0+ ++++++++++++++117.0+ ++++++++++++++210.0+ ++++++++++++++200.0+(Gain)+Loss+On+Sale+Of+Invest. ++++++++++(208.0)++ ++++++++++(362.0)++ ++++++++++(200.0)++ ++++++++++++++++80.0+ ++++++++++(109.0)++Asset+Writedown+&+Restructuring+Costs P P ++++++++++6,193.0+ P PStockPBased+Compensation ++++++++++1,891.0+ ++++++++++2,166.0+ ++++++++++2,244.0+ ++++++++++2,406.0+ ++++++++++2,446.0+Tax+Benefit+from+Stock+Options ++++++++++++(45.0)++ ++++++++++++(17.0)++ ++++++++++++(93.0)++ ++++++++++(209.0)++ ++++++++++(271.0)++Other+Operating+Activities ++++++++++++++410.0+ ++++++++++2,409.0+ ++++++++++3,803.0+ ++++++++++2,519.0+ ++++++++++3,022.0+Change+in+Acc.+Receivable +++++++(2,238.0)++ +++++++(1,451.0)++ +++++++(1,156.0)++ +++++++(1,807.0)++ +++++++(1,120.0)++Change+In+Inventories ++++++++++++(44.0)++ ++++++++++(561.0)++ ++++++++++++++184.0+ ++++++++++(802.0)++ ++++++++++(161.0)++Change+in+Acc.+Payable ++++++++++++++844.0+ ++++++++++++++++58.0+ ++++++++++++(31.0)++ ++++++++++++++537.0+ ++++++++++++++473.0+Change+in+Other+Net+Operating+Assets ++++++++++2,099.0+ +++++++(1,049.0)++ ++++++++++++++829.0+ ++++++++++++++697.0+ ++++++++++1,432.0+%%Cash%from%Ops. %%%%%%%%24,073.0% %%%%%%%%26,994.0% %%%%%%%%31,626.0% %%%%%%%%28,833.0% %%%%%%%%32,231.0%

Capital+Expenditure +++++++(1,977.0)++ +++++++(2,355.0)++ +++++++(2,305.0)++ +++++++(4,257.0)++ +++++++(5,485.0)++Cash+Acquisitions ++++++++++(245.0)++ ++++++++++++(71.0)++ ++++(10,112.0)++ +++++++(1,584.0)++ +++++++(5,937.0)++Divestitures P P P P PInvest.+in+Marketable+&+Equity+Securt. +++++++(7,590.0)++ ++++(13,216.0)++ ++++(11,975.0)++ ++++(17,802.0)++ +++++++(7,324.0)++Net+(Inc.)+Dec.+in+Loans+Originated/Sold P P P P POther+Investing+Activities +++++++(1,502.0)++ ++++++++++1,026.0+ ++++++++++(394.0)++ ++++++++++(168.0)++ ++++++++++++(87.0)++%%Cash%from%Investing %%%%(11,314.0)%% %%%%(14,616.0)%% %%%%(24,786.0)%% %%%%(23,811.0)%% %%%%(18,833.0)%%

Short+Term+Debt+Issued P P P P ++++++++++++++500.0+LongPTerm+Debt+Issued ++++++++++4,167.0+ ++++++++++6,960.0+ P ++++++++++4,883.0+ ++++++++10,350.0+Total%Debt%Issued %%%%%%%%%%4,167.0% %%%%%%%%%%6,960.0% 9 %%%%%%%%%%4,883.0% %%%%%%%%10,850.0%Short+Term+Debt+Repaid ++++++++++(991.0)++ ++++++++++(186.0)++ P P PLongPTerm+Debt+Repaid +++++++(2,986.0)++ ++++++++++(814.0)++ P +++++++(1,346.0)++ +++++++(3,888.0)++Total%Debt%Repaid %%%%%%(3,977.0)%% %%%%%%(1,000.0)%% 9 %%%%%%(1,346.0)%% %%%%%%(3,888.0)%%

Issuance+of+Common+Stock ++++++++++2,311.0+ ++++++++++2,422.0+ ++++++++++1,913.0+ ++++++++++++++931.0+ ++++++++++++++607.0+Repurchase+of+Common+Stock ++++(11,269.0)++ ++++(11,555.0)++ +++++++(5,029.0)++ +++++++(5,360.0)++ +++++++(7,316.0)++

Common+Dividends+Paid +++++++(4,578.0)++ +++++++(5,180.0)++ +++++++(6,385.0)++ +++++++(7,455.0)++ +++++++(8,879.0)++Total%Dividends%Paid %%%%%%(4,578.0)%% %%%%%%(5,180.0)%% %%%%%%(6,385.0)%% %%%%%%(7,455.0)%% %%%%%%(8,879.0)%%

Special+Dividend+Paid P P P P POther+Financing+Activities ++++++++++++++++55.0+ ++++++++++++(23.0)++ ++++++++++++++++93.0+ ++++++++++++++199.0+ ++++++++++++++232.0+%%Cash%from%Financing %%%%(13,291.0)%% %%%%%%(8,376.0)%% %%%%%%(9,408.0)%% %%%%%%(8,148.0)%% %%%%%%(8,394.0)%%

Foreign+Exchange+Rate+Adj. ++++++++++++(39.0)++ ++++++++++++++103.0+ ++++++++++(104.0)++ +++++++++++++++(8.0)++ ++++++++++(139.0)++%%Net%Change%in%Cash %%%%%%%%%%(571.0)%% %%%%%%%%%%4,105.0% %%%%%%(2,672.0)%% %%%%%%(3,134.0)%% %%%%%%%%%%4,865.0%

Page 22: Analysis and Valuation Project

PART  9:  TABLES  AND  SPREADSHEETS        

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  20  

Forecast  of  Future  Financial  Statements  

 

Microsoft)Co

rporation)MSFT

8.26%

4.99%

6.65%

4.53%

5.06%

(In.M

illions)

1.0826

1.0499

1.06550

1.0453

1.0506

Income'Statem

ent

2014

2015

2016

2017

2018

2019

Sales/Re

venu

e86,833

94,005

98696

105161

109925

115487

COGS

26,934

29,159

30,614

32,619

34,097

35,822

Gross'P

rofit

59,899

64,847

68,083

72,542

75,828

79,665

SG&A

20,632

22,336

23,451

24,987

26,119

27,440

R&D

11,381

12,321

12,936

13,783

14,408

15,137

Other.Ope

ratin

g.To

tal

32,013

34,657

36,387

38,770

40,526

42,577

Ope

ratin

g'Income

27,886

30,189

31,696

33,772

35,302

37,088

Interest.Expen

se(597

)(646

)(679

)(723

)(756

)(794

)Interest.and

.Invest..Incom

e883

956

1,004

1,069

1,118

1,174

Net'In

terest'Expen

se286

310

325

346

362

380

Curren

cy.Exchange.Ga

ins(Loss)

(490

)(530

)(557

)(593

)(620

)(652

)Other.Non

ROpe

ratin

g.Inc..(E

xp)

(99)

(107

)(113

)(120

)(125

)(132

)EB

T'Excl.'U

nusual'Item

s27,583

29,861

31,351

33,405

34,918

36,685

Merger.&

.Related

.Restruct..Ch

arges

(127

)R

RR

RR

Gain(Loss).on.Sale.of.Invest.

364

394

414

441

461

484

EBT'Inclu.'Unu

sual'Item

s27,820

30,255

31,765

33,846

35,379

37,169

Income.Tax.Expe

nse

5746

6,363

6,680

7,118

7,440

7,817

Earnings'from

'Con

t.'Ops.

22,074

23,893

25,085

26,728

27,939

29,352

Net'In

come'to'Com

pany

22,074

23,893

25,085

26,728

27,939

29,352

Page 23: Analysis and Valuation Project

PART  9:  TABLES  AND  SPREADSHEETS        

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  21  

                                     

Microsoft)Corpo

ratio

n)MSFT

In#M

illions

Balance'Sheet

2014

2015

2016

2017

2018

2019

Assets

Cash#&#Equ

ivalen

ts8,669

9,385

9,853

10,499

10,974

11,530

Short#T

erm#Investmen

ts76,272

82,572

86,692

92,371

96,555

101,441

Total'Cash&

'ST'Investmen

ts84,941

91,957

96,546

102,870

107,530

112,971

Accoun

ts#Receivables

19,544

21,158

22,214

23,669

24,741

25,993

Total'R

eceivables

19,544

21,158

22,214

23,669

24,741

25,993

Inventory

2,660

2,880

3,023

3,221

3,367

3,538

Other#Current#Assets

7,101

7,688

8,071

8,600

8,989

9,444

Total'Current'Assets

114,246

123,683

129,854

138,360

144,628

151,946

Gross#Prope

rty,#Plant#&#Equ

ipmen

t27,804

30,101

31,603

33,673

35,198

36,979

Accumulated

#Dep

reciation

(14,79

3)(16,01

5)(16,81

4)(17,91

5)(18,72

7)(19,67

5)Net'PP&

E13,011

14,086

14,789

15,757

16,471

17,304

LongQterm#Investmen

ts14,597

15,803

16,591

17,678

18,479

19,414

Goo

dwill

20,127

21,789

22,877

24,375

25,479

26,769

Other#Intangibles

6,981

7,558

7,935

8,454

8,837

9,285

Other#Lon

gQTerm

#Assets

3,422

3,705

3,890

4,144

4,332

4,551

Total'A

ssets

172,384

186,623

195,935

208,769

218,226

229,269

Liab

ilitie

sAccoun

ts#Payable

7,432

8,046

8,447

9,001

9,408

9,884

Accrue

d#Expe

nse

4,797

5,193

5,452

5,810

6,073

6,380

Page 24: Analysis and Valuation Project

PART  9:  TABLES  AND  SPREADSHEETS        

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  22  

   

ShortQTerm

#Borrowings

2,558

2,769

2,907

3,098

3,238

3,402

Other#Current#Liabilities

30,838

33,385

35,051

37,347

39,039

41,014

Total'Current'Liabilities

45,625

49,394

51,858

55,255

57,758

60,681

Long#Term

#Debt

20,645

22,350

23,466

25,003

26,135

27,458

Other#NonQCurrent#Liabilities

16,330

17,679

18,561

19,777

20,673

21,719

Total'Liabilities

82,600

89,423

93,885

100,034

104,566

109,857

Common#Stock

68,366

74,013

77,706

82,796

86,547

90,926

Additional#Paid#In#Capital

QQ

QQ

QQ

Retained#Earnings

17,710

19,173

20,130

21,448

22,420

23,554

Comprehensive#Inc.#&#Other

3,708

4,014

4,215

4,491

4,694

4,932

Total'Com

mon

'Equ

ity89,784

97,200

102,050

108,735

113,660

119,412

Total'Equ

ity89,784

97,200

102,050

108,735

113,660

119,412

Total'Liabilities'&

'Equ

ity172,384

186,623

195,935

208,769

218,226

229,269

Page 25: Analysis and Valuation Project

PART  9:  TABLES  AND  SPREADSHEETS        

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  23  

   

In#M

illions

Statem

ent'o

f'Cash'Flow

s2014

2015

2016

2017

2018

2019

Net#Income

22,074

23,893

25,085

26,728

27,939

29,352

Depreciatio

n2,280

1,222

799

1,101

812

948

Change#in#A/R

(2,058

)(1,614

)(1,056

)(1,455

)(1,072

)(1,252

)Ch

ange#in#Inv

(732

)(220

)(144

)(198

)(146

)(170

)Ch

ange#in#A/P

2,604

614

401

553

408

476

Change#in#Accruals

680

396

259

357

263

307

Change#in#Other#CA

(1,273

)(587

)(384

)(529

)(390

)(455

)CF'from

'Ope

ratio

ns23,575

23,704

24,962

26,558

27,814

29,206

Change#in#Gross#Fixed

#Assets

(5,300

)(2,297

)(1,502

)(2,070

)(1,525

)(1,781

)Ch

ange#in#Sho

rtNTerm#Invest.

(3,862

)(6,300

)(4,120

)(5,678

)(4,184

)(4,886

)Ch

ange#in#Lon

g#Term

#Invest.

(11,68

6)(3,727

)(2,438

)(3,360

)(2,476

)(2,891

)CF'from

'Investmen

t'(20,84

8)(12,32

4)(8,060

)(11,10

8)(8,185

)(9,557

)

Change#in#Sho

rtNTerm#Borro.

1,913

211

138

190

140

164

Change#in#Lon

gNTerm

#Deb

t8,044

1,705

1,115

1,537

1,133

1,322

Change#in#Com

mon

#Stock

1,060

5,647

3,693

5,090

3,751

4,379

Repu

rchase#Com

mon

#Stock

N(8,617

)(11,29

0)(10,87

0)(12,93

9)(13,15

1)Paym

ent#o

f#Cash#Divide

nds

(8,879

)(9,611

)(10,09

0)(10,75

1)(11,23

8)(11,80

7)CF'from

'Finan

cing'

2,138

(10,66

4)(16,43

3)(14,80

4)(19,15

3)(19,09

2)

Net#Cash#Flow

4865

716

468

646

475

557

Beg.#Cash#

3804

8,669

9,385

9,853

10,499

10,974

End#Cash#

8669

9,385

9,853

10,499

10,974

11,530

Page 26: Analysis and Valuation Project

PART  9:  TABLES  AND  SPREADSHEETS        

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  24  

Earnings  Per  Share    EARNINGS  PER  SHARE   EPS  

       2014A    $2.68            2015E    $2.90      

8239   shares  outstanding  2016E    $3.04    

       2017E    $3.24            2018E    $3.39            2019E    $3.56              

ASSUMPTION:    Shares  outstanding  remains  constant  at  8239.    

           

               

EPS    $(1.00)  

 $1.00    

 $3.00    

 $5.00    

2014A   2015E   2016E   2017E   2018E   2019E  

Earnings  Per  Share  

EPS  

Page 27: Analysis and Valuation Project

PART  10:  BIBLIOGRAPHY        

  MICROSOFT  ANALYSIS  AND  VALUATION  PROJECT  |  25  

REFERENCES    

Capital  IQ  (2014,  December  31).  Microsoft  Financial  Statements.  Retrieved  March  15,  2015.    Jurevicius,  O.  (n.d.).  SWOT  analysis  of  Microsoft.  Retrieved  April  8,  2015,  from  

http://www.strategicmanagementinsight.com/swot-­‐analyses/microsoft-­‐swot-­‐analysis.html  

 MICROSOFT  CORP  (MSFT:NASDAQ  GS):  Stock  Quote  &  Company  Profile.  (2015,  April  8).  

Retrieved  April  9,  2015,  from  http://www.bloomberg.com/research/stocks/snapshot/snapshot.asp?ticker=MSFT  

 Microsoft  Corporation.  (n.d.).  Retrieved  April  7,  2015,  from  

https://www.capitaliq.com/CIQDotNet/company.aspx?companyId=21835    Microsoft  Investor  Relations  -­‐  Risk  Factors.  (n.d.).  Retrieved  April  8,  2015,  from  

http://www.microsoft.com/investor/EarningsAndFinancials/Earnings/RisksAndUncertainities/FY10/Q4/RisksAndUncertainties.aspx  

 Mogg,  T.  (2015,  January  26).  Windows  wins  a  few  buyers!  Surface  and  Lumia  sales  reach  

new  highs.  Retrieved  April  8,  2015,  from  http://www.digitaltrends.com/mobile/microsoft-­‐surface-­‐and-­‐lumia-­‐sales-­‐break-­‐records-­‐but-­‐profit-­‐drops/  

 Ruddick,  G.  (2015,  January  26).  Falling  Windows  sales  hits  Microsoft  profits.  Retrieved  

April  9,  2015,  from  http://www.telegraph.co.uk/technology/microsoft/11371095/Falling-­‐Windows-­‐sales-­‐hits-­‐Microsoft-­‐profits.html