# Financial Valuation for Microsoft

Topics: Financial ratio, Microsoft, Generally Accepted Accounting Principles Pages: 27 (8132 words) Published: April 1, 2013
Microsoft Valuation

| |
| |
| |
| |
Chapter 1 : Executive Summary1
Chapter 2 : Introduction2
Chapter 3 : Financial Ratio Analysis5
3.1Time Series5
3.2Competitors Comparison Analysis7
3.3Financial Highlights – 20128
Chapter 4 : WACC (Weighted Average Cost of Capital)10
4.1Cost of Debt10
4.2Cost of Equity12
4.3WACC Calculation12
Chapter 5 : Valuation of Microsoft13
5.1Normal Scenario14
5.2Best Case Scenario15
5.3Worst Case Scenario17
5.4Sensitivity Analysis18
Chapter 6 : Conclusion19
Appendix AProjected Financial StatementsA-1
A.1NET INCOME StatementA-1
A.2Balance Sheet StatementA-4
A.3Statement of Cash flowsA-10
Appendix B ReferencesB-1

: Executive Summary
The purpose of this report is to valuate Microsoft Corporation, and check its stock price whether it is undervalued or overvalued and give recommendations accordingly. The report starts by introducing Microsoft and its business divisions. We then start our analysis by ratio analysis. We start by time series analysis, then competitors’ comparison analysis (Apple, Google, Oracle, and industry average). After that we start our valuation by calculating the WACC by calculating the cost of debt and cost of equity which required applying CAPM model and Microsoft Beta calculations. We then developed three different scenarios for expected growth rate for Microsoft 1. Normal Case scenario with 9.8% growth rate in the coming 5 years (based on Microsoft Historical growth rate), and 3% terminal growth rate 2. Best Case scenario with 12% growth rate in 2012 (matching with 2011 rate), and exceptionally 20% in 2013 & 2014 (with Windows 8 introduction), and back to 10% in 2015 & 2016, and finally a terminal rate of 5% 3. Worst Case scenario with 6% growth rate in 2012 through 2016, and 2% terminal value For each scenario developed, we provided backup for the rates used. After that we started projecting the financial statements of Microsoft using percentage of sales method. All projected financial statements (Balance sheet, income statement, and Statement of Cash flows) with the used assumptions are presented in Appendix A Using the projected financial statements, we calculated the free cash flow under each scenario (Normal, best, and worst) which we discounted to the present time to calculate the value of the firm. We then used that to calculate the fair price of the stock. In the conclusion section, we reflected our beliefs of the scenario that we think is most likely to happen which is the best case scenario, and presented some of the articles that support our expectations

: Introduction

Microsoft was founded in 1975. Its mission is to enable people and businesses throughout the world to realize their full potential by creating technology that transforms the way people work, play, and communicate. Microsoft develops and market software, services, and hardware that deliver new opportunities, greater convenience, and enhanced value to people’s lives. The company operates worldwide and has offices in more than 100 countries. Microsoft products include operating systems for personal computers (“PCs”), servers, phones, and other intelligent devices; server applications for distributed computing environments; productivity applications; business solution applications; desktop and server management tools; software development tools; video games; and online advertising. Microsoft also designs and sells hardware including the Xbox 360 gaming and entertainment console, Kinect for Xbox 360, Xbox 360 accessories, and Microsoft PC hardware products. (Microsoft 2011 Annual Report) Microsoft also offers cloud-based solutions that provide customers with software, services and content over the Internet by way of shared computing resources located in centralized data...