Intrinsic value of Microsoft - MSFT

Previous Close

$73.65

  Intrinsic Value

$47.21

stock screener

  Rating & Target

sell

-36%

  Value-price divergence*

-74%

Previous close

$73.65

 
Intrinsic value

$47.21

 
Up/down potential

-36%

 
Rating

sell

 
Value-price divergence*

-74%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of MSFT stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 566.9

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -8.83
  7.60
  7.34
  7.11
  6.90
  6.71
  6.54
  6.38
  6.24
  6.12
  6.01
  5.91
  5.82
  5.73
  5.66
  5.59
  5.54
  5.48
  5.43
  5.39
  5.35
  5.32
  5.28
  5.26
  5.23
  5.21
  5.19
  5.17
  5.15
  5.14
  5.12
Revenue, $m
  85,320
  91,804
  98,543
  105,545
  112,823
  120,389
  128,256
  136,441
  144,960
  153,831
  163,072
  172,704
  182,748
  193,227
  204,166
  215,588
  227,522
  239,994
  253,034
  266,674
  280,944
  295,879
  311,515
  327,888
  345,038
  363,006
  381,834
  401,567
  422,252
  443,939
  466,680
Variable operating expenses, $m
 
  74,042
  79,346
  84,857
  90,585
  96,540
  102,732
  109,174
  115,879
  122,860
  130,133
  135,927
  143,832
  152,080
  160,689
  169,679
  179,072
  188,888
  199,152
  209,886
  221,118
  232,873
  245,179
  258,065
  271,563
  285,705
  300,523
  316,054
  332,335
  349,404
  367,302
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  65,460
  74,042
  79,346
  84,857
  90,585
  96,540
  102,732
  109,174
  115,879
  122,860
  130,133
  135,927
  143,832
  152,080
  160,689
  169,679
  179,072
  188,888
  199,152
  209,886
  221,118
  232,873
  245,179
  258,065
  271,563
  285,705
  300,523
  316,054
  332,335
  349,404
  367,302
Operating income, $m
  19,860
  17,762
  19,197
  20,688
  22,238
  23,849
  25,525
  27,268
  29,082
  30,971
  32,938
  36,777
  38,916
  41,147
  43,476
  45,909
  48,450
  51,106
  53,883
  56,787
  59,826
  63,007
  66,336
  69,823
  73,475
  77,301
  81,310
  85,512
  89,917
  94,536
  99,378
EBITDA, $m
  26,482
  20,807
  22,334
  23,922
  25,571
  27,286
  29,069
  30,924
  32,855
  34,865
  36,960
  39,143
  41,419
  43,794
  46,274
  48,862
  51,567
  54,394
  57,350
  60,441
  63,675
  67,060
  70,604
  74,315
  78,202
  82,274
  86,541
  91,014
  95,702
  100,618
  105,772
Interest expense (income), $m
  1,100
  1,419
  1,706
  2,006
  2,317
  2,641
  2,978
  3,328
  3,693
  4,072
  4,467
  4,878
  5,307
  5,754
  6,220
  6,707
  7,216
  7,747
  8,302
  8,882
  9,489
  10,125
  10,789
  11,485
  12,214
  12,977
  13,777
  14,615
  15,493
  16,414
  17,380
Earnings before tax, $m
  19,751
  16,343
  17,491
  18,683
  19,921
  21,208
  22,546
  23,939
  25,389
  26,899
  28,472
  31,899
  33,609
  35,393
  37,256
  39,202
  41,235
  43,359
  45,581
  47,905
  50,337
  52,882
  55,547
  58,338
  61,261
  64,324
  67,533
  70,897
  74,424
  78,121
  81,999
Tax expense, $m
  2,953
  4,413
  4,723
  5,044
  5,379
  5,726
  6,088
  6,464
  6,855
  7,263
  7,687
  8,613
  9,074
  9,556
  10,059
  10,584
  11,133
  11,707
  12,307
  12,934
  13,591
  14,278
  14,998
  15,751
  16,540
  17,367
  18,234
  19,142
  20,094
  21,093
  22,140
Net income, $m
  16,798
  11,930
  12,769
  13,638
  14,542
  15,482
  16,459
  17,476
  18,534
  19,636
  20,784
  23,286
  24,534
  25,837
  27,197
  28,617
  30,101
  31,652
  33,274
  34,971
  36,746
  38,604
  40,549
  42,586
  44,720
  46,956
  49,299
  51,755
  54,329
  57,029
  59,859

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  113,239
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  193,468
  145,031
  155,676
  166,738
  178,235
  190,188
  202,617
  215,547
  229,005
  243,018
  257,617
  272,834
  288,701
  305,256
  322,537
  340,582
  359,434
  379,138
  399,739
  421,285
  443,829
  467,424
  492,125
  517,991
  545,084
  573,469
  603,213
  634,387
  667,065
  701,326
  737,251
Adjusted assets (=assets-cash), $m
  80,229
  145,031
  155,676
  166,738
  178,235
  190,188
  202,617
  215,547
  229,005
  243,018
  257,617
  272,834
  288,701
  305,256
  322,537
  340,582
  359,434
  379,138
  399,739
  421,285
  443,829
  467,424
  492,125
  517,991
  545,084
  573,469
  603,213
  634,387
  667,065
  701,326
  737,251
Revenue / Adjusted assets
  1.063
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
Average production assets, $m
  11,650
  12,577
  13,500
  14,460
  15,457
  16,493
  17,571
  18,692
  19,860
  21,075
  22,341
  23,660
  25,036
  26,472
  27,971
  29,536
  31,170
  32,879
  34,666
  36,534
  38,489
  40,535
  42,678
  44,921
  47,270
  49,732
  52,311
  55,015
  57,849
  60,820
  63,935
Working capital, $m
  80,303
  -9,180
  -9,854
  -10,555
  -11,282
  -12,039
  -12,826
  -13,644
  -14,496
  -15,383
  -16,307
  -17,270
  -18,275
  -19,323
  -20,417
  -21,559
  -22,752
  -23,999
  -25,303
  -26,667
  -28,094
  -29,588
  -31,151
  -32,789
  -34,504
  -36,301
  -38,183
  -40,157
  -42,225
  -44,394
  -46,668
Total debt, $m
  53,461
  48,740
  57,309
  66,214
  75,469
  85,091
  95,097
  105,506
  116,339
  127,620
  139,372
  151,621
  164,395
  177,721
  191,632
  206,158
  221,335
  237,196
  253,779
  271,125
  289,273
  308,266
  328,150
  348,973
  370,783
  393,632
  417,576
  442,671
  468,977
  496,557
  525,477
Total liabilities, $m
  121,471
  116,750
  125,319
  134,224
  143,479
  153,101
  163,107
  173,516
  184,349
  195,630
  207,382
  219,631
  232,405
  245,731
  259,642
  274,168
  289,345
  305,206
  321,789
  339,135
  357,283
  376,276
  396,160
  416,983
  438,793
  461,642
  485,586
  510,681
  536,987
  564,567
  593,487
Total equity, $m
  71,997
  28,281
  30,357
  32,514
  34,756
  37,087
  39,510
  42,032
  44,656
  47,389
  50,235
  53,203
  56,297
  59,525
  62,895
  66,413
  70,090
  73,932
  77,949
  82,151
  86,547
  91,148
  95,964
  101,008
  106,291
  111,826
  117,626
  123,705
  130,078
  136,759
  143,764
Total liabilities and equity, $m
  193,468
  145,031
  155,676
  166,738
  178,235
  190,188
  202,617
  215,548
  229,005
  243,019
  257,617
  272,834
  288,702
  305,256
  322,537
  340,581
  359,435
  379,138
  399,738
  421,286
  443,830
  467,424
  492,124
  517,991
  545,084
  573,468
  603,212
  634,386
  667,065
  701,326
  737,251
Debt-to-equity ratio
  0.743
  1.720
  1.890
  2.040
  2.170
  2.290
  2.410
  2.510
  2.610
  2.690
  2.770
  2.850
  2.920
  2.990
  3.050
  3.100
  3.160
  3.210
  3.260
  3.300
  3.340
  3.380
  3.420
  3.450
  3.490
  3.520
  3.550
  3.580
  3.610
  3.630
  3.660
Adjusted equity ratio
  -0.353
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195
  0.195

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  16,798
  11,930
  12,769
  13,638
  14,542
  15,482
  16,459
  17,476
  18,534
  19,636
  20,784
  23,286
  24,534
  25,837
  27,197
  28,617
  30,101
  31,652
  33,274
  34,971
  36,746
  38,604
  40,549
  42,586
  44,720
  46,956
  49,299
  51,755
  54,329
  57,029
  59,859
Depreciation, amort., depletion, $m
  6,622
  3,045
  3,137
  3,233
  3,333
  3,437
  3,544
  3,656
  3,773
  3,895
  4,021
  2,366
  2,504
  2,647
  2,797
  2,954
  3,117
  3,288
  3,467
  3,653
  3,849
  4,054
  4,268
  4,492
  4,727
  4,973
  5,231
  5,501
  5,785
  6,082
  6,394
Funds from operations, $m
  31,249
  14,975
  15,906
  16,871
  17,875
  18,918
  20,003
  21,132
  22,307
  23,531
  24,806
  25,652
  27,038
  28,484
  29,994
  31,571
  33,218
  34,940
  36,741
  38,624
  40,595
  42,657
  44,817
  47,078
  49,447
  51,929
  54,530
  57,256
  60,114
  63,111
  66,252
Change in working capital, $m
  -2,076
  -648
  -674
  -700
  -728
  -757
  -787
  -819
  -852
  -887
  -924
  -963
  -1,004
  -1,048
  -1,094
  -1,142
  -1,193
  -1,247
  -1,304
  -1,364
  -1,427
  -1,494
  -1,564
  -1,637
  -1,715
  -1,797
  -1,883
  -1,973
  -2,069
  -2,169
  -2,274
Cash from operations, $m
  33,325
  15,624
  16,580
  17,572
  18,603
  19,675
  20,790
  21,951
  23,159
  24,418
  25,730
  26,615
  28,043
  29,532
  31,088
  32,713
  34,412
  36,187
  38,045
  39,988
  42,022
  44,151
  46,381
  48,716
  51,162
  53,726
  56,413
  59,230
  62,183
  65,279
  68,527
Maintenance CAPEX, $m
  0
  -1,165
  -1,258
  -1,350
  -1,446
  -1,546
  -1,649
  -1,757
  -1,869
  -1,986
  -2,107
  -2,234
  -2,366
  -2,504
  -2,647
  -2,797
  -2,954
  -3,117
  -3,288
  -3,467
  -3,653
  -3,849
  -4,054
  -4,268
  -4,492
  -4,727
  -4,973
  -5,231
  -5,501
  -5,785
  -6,082
New CAPEX, $m
  -8,343
  -928
  -923
  -959
  -997
  -1,037
  -1,078
  -1,121
  -1,167
  -1,215
  -1,266
  -1,320
  -1,376
  -1,436
  -1,499
  -1,565
  -1,635
  -1,709
  -1,787
  -1,869
  -1,955
  -2,046
  -2,142
  -2,243
  -2,350
  -2,462
  -2,579
  -2,703
  -2,834
  -2,971
  -3,115
Cash from investing activities, $m
  -23,950
  -2,093
  -2,181
  -2,309
  -2,443
  -2,583
  -2,727
  -2,878
  -3,036
  -3,201
  -3,373
  -3,554
  -3,742
  -3,940
  -4,146
  -4,362
  -4,589
  -4,826
  -5,075
  -5,336
  -5,608
  -5,895
  -6,196
  -6,511
  -6,842
  -7,189
  -7,552
  -7,934
  -8,335
  -8,756
  -9,197
Free cash flow, $m
  9,375
  13,531
  14,399
  15,262
  16,160
  17,093
  18,063
  19,072
  20,123
  21,217
  22,356
  23,062
  24,300
  25,593
  26,942
  28,351
  29,823
  31,362
  32,970
  34,653
  36,413
  38,256
  40,185
  42,205
  44,321
  46,538
  48,861
  51,295
  53,847
  56,523
  59,329
Issuance/(repayment) of debt, $m
  18,283
  8,183
  8,569
  8,905
  9,255
  9,622
  10,006
  10,409
  10,834
  11,281
  11,752
  12,249
  12,774
  13,327
  13,911
  14,526
  15,176
  15,861
  16,584
  17,345
  18,148
  18,993
  19,884
  20,822
  21,810
  22,850
  23,944
  25,095
  26,306
  27,580
  28,920
Issuance/(repurchase) of shares, $m
  -15,301
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  2,613
  8,183
  8,569
  8,905
  9,255
  9,622
  10,006
  10,409
  10,834
  11,281
  11,752
  12,249
  12,774
  13,327
  13,911
  14,526
  15,176
  15,861
  16,584
  17,345
  18,148
  18,993
  19,884
  20,822
  21,810
  22,850
  23,944
  25,095
  26,306
  27,580
  28,920
Total cash flow (excl. dividends), $m
  11,921
  21,713
  22,968
  24,167
  25,415
  26,714
  28,068
  29,481
  30,956
  32,497
  34,108
  35,311
  37,074
  38,920
  40,853
  42,878
  44,999
  47,223
  49,554
  51,998
  54,561
  57,249
  60,069
  63,027
  66,131
  69,387
  72,804
  76,390
  80,154
  84,103
  88,249
Retained Cash Flow (-), $m
  8,086
  -2,012
  -2,076
  -2,157
  -2,242
  -2,331
  -2,424
  -2,521
  -2,624
  -2,733
  -2,847
  -2,967
  -3,094
  -3,228
  -3,370
  -3,519
  -3,676
  -3,842
  -4,017
  -4,202
  -4,396
  -4,601
  -4,817
  -5,044
  -5,283
  -5,535
  -5,800
  -6,079
  -6,372
  -6,681
  -7,005
Prev. year cash balance distribution, $m
 
  45,728
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  65,430
  20,892
  22,010
  23,173
  24,383
  25,645
  26,960
  28,332
  29,765
  31,262
  32,344
  33,980
  35,692
  37,483
  39,359
  41,323
  43,381
  45,537
  47,797
  50,165
  52,648
  55,252
  57,983
  60,848
  63,852
  67,004
  70,311
  73,781
  77,422
  81,243
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  62,732
  19,126
  19,155
  19,081
  18,900
  18,611
  18,214
  17,708
  17,098
  16,389
  15,360
  14,500
  13,571
  12,584
  11,555
  10,501
  9,439
  8,386
  7,359
  6,374
  5,446
  4,585
  3,800
  3,099
  2,484
  1,955
  1,509
  1,142
  845
  612
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Microsoft Corporation, a technology company, develops, licenses, and supports software products, services, and devices worldwide. The company’s Productivity and Business Processes segment offers Office 365 commercial products and services for businesses, including Office, Exchange, SharePoint, and Skype, as well as related Client Access Licenses (CALs); Office 365 consumer services, such as Skype, Outlook.com, and OneDrive; Dynamics business solutions, such as financial management, customer relationship management, supply chain management, and analytics applications for small and mid-size businesses, large organizations, and divisions of enterprises; and LinkedIn online professional network. Its Intelligent Cloud segment licenses server products and cloud services, such as SQL Server, Windows Server, Visual Studio, System Center, and related CALs, as well as Azure, a cloud platform with computing, networking, storage, database, and management services; and enterprise services, such as Premier Support and Microsoft Consulting that assist in developing, deploying, and managing Microsoft server and desktop solutions, as well as provide training and certification to developers and IT professionals on Microsoft products. The company’s More Personal Computing segment comprises Windows OEM, volume, and other non-volume licensing of the Windows operating system, as well as patent licensing, Windows Embedded, MSN display advertising, and Windows Phone licensing system; devices, including Microsoft Surface, phones, and PC accessories; and search advertising, including Bing and Bing Ads. This segment also provides gaming platforms, including Xbox hardware, Xbox Live, video games, and third-party video games. The company markets and distributes its products through original equipment manufacturers (OEM), distributors, and resellers, as well as through online and Microsoft retail stores. Microsoft Corporation was founded in 1975 and is headquartered in Redmond, Washington.

FINANCIAL RATIOS  of  Microsoft (MSFT)

Valuation Ratios
P/E Ratio 34.2
Price to Sales 6.7
Price to Book 8
Price to Tangible Book
Price to Cash Flow 17.3
Price to Free Cash Flow 23
Growth Rates
Sales Growth Rate -8.8%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 40.4%
Cap. Spend. - 3 Yr. Gr. Rate 14.4%
Financial Strength
Quick Ratio 9
Current Ratio 0.1
LT Debt to Equity 56.3%
Total Debt to Equity 74.3%
Interest Coverage 19
Management Effectiveness
Return On Assets 9.6%
Ret/ On Assets - 3 Yr. Avg. 10.4%
Return On Total Capital 13.9%
Ret/ On T. Cap. - 3 Yr. Avg. 15.3%
Return On Equity 22.1%
Return On Equity - 3 Yr. Avg. 20.9%
Asset Turnover 0.5
Profitability Ratios
Gross Margin 61.6%
Gross Margin - 3 Yr. Avg. 65%
EBITDA Margin 32.2%
EBITDA Margin - 3 Yr. Avg. 32.5%
Operating Margin 23.3%
Oper. Margin - 3 Yr. Avg. 24.8%
Pre-Tax Margin 23.1%
Pre-Tax Margin - 3 Yr. Avg. 25%
Net Profit Margin 19.7%
Net Profit Margin - 3 Yr. Avg. 19.4%
Effective Tax Rate 15%
Eff/ Tax Rate - 3 Yr. Avg. 23.2%
Payout Ratio 65.5%

MSFT stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the MSFT stock intrinsic value calculation we used $85320 million for the last fiscal year's total revenue generated by Microsoft. The default revenue input number comes from 2016 income statement of Microsoft. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our MSFT stock valuation model: a) initial revenue growth rate of 7.6% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for MSFT is calculated based on our internal credit rating of Microsoft, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Microsoft.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of MSFT stock the variable cost ratio is equal to 80.8%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for MSFT stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Microsoft.

Corporate tax rate of 27% is the nominal tax rate for Microsoft. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the MSFT stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for MSFT are equal to 13.7%.

Life of production assets of 10 years is the average useful life of capital assets used in Microsoft operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for MSFT is equal to -10%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $71997 million for Microsoft - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 7697.41 million for Microsoft is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Microsoft at the current share price and the inputted number of shares is $566.9 billion.

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Stock chart of MSFT Financial statements of MSFT
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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