Thu Pham - MSFT Valuation

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

TABLE OF CONTENTS
MICROSOFT ANALYSIS A
PART 1: COMPANY DESCRIPTION AND BACKGROU
BUSINESS 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 ANALYSIS
COMPARATIVE DATA
PORTER’S FIVE FORCES
RATIO ANALYSIS
PART 5: FUTURE PERFORMANCE ANALYSIS
LIST OF ASSUMPTIONS
PROJECTING FINANCIAL STATEMENTS
PART 6: WEIGHTED AVERAGE COS
WACC FORMULA
MSFT WACC CALCULATION
CAPITAL STRUCTURE ANALYSIS
PART 7: COMMON SHARES VALUATION
FREE CASH FLOW TO EQUITY
DIVIDEND DISCOUNT MODEL
DISCOUNTED CASH FLOW
INTRINSIC VALUE
PE RATIO
PART 8: CONCLUSION AND RECOMMENDATION
PART 9: TABLES AND SPREADSHEETS
HISTORICAL 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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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%.

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.

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.

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.

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.

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

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.

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

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.

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! ×
𝐷
𝑉
+ 𝑟!×
𝐸
𝑉

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%

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! ×
𝐷
𝑉
+ 𝑟!×
𝐸
𝑉

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

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

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

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

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.

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

PART
9:
TABLES
AND
SPREADSHEETS

MICROSOFT
ANALYSIS
AND
VALUATION
PROJECT
|
17

TABLES
AND
SPREADSHEETS

Historical
Financial
Statements

Income Statement
For$the$Fiscal$Period$Ending
Reclassified
12$months
Jun93092010
12$months
Jun93092011
12$months
Jun93092012
12$months
Jun93092013
12$months
Jun93092014
Currency 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 $$$$$50,089.0$ $$$$$54,366.0$ $$$$$56,193.0$ $$$$$57,600.0$ $$$$$59,899.0$
Selling&General&&&Admin&Exp. &&&&&&17,277.0& &&&&&&18,162.0& &&&&&&18,426.0& &&&&&&19,692.0& &&&&&&20,632.0&
R&&&D&Exp. &&&&&&&&8,714.0& &&&&&&&&9,043.0& &&&&&&&&9,811.0& &&&&&&10,411.0& &&&&&&11,381.0&
Depreciation&&&Amort. 5 5 5 5 5
Other&Operating&Expense/(Income) 5 5 5 5 5
$$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 $$$$$24,653.0$ $$$$$27,597.0$ $$$$$27,981.0$ $$$$$27,653.0$ $$$$$27,583.0$
Restructuring&Charges 5 5 5 5 5
Merger&&&Related&Restruct.&Charges 5 5 5 5 &&&&&&&(127.0)&&
Impairment&of&Goodwill 5 5 &&&&(6,193.0)&& 5 5
Gain&(Loss)&On&Sale&Of&Invest. &&&&&&&&&&&360.0& &&&&&&&&&&&474.0& &&&&&&&&&&&479.0& &&&&&&&&&&&132.0& &&&&&&&&&&&364.0&
Legal&Settlements 5 5 5 &&&&&&&(733.0)&& 5
Other&Unusual&Items 5 5 5 5 5
$$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. $$$$$18,760.0$ $$$$$23,150.0$ $$$$$16,978.0$ $$$$$21,863.0$ $$$$$22,074.0$
Earnings&of&Discontinued&Ops. 5 5 5 5 5
Extraord.&Item&&&Account.&Change 5 5 5 5 5
$$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%&

PART
9:
TABLES
AND
SPREADSHEETS

MICROSOFT
ANALYSIS
AND
VALUATION
PROJECT
|
18

Balance'Sheet
Balance'Sheet'as'of:
Jun13012010 Jun13012011 Jun13012012 Jun13012013 Jun13012014
ASSETS
Cash%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'
LIABILITIES
Accounts%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 E
Retained%Earnings %%%%%%(17,736.0)%% %%%%%%%%(8,195.0)%% %%%%%%%%%%%%(856.0)%% %%%%%%%%%%%%9,895.0% %%%%%%%%%%17,710.0%
Treasury%Stock E E E E E
Comprehensive%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'

PART
9:
TABLES
AND
SPREADSHEETS

MICROSOFT
ANALYSIS
AND
VALUATION
PROJECT
|
19

Cash%Flow
For%the%Fiscal%Period%Ending 12%months
Jun93092010
12%months
Jun93092011
12%months
Jun93092012
12%months
Jun93092013
12%months
Jun93092014
%
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 P
StockPBased+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 P
Invest.+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 P
Other+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 P
LongPTerm+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 P
Other+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%

PART
9:
TABLES
AND
SPREADSHEETS

MICROSOFT
ANALYSIS
AND
VALUATION
PROJECT
|
20

Forecast
of
Future
Financial
Statements

Microsoft)Corporation)MSFT
8.26%4.99%6.65%4.53%5.06%
(In.Millions)1.08261.04991.065501.04531.0506
Income'Statement201420152016201720182019
Sales/Revenue86,83394,00598696105161109925115487
COGS26,93429,15930,61432,61934,09735,822
Gross'Profit59,89964,84768,08372,54275,82879,665
SG&A20,63222,33623,45124,98726,11927,440
R&D11,38112,32112,93613,78314,40815,137
Other.Operating.Total32,01334,65736,38738,77040,52642,577
Operating'Income27,88630,18931,69633,77235,30237,088
Interest.Expense(597)(646)(679)(723)(756)(794)
Interest.and.Invest..Income8839561,0041,0691,1181,174
Net'Interest'Expense286310325346362380
Currency.Exchange.Gains(Loss)(490)(530)(557)(593)(620)(652)
Other.NonROperating.Inc..(Exp)(99)(107)(113)(120)(125)(132)
EBT'Excl.'Unusual'Items27,58329,86131,35133,40534,91836,685
Merger.&.Related.Restruct..Charges(127)RRRRR
Gain(Loss).on.Sale.of.Invest.364394414441461484
EBT'Inclu.'Unusual'Items27,82030,25531,76533,84635,37937,169
Income.Tax.Expense57466,3636,6807,1187,4407,817
Earnings'from'Cont.'Ops.22,07423,89325,08526,72827,93929,352
Net'Income'to'Company22,07423,89325,08526,72827,93929,352

PART
9:
TABLES
AND
SPREADSHEETS

MICROSOFT
ANALYSIS
AND
VALUATION
PROJECT
|
21

Microsoft)Corporation)MSFT
In#Millions
Balance'Sheet
201420152016201720182019
Assets
Cash#&#Equivalents8,6699,3859,85310,49910,97411,530
Short#Term#Investments76,27282,57286,69292,37196,555101,441
Total'Cash&'ST'Investments84,94191,95796,546102,870107,530112,971
Accounts#Receivables19,54421,15822,21423,66924,74125,993
Total'Receivables19,54421,15822,21423,66924,74125,993
Inventory2,6602,8803,0233,2213,3673,538
Other#Current#Assets7,1017,6888,0718,6008,9899,444
Total'Current'Assets114,246123,683129,854138,360144,628151,946
Gross#Property,#Plant#&#Equipment27,80430,10131,60333,67335,19836,979
Accumulated#Depreciation(14,793)(16,015)(16,814)(17,915)(18,727)(19,675)
Net'PP&E13,01114,08614,78915,75716,47117,304
LongQterm#Investments14,59715,80316,59117,67818,47919,414
Goodwill20,12721,78922,87724,37525,47926,769
Other#Intangibles6,9817,5587,9358,4548,8379,285
Other#LongQTerm#Assets3,4223,7053,8904,1444,3324,551
Total'Assets172,384186,623195,935208,769218,226229,269
Liabilities
Accounts#Payable7,4328,0468,4479,0019,4089,884
Accrued#Expense4,7975,1935,4525,8106,0736,380

PART
9:
TABLES
AND
SPREADSHEETS

MICROSOFT
ANALYSIS
AND
VALUATION
PROJECT
|
22

ShortQTerm#Borrowings2,5582,7692,9073,0983,2383,402
Other#Current#Liabilities30,83833,38535,05137,34739,03941,014
Total'Current'Liabilities45,62549,39451,85855,25557,75860,681
Long#Term#Debt20,64522,35023,46625,00326,13527,458
Other#NonQCurrent#Liabilities16,33017,67918,56119,77720,67321,719
Total'Liabilities82,60089,42393,885100,034104,566109,857
Common#Stock68,36674,01377,70682,79686,54790,926
Additional#Paid#In#CapitalQQQQQQ
Retained#Earnings17,71019,17320,13021,44822,42023,554
Comprehensive#Inc.#&#Other3,7084,0144,2154,4914,6944,932
Total'Common'Equity89,78497,200102,050108,735113,660119,412
Total'Equity89,78497,200102,050108,735113,660119,412
Total'Liabilities'&'Equity172,384186,623195,935208,769218,226229,269

PART
9:
TABLES
AND
SPREADSHEETS

MICROSOFT
ANALYSIS
AND
VALUATION
PROJECT
|
23

In#Millions
Statement'of'Cash'Flows201420152016201720182019
Net#Income22,07423,89325,08526,72827,93929,352
Depreciation2,2801,2227991,101812948
Change#in#A/R(2,058)(1,614)(1,056)(1,455)(1,072)(1,252)
Change#in#Inv(732)(220)(144)(198)(146)(170)
Change#in#A/P2,604614401553408476
Change#in#Accruals680396259357263307
Change#in#Other#CA(1,273)(587)(384)(529)(390)(455)
CF'from'Operations23,57523,70424,96226,55827,81429,206
Change#in#Gross#Fixed#Assets(5,300)(2,297)(1,502)(2,070)(1,525)(1,781)
Change#in#ShortNTerm#Invest.(3,862)(6,300)(4,120)(5,678)(4,184)(4,886)
Change#in#Long#Term#Invest.(11,686)(3,727)(2,438)(3,360)(2,476)(2,891)
CF'from'Investment'(20,848)(12,324)(8,060)(11,108)(8,185)(9,557)
Change#in#ShortNTerm#Borro.1,913211138190140164
Change#in#LongNTerm#Debt8,0441,7051,1151,5371,1331,322
Change#in#Common#Stock1,0605,6473,6935,0903,7514,379
Repurchase#Common#StockN(8,617)(11,290)(10,870)(12,939)(13,151)
Payment#of#Cash#Dividends(8,879)(9,611)(10,090)(10,751)(11,238)(11,807)
CF'from'Financing'2,138(10,664)(16,433)(14,804)(19,153)(19,092)
Net#Cash#Flow4865716468646475557
Beg.#Cash#38048,6699,3859,85310,49910,974
End#Cash#86699,3859,85310,49910,97411,530

PART
9:
TABLES
AND
SPREADSHEETS

MICROSOFT
ANALYSIS
AND
VALUATION
PROJECT
|
24

Earnings
Per
Share

EARNINGS
PER
SHARE
EPS

2014A

$2.68

2015E

$2.90

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

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/RisksAndU
ncertainities/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

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