Intrinsic value of Microsoft - MSFT

Previous Close

$107.64

  Intrinsic Value

$60.61

stock screener

  Rating & Target

sell

-44%

Previous close

$107.64

 
Intrinsic value

$60.61

 
Up/down potential

-44%

 
Rating

sell

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 2017), $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 833.8

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   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
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  5.40
  5.36
  5.32
  5.29
  5.26
  5.24
  5.21
  5.19
  5.17
  5.15
  5.14
  5.13
  5.11
  5.10
  5.09
  5.08
  5.07
  5.07
  5.06
  5.05
  5.05
  5.04
  5.04
  5.04
  5.03
  5.03
  5.03
  5.02
  5.02
  5.02
Revenue, $m
  94,807
  99,889
  105,207
  110,774
  116,604
  122,709
  129,106
  135,808
  142,832
  150,195
  157,914
  166,008
  174,496
  183,398
  192,736
  202,532
  212,808
  223,591
  234,904
  246,777
  259,235
  272,311
  286,033
  300,437
  315,554
  331,423
  348,079
  365,564
  383,919
  403,187
Variable operating expenses, $m
  50,667
  53,141
  55,729
  58,439
  61,276
  64,248
  67,361
  70,623
  74,042
  77,626
  76,860
  80,799
  84,931
  89,263
  93,808
  98,576
  103,578
  108,826
  114,332
  120,111
  126,175
  132,539
  139,218
  146,228
  153,586
  161,310
  169,417
  177,927
  186,861
  196,239
Fixed operating expenses, $m
  20,216
  20,661
  21,115
  21,580
  22,055
  22,540
  23,036
  23,543
  24,061
  24,590
  25,131
  25,684
  26,249
  26,826
  27,416
  28,020
  28,636
  29,266
  29,910
  30,568
  31,240
  31,928
  32,630
  33,348
  34,082
  34,831
  35,598
  36,381
  37,181
  37,999
Total operating expenses, $m
  70,883
  73,802
  76,844
  80,019
  83,331
  86,788
  90,397
  94,166
  98,103
  102,216
  101,991
  106,483
  111,180
  116,089
  121,224
  126,596
  132,214
  138,092
  144,242
  150,679
  157,415
  164,467
  171,848
  179,576
  187,668
  196,141
  205,015
  214,308
  224,042
  234,238
Operating income, $m
  23,924
  26,087
  28,363
  30,756
  33,273
  35,922
  38,709
  41,642
  44,730
  47,980
  55,924
  59,525
  63,317
  67,309
  71,511
  75,936
  80,594
  85,499
  90,662
  96,098
  101,820
  107,844
  114,185
  120,860
  127,886
  135,282
  143,065
  151,256
  159,877
  168,949
EBITDA, $m
  34,533
  37,023
  39,640
  42,390
  45,282
  48,322
  51,520
  54,884
  58,422
  62,145
  66,062
  70,183
  74,519
  79,083
  83,885
  88,939
  94,257
  99,853
  105,743
  111,941
  118,463
  125,327
  132,549
  140,148
  148,145
  156,559
  165,412
  174,726
  184,525
  194,834
Interest expense (income), $m
  1,600
  4,398
  4,838
  5,303
  5,789
  6,299
  6,832
  7,391
  7,976
  8,589
  9,232
  9,905
  10,611
  11,352
  12,128
  12,943
  13,797
  14,693
  15,634
  16,620
  17,655
  18,741
  19,881
  21,077
  22,333
  23,651
  25,034
  26,485
  28,009
  29,609
  31,288
Earnings before tax, $m
  19,526
  21,250
  23,060
  24,966
  26,974
  29,090
  31,318
  33,666
  36,141
  38,748
  46,018
  48,914
  51,965
  55,180
  58,568
  62,139
  65,901
  69,865
  74,042
  78,443
  83,079
  87,963
  93,108
  98,528
  104,236
  110,248
  116,579
  123,247
  130,268
  137,661
Tax expense, $m
  5,272
  5,737
  6,226
  6,741
  7,283
  7,854
  8,456
  9,090
  9,758
  10,462
  12,425
  13,207
  14,030
  14,899
  15,813
  16,777
  17,793
  18,864
  19,991
  21,180
  22,431
  23,750
  25,139
  26,602
  28,144
  29,767
  31,476
  33,277
  35,172
  37,168
Net income, $m
  14,254
  15,512
  16,834
  18,225
  19,691
  21,235
  22,862
  24,576
  26,383
  28,286
  33,593
  35,707
  37,934
  40,281
  42,755
  45,361
  48,108
  51,002
  54,051
  57,263
  60,648
  64,213
  67,969
  71,925
  76,092
  80,481
  85,103
  89,970
  95,096
  100,492

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $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 assets, $m
  182,322
  192,094
  202,321
  213,027
  224,238
  235,979
  248,280
  261,169
  274,677
  288,837
  303,681
  319,246
  335,569
  352,689
  370,646
  389,484
  409,247
  429,982
  451,739
  474,570
  498,530
  523,674
  550,064
  577,763
  606,835
  637,351
  669,383
  703,008
  738,306
  775,360
Adjusted assets (=assets-cash), $m
  182,322
  192,094
  202,321
  213,027
  224,238
  235,979
  248,280
  261,169
  274,677
  288,837
  303,681
  319,246
  335,569
  352,689
  370,646
  389,484
  409,247
  429,982
  451,739
  474,570
  498,530
  523,674
  550,064
  577,763
  606,835
  637,351
  669,383
  703,008
  738,306
  775,360
Revenue / Adjusted assets
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
  0.520
Average production assets, $m
  60,866
  64,129
  67,543
  71,117
  74,860
  78,779
  82,886
  87,189
  91,698
  96,425
  101,381
  106,577
  112,026
  117,742
  123,737
  130,025
  136,623
  143,545
  150,809
  158,431
  166,429
  174,823
  183,633
  192,880
  202,586
  212,773
  223,467
  234,692
  246,476
  258,846
Working capital, $m
  -5,594
  -5,893
  -6,207
  -6,536
  -6,880
  -7,240
  -7,617
  -8,013
  -8,427
  -8,862
  -9,317
  -9,794
  -10,295
  -10,821
  -11,371
  -11,949
  -12,556
  -13,192
  -13,859
  -14,560
  -15,295
  -16,066
  -16,876
  -17,726
  -18,618
  -19,554
  -20,537
  -21,568
  -22,651
  -23,788
Total debt, $m
  89,590
  98,200
  107,210
  116,642
  126,518
  136,863
  147,700
  159,055
  170,955
  183,430
  196,508
  210,221
  224,602
  239,684
  255,504
  272,100
  289,511
  307,779
  326,947
  347,061
  368,170
  390,322
  413,572
  437,974
  463,587
  490,471
  518,692
  548,315
  579,412
  612,057
Total liabilities, $m
  160,625
  169,235
  178,245
  187,677
  197,553
  207,898
  218,735
  230,090
  241,990
  254,465
  267,543
  281,256
  295,637
  310,719
  326,539
  343,135
  360,546
  378,814
  397,982
  418,096
  439,205
  461,357
  484,607
  509,009
  534,622
  561,506
  589,727
  619,350
  650,447
  683,092
Total equity, $m
  21,696
  22,859
  24,076
  25,350
  26,684
  28,082
  29,545
  31,079
  32,687
  34,372
  36,138
  37,990
  39,933
  41,970
  44,107
  46,349
  48,700
  51,168
  53,757
  56,474
  59,325
  62,317
  65,458
  68,754
  72,213
  75,845
  79,657
  83,658
  87,858
  92,268
Total liabilities and equity, $m
  182,321
  192,094
  202,321
  213,027
  224,237
  235,980
  248,280
  261,169
  274,677
  288,837
  303,681
  319,246
  335,570
  352,689
  370,646
  389,484
  409,246
  429,982
  451,739
  474,570
  498,530
  523,674
  550,065
  577,763
  606,835
  637,351
  669,384
  703,008
  738,305
  775,360
Debt-to-equity ratio
  4.130
  4.300
  4.450
  4.600
  4.740
  4.870
  5.000
  5.120
  5.230
  5.340
  5.440
  5.530
  5.620
  5.710
  5.790
  5.870
  5.940
  6.020
  6.080
  6.150
  6.210
  6.260
  6.320
  6.370
  6.420
  6.470
  6.510
  6.550
  6.590
  6.630
Adjusted equity ratio
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119
  0.119

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  14,254
  15,512
  16,834
  18,225
  19,691
  21,235
  22,862
  24,576
  26,383
  28,286
  33,593
  35,707
  37,934
  40,281
  42,755
  45,361
  48,108
  51,002
  54,051
  57,263
  60,648
  64,213
  67,969
  71,925
  76,092
  80,481
  85,103
  89,970
  95,096
  100,492
Depreciation, amort., depletion, $m
  10,609
  10,936
  11,277
  11,635
  12,009
  12,401
  12,811
  13,242
  13,693
  14,165
  10,138
  10,658
  11,203
  11,774
  12,374
  13,003
  13,662
  14,355
  15,081
  15,843
  16,643
  17,482
  18,363
  19,288
  20,259
  21,277
  22,347
  23,469
  24,648
  25,885
Funds from operations, $m
  24,863
  26,448
  28,111
  29,860
  31,700
  33,636
  35,674
  37,818
  40,075
  42,451
  43,731
  46,365
  49,137
  52,056
  55,129
  58,364
  61,770
  65,356
  69,132
  73,106
  77,291
  81,695
  86,332
  91,213
  96,351
  101,758
  107,450
  113,440
  119,743
  126,377
Change in working capital, $m
  -287
  -300
  -314
  -328
  -344
  -360
  -377
  -395
  -414
  -434
  -455
  -478
  -501
  -525
  -551
  -578
  -606
  -636
  -668
  -700
  -735
  -771
  -810
  -850
  -892
  -936
  -983
  -1,032
  -1,083
  -1,137
Cash from operations, $m
  25,150
  26,748
  28,424
  30,188
  32,044
  33,996
  36,051
  38,214
  40,490
  42,886
  44,187
  46,842
  49,638
  52,581
  55,680
  58,942
  62,376
  65,992
  69,799
  73,807
  78,026
  82,467
  87,142
  92,063
  97,243
  102,694
  108,432
  114,471
  120,826
  127,514
Maintenance CAPEX, $m
  -5,774
  -6,087
  -6,413
  -6,754
  -7,112
  -7,486
  -7,878
  -8,289
  -8,719
  -9,170
  -9,643
  -10,138
  -10,658
  -11,203
  -11,774
  -12,374
  -13,003
  -13,662
  -14,355
  -15,081
  -15,843
  -16,643
  -17,482
  -18,363
  -19,288
  -20,259
  -21,277
  -22,347
  -23,469
  -24,648
New CAPEX, $m
  -3,127
  -3,262
  -3,414
  -3,574
  -3,742
  -3,920
  -4,106
  -4,303
  -4,510
  -4,727
  -4,956
  -5,196
  -5,449
  -5,715
  -5,995
  -6,289
  -6,598
  -6,922
  -7,263
  -7,622
  -7,999
  -8,394
  -8,810
  -9,247
  -9,706
  -10,187
  -10,694
  -11,225
  -11,784
  -12,370
Cash from investing activities, $m
  -8,901
  -9,349
  -9,827
  -10,328
  -10,854
  -11,406
  -11,984
  -12,592
  -13,229
  -13,897
  -14,599
  -15,334
  -16,107
  -16,918
  -17,769
  -18,663
  -19,601
  -20,584
  -21,618
  -22,703
  -23,842
  -25,037
  -26,292
  -27,610
  -28,994
  -30,446
  -31,971
  -33,572
  -35,253
  -37,018
Free cash flow, $m
  16,249
  17,399
  18,597
  19,860
  21,190
  22,591
  24,067
  25,622
  27,261
  28,989
  29,589
  31,508
  33,531
  35,663
  37,911
  40,279
  42,776
  45,408
  48,181
  51,104
  54,184
  57,430
  60,850
  64,453
  68,249
  72,248
  76,461
  80,899
  85,573
  90,496
Issuance/(repayment) of debt, $m
  8,145
  8,610
  9,010
  9,432
  9,876
  10,344
  10,837
  11,355
  11,901
  12,475
  13,078
  13,713
  14,381
  15,082
  15,820
  16,596
  17,411
  18,268
  19,168
  20,114
  21,108
  22,152
  23,250
  24,402
  25,613
  26,885
  28,220
  29,624
  31,097
  32,645
Issuance/(repurchase) of shares, $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 from financing (excl. dividends), $m  
  8,145
  8,610
  9,010
  9,432
  9,876
  10,344
  10,837
  11,355
  11,901
  12,475
  13,078
  13,713
  14,381
  15,082
  15,820
  16,596
  17,411
  18,268
  19,168
  20,114
  21,108
  22,152
  23,250
  24,402
  25,613
  26,885
  28,220
  29,624
  31,097
  32,645
Total cash flow (excl. dividends), $m
  24,394
  26,008
  27,607
  29,292
  31,066
  32,935
  34,904
  36,977
  39,162
  41,463
  42,667
  45,221
  47,911
  50,745
  53,731
  56,875
  60,187
  63,676
  67,349
  71,218
  75,292
  79,582
  84,099
  88,855
  93,862
  99,133
  104,682
  110,523
  116,670
  123,141
Retained Cash Flow (-), $m
  -1,100
  -1,163
  -1,217
  -1,274
  -1,334
  -1,397
  -1,464
  -1,534
  -1,607
  -1,685
  -1,767
  -1,852
  -1,942
  -2,037
  -2,137
  -2,242
  -2,352
  -2,468
  -2,589
  -2,717
  -2,851
  -2,992
  -3,140
  -3,296
  -3,460
  -3,631
  -3,812
  -4,001
  -4,200
  -4,409
Prev. year cash balance distribution, $m
  67,115
  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
  3,238
  3,413
  3,596
  3,787
  3,988
  4,198
  4,418
  4,648
  4,889
  5,142
  5,407
  5,685
  5,976
  6,282
  6,602
  6,938
  7,291
  7,661
  8,049
  8,457
  8,884
  9,332
  9,803
  10,297
  10,816
  11,360
  11,931
  12,531
  13,160
  13,821
Cash available for distribution, $m
  90,409
  24,845
  26,390
  28,018
  29,732
  31,538
  33,440
  35,444
  37,555
  39,778
  40,900
  43,369
  45,969
  48,708
  51,594
  54,634
  57,836
  61,208
  64,760
  68,501
  72,441
  76,590
  80,959
  85,559
  90,402
  95,502
  100,870
  106,521
  112,470
  118,732
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
  86,682
  22,745
  22,967
  23,070
  23,046
  22,888
  22,591
  22,153
  21,573
  20,854
  19,423
  18,507
  17,478
  16,352
  15,147
  13,884
  12,584
  11,272
  9,971
  8,704
  7,493
  6,355
  5,306
  4,358
  3,517
  2,786
  2,165
  1,648
  1,228
  894
Current shareholders' claim on cash, %
  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 is a technology company. The Company develops, licenses, and supports a range of software products, services and devices. The Company's segments include Productivity and Business Processes, Intelligent Cloud and More Personal Computing. The Company's products include operating systems; cross-device productivity applications; server applications; business solution applications; desktop and server management tools; software development tools; video games, and training and certification of computer system integrators and developers. It also designs, manufactures, and sells devices, including personal computers (PCs), tablets, gaming and entertainment consoles, phones, other intelligent devices, and related accessories, that integrate with its cloud-based offerings. It offers an array of services, including cloud-based solutions that provide customers with software, services, platforms, and content, and it provides solution support and consulting services.

FINANCIAL RATIOS  of  Microsoft (MSFT)

Valuation Ratios
P/E Ratio 39.1
Price to Sales 9.2
Price to Book 9.5
Price to Tangible Book
Price to Cash Flow 21
Price to Free Cash Flow 26.4
Growth Rates
Sales Growth Rate 5.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -2.6%
Cap. Spend. - 3 Yr. Gr. Rate 8.2%
Financial Strength
Quick Ratio 13
Current Ratio 0.1
LT Debt to Equity 86.7%
Total Debt to Equity 98.3%
Interest Coverage 15
Management Effectiveness
Return On Assets 10.2%
Ret/ On Assets - 3 Yr. Avg. 9%
Return On Total Capital 14.2%
Ret/ On T. Cap. - 3 Yr. Avg. 12.9%
Return On Equity 26.6%
Return On Equity - 3 Yr. Avg. 21%
Asset Turnover 0.4
Profitability Ratios
Gross Margin 61.9%
Gross Margin - 3 Yr. Avg. 62.7%
EBITDA Margin 37.3%
EBITDA Margin - 3 Yr. Avg. 32.1%
Operating Margin 24.8%
Oper. Margin - 3 Yr. Avg. 22.4%
Pre-Tax Margin 25.7%
Pre-Tax Margin - 3 Yr. Avg. 22.9%
Net Profit Margin 23.6%
Net Profit Margin - 3 Yr. Avg. 18.8%
Effective Tax Rate 8.4%
Eff/ Tax Rate - 3 Yr. Avg. 19.2%
Payout Ratio 55.9%

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 $89950 million for the last fiscal year's total revenue generated by Microsoft. The default revenue input number comes from 2017 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 5.4% 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 53.7%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $19781 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 5.4% 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 3.6%.

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 64.2%.

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 -5.9%. 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 - $87711 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 7746 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 $833.8 billion.

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