Intrinsic value of Microsoft - MSFT

Previous Close

$78.81

  Intrinsic Value

$60.77

stock screener

  Rating & Target

sell

-23%

Previous close

$78.81

 
Intrinsic value

$60.77

 
Up/down potential

-23%

 
Rating

sell

*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 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 608.0

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2017(a)
   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, %
  5.43
  13.10
  12.29
  11.56
  10.90
  10.31
  9.78
  9.30
  8.87
  8.49
  8.14
  7.82
  7.54
  7.29
  7.06
  6.85
  6.67
  6.50
  6.35
  6.22
  6.09
  5.98
  5.89
  5.80
  5.72
  5.65
  5.58
  5.52
  5.47
  5.42
  5.38
Revenue, $m
  89,950
  101,733
  114,236
  127,443
  141,341
  155,919
  171,173
  187,100
  203,704
  220,992
  238,976
  257,674
  277,108
  297,303
  318,289
  340,101
  362,778
  386,362
  410,900
  436,440
  463,038
  490,749
  519,636
  549,763
  581,198
  614,013
  648,284
  684,091
  721,518
  760,652
  801,587
Variable operating expenses, $m
 
  48,270
  53,771
  59,581
  65,696
  72,110
  78,820
  85,828
  93,132
  100,738
  108,651
  113,365
  121,915
  130,799
  140,032
  149,629
  159,606
  169,982
  180,777
  192,013
  203,715
  215,907
  228,616
  241,870
  255,700
  270,137
  285,215
  300,969
  317,435
  334,652
  352,661
Fixed operating expenses, $m
 
  25,813
  26,458
  27,119
  27,797
  28,492
  29,205
  29,935
  30,683
  31,450
  32,236
  33,042
  33,868
  34,715
  35,583
  36,472
  37,384
  38,319
  39,277
  40,259
  41,265
  42,297
  43,354
  44,438
  45,549
  46,688
  47,855
  49,051
  50,278
  51,535
  52,823
Total operating expenses, $m
  67,679
  74,083
  80,229
  86,700
  93,493
  100,602
  108,025
  115,763
  123,815
  132,188
  140,887
  146,407
  155,783
  165,514
  175,615
  186,101
  196,990
  208,301
  220,054
  232,272
  244,980
  258,204
  271,970
  286,308
  301,249
  316,825
  333,070
  350,020
  367,713
  386,187
  405,484
Operating income, $m
  22,271
  27,651
  34,008
  40,743
  47,848
  55,318
  63,148
  71,338
  79,888
  88,803
  98,089
  111,267
  121,325
  131,788
  142,674
  154,000
  165,788
  178,062
  190,846
  204,168
  218,057
  232,545
  247,666
  263,454
  279,948
  297,188
  315,214
  334,071
  353,806
  374,466
  396,103
EBITDA, $m
  31,049
  35,252
  42,111
  49,377
  57,041
  65,097
  73,540
  82,370
  91,588
  101,198
  111,206
  121,624
  132,462
  143,737
  155,466
  167,669
  180,369
  193,591
  207,361
  221,709
  236,668
  252,270
  268,551
  285,551
  303,308
  321,866
  341,270
  361,566
  382,805
  405,038
  428,320
Interest expense (income), $m
  1,600
  2,663
  969
  1,443
  1,943
  2,470
  3,023
  3,601
  4,205
  4,834
  5,490
  6,171
  6,880
  7,617
  8,382
  9,178
  10,004
  10,864
  11,758
  12,688
  13,656
  14,665
  15,715
  16,810
  17,952
  19,144
  20,387
  21,687
  23,044
  24,463
  25,946
Earnings before tax, $m
  23,149
  24,988
  33,039
  39,300
  45,904
  52,847
  60,125
  67,737
  75,683
  83,969
  92,600
  105,096
  114,445
  124,171
  134,291
  144,822
  155,784
  167,198
  179,088
  191,480
  204,401
  217,881
  231,951
  246,644
  261,997
  278,044
  294,826
  312,385
  330,762
  350,003
  370,157
Tax expense, $m
  1,945
  6,747
  8,920
  10,611
  12,394
  14,269
  16,234
  18,289
  20,435
  22,672
  25,002
  28,376
  30,900
  33,526
  36,259
  39,102
  42,062
  45,143
  48,354
  51,699
  55,188
  58,828
  62,627
  66,594
  70,739
  75,072
  79,603
  84,344
  89,306
  94,501
  99,942
Net income, $m
  21,204
  18,241
  24,118
  28,689
  33,510
  38,579
  43,891
  49,448
  55,249
  61,297
  67,598
  76,720
  83,545
  90,645
  98,033
  105,720
  113,722
  122,054
  130,734
  139,780
  149,213
  159,053
  169,324
  180,050
  191,257
  202,972
  215,223
  228,041
  241,456
  255,502
  270,214

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  132,901
  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
  241,086
  122,423
  137,469
  153,361
  170,085
  187,629
  205,984
  225,150
  245,131
  265,935
  287,577
  310,077
  333,463
  357,765
  383,019
  409,267
  436,556
  464,937
  494,464
  525,199
  557,205
  590,553
  625,314
  661,568
  699,396
  738,884
  780,125
  823,214
  868,252
  915,346
  964,605
Adjusted assets (=assets-cash), $m
  108,185
  122,423
  137,469
  153,361
  170,085
  187,629
  205,984
  225,150
  245,131
  265,935
  287,577
  310,077
  333,463
  357,765
  383,019
  409,267
  436,556
  464,937
  494,464
  525,199
  557,205
  590,553
  625,314
  661,568
  699,396
  738,884
  780,125
  823,214
  868,252
  915,346
  964,605
Revenue / Adjusted assets
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
  0.831
Average production assets, $m
  18,787
  21,262
  23,875
  26,636
  29,540
  32,587
  35,775
  39,104
  42,574
  46,187
  49,946
  53,854
  57,916
  62,136
  66,522
  71,081
  75,821
  80,750
  85,878
  91,216
  96,775
  102,567
  108,604
  114,900
  121,470
  128,329
  135,491
  142,975
  150,797
  158,976
  167,532
Working capital, $m
  95,324
  -31,029
  -34,842
  -38,870
  -43,109
  -47,555
  -52,208
  -57,066
  -62,130
  -67,402
  -72,888
  -78,591
  -84,518
  -90,677
  -97,078
  -103,731
  -110,647
  -117,840
  -125,324
  -133,114
  -141,226
  -149,679
  -158,489
  -167,678
  -177,265
  -187,274
  -197,727
  -208,648
  -220,063
  -231,999
  -244,484
Total debt, $m
  86,194
  27,683
  41,224
  55,527
  70,579
  86,368
  102,888
  120,137
  138,120
  156,843
  176,321
  196,572
  217,619
  239,490
  262,219
  285,843
  310,403
  335,945
  362,520
  390,181
  418,987
  448,999
  480,285
  512,913
  546,958
  582,498
  619,615
  658,395
  698,929
  741,313
  785,647
Total liabilities, $m
  168,692
  110,181
  123,722
  138,025
  153,077
  168,866
  185,386
  202,635
  220,618
  239,341
  258,819
  279,070
  300,117
  321,988
  344,717
  368,341
  392,901
  418,443
  445,018
  472,679
  501,485
  531,497
  562,783
  595,411
  629,456
  664,996
  702,113
  740,893
  781,427
  823,811
  868,145
Total equity, $m
  72,394
  12,242
  13,747
  15,336
  17,009
  18,763
  20,598
  22,515
  24,513
  26,593
  28,758
  31,008
  33,346
  35,776
  38,302
  40,927
  43,656
  46,494
  49,446
  52,520
  55,721
  59,055
  62,531
  66,157
  69,940
  73,888
  78,013
  82,321
  86,825
  91,535
  96,461
Total liabilities and equity, $m
  241,086
  122,423
  137,469
  153,361
  170,086
  187,629
  205,984
  225,150
  245,131
  265,934
  287,577
  310,078
  333,463
  357,764
  383,019
  409,268
  436,557
  464,937
  494,464
  525,199
  557,206
  590,552
  625,314
  661,568
  699,396
  738,884
  780,126
  823,214
  868,252
  915,346
  964,606
Debt-to-equity ratio
  1.191
  2.260
  3.000
  3.620
  4.150
  4.600
  4.990
  5.340
  5.630
  5.900
  6.130
  6.340
  6.530
  6.690
  6.850
  6.980
  7.110
  7.230
  7.330
  7.430
  7.520
  7.600
  7.680
  7.750
  7.820
  7.880
  7.940
  8.000
  8.050
  8.100
  8.140
Adjusted equity ratio
  -0.475
  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
  0.100

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  21,204
  18,241
  24,118
  28,689
  33,510
  38,579
  43,891
  49,448
  55,249
  61,297
  67,598
  76,720
  83,545
  90,645
  98,033
  105,720
  113,722
  122,054
  130,734
  139,780
  149,213
  159,053
  169,324
  180,050
  191,257
  202,972
  215,223
  228,041
  241,456
  255,502
  270,214
Depreciation, amort., depletion, $m
  8,778
  7,601
  8,104
  8,634
  9,193
  9,779
  10,392
  11,032
  11,700
  12,394
  13,117
  10,357
  11,138
  11,949
  12,793
  13,669
  14,581
  15,529
  16,515
  17,542
  18,611
  19,724
  20,885
  22,096
  23,360
  24,679
  26,056
  27,495
  28,999
  30,572
  32,218
Funds from operations, $m
  41,159
  25,842
  32,222
  37,323
  42,703
  48,358
  54,283
  60,480
  66,948
  73,692
  80,715
  87,077
  94,682
  102,594
  110,825
  119,390
  128,303
  137,583
  147,249
  157,322
  167,823
  178,777
  190,210
  202,147
  214,617
  227,651
  241,279
  255,536
  270,455
  286,075
  302,432
Change in working capital, $m
  1,652
  -3,594
  -3,813
  -4,028
  -4,239
  -4,446
  -4,652
  -4,858
  -5,064
  -5,273
  -5,485
  -5,703
  -5,927
  -6,159
  -6,401
  -6,653
  -6,916
  -7,193
  -7,484
  -7,790
  -8,112
  -8,452
  -8,811
  -9,189
  -9,588
  -10,009
  -10,453
  -10,921
  -11,415
  -11,936
  -12,485
Cash from operations, $m
  39,507
  29,436
  36,035
  41,351
  46,942
  52,804
  58,936
  65,338
  72,013
  78,965
  86,200
  92,780
  100,610
  108,754
  117,226
  126,042
  135,220
  144,776
  154,733
  165,112
  175,935
  187,229
  199,020
  211,335
  224,205
  237,659
  251,732
  266,457
  281,871
  298,011
  314,917
Maintenance CAPEX, $m
  0
  -3,613
  -4,089
  -4,591
  -5,122
  -5,681
  -6,267
  -6,880
  -7,520
  -8,187
  -8,882
  -9,605
  -10,357
  -11,138
  -11,949
  -12,793
  -13,669
  -14,581
  -15,529
  -16,515
  -17,542
  -18,611
  -19,724
  -20,885
  -22,096
  -23,360
  -24,679
  -26,056
  -27,495
  -28,999
  -30,572
New CAPEX, $m
  -8,129
  -2,476
  -2,613
  -2,760
  -2,905
  -3,047
  -3,188
  -3,329
  -3,470
  -3,613
  -3,759
  -3,908
  -4,062
  -4,221
  -4,386
  -4,559
  -4,739
  -4,929
  -5,128
  -5,338
  -5,559
  -5,792
  -6,037
  -6,296
  -6,570
  -6,858
  -7,163
  -7,484
  -7,822
  -8,179
  -8,555
Cash from investing activities, $m
  -46,781
  -6,089
  -6,702
  -7,351
  -8,027
  -8,728
  -9,455
  -10,209
  -10,990
  -11,800
  -12,641
  -13,513
  -14,419
  -15,359
  -16,335
  -17,352
  -18,408
  -19,510
  -20,657
  -21,853
  -23,101
  -24,403
  -25,761
  -27,181
  -28,666
  -30,218
  -31,842
  -33,540
  -35,317
  -37,178
  -39,127
Free cash flow, $m
  -7,274
  23,348
  29,333
  34,000
  38,915
  44,076
  49,481
  55,129
  61,022
  67,164
  73,559
  79,267
  86,191
  93,396
  100,891
  108,691
  116,811
  125,266
  134,076
  143,259
  152,835
  162,827
  173,258
  184,154
  195,539
  207,441
  219,891
  232,917
  246,553
  260,832
  275,789
Issuance/(repayment) of debt, $m
  31,459
  -48,390
  13,541
  14,303
  15,052
  15,789
  16,520
  17,250
  17,982
  18,723
  19,478
  20,251
  21,047
  21,872
  22,729
  23,624
  24,560
  25,542
  26,575
  27,661
  28,806
  30,013
  31,286
  32,628
  34,045
  35,540
  37,117
  38,780
  40,534
  42,384
  44,334
Issuance/(repurchase) of shares, $m
  -11,016
  44,387
  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  
  20,253
  -4,003
  13,541
  14,303
  15,052
  15,789
  16,520
  17,250
  17,982
  18,723
  19,478
  20,251
  21,047
  21,872
  22,729
  23,624
  24,560
  25,542
  26,575
  27,661
  28,806
  30,013
  31,286
  32,628
  34,045
  35,540
  37,117
  38,780
  40,534
  42,384
  44,334
Total cash flow (excl. dividends), $m
  12,998
  19,344
  42,874
  48,303
  53,967
  59,865
  66,001
  72,379
  79,005
  85,887
  93,037
  99,517
  107,238
  115,267
  123,620
  132,314
  141,370
  150,809
  160,651
  170,920
  181,641
  192,840
  204,544
  216,782
  229,584
  242,981
  257,008
  271,698
  287,088
  303,216
  320,123
Retained Cash Flow (-), $m
  -397
  -62,628
  -1,505
  -1,589
  -1,672
  -1,754
  -1,836
  -1,917
  -1,998
  -2,080
  -2,164
  -2,250
  -2,339
  -2,430
  -2,525
  -2,625
  -2,729
  -2,838
  -2,953
  -3,073
  -3,201
  -3,335
  -3,476
  -3,625
  -3,783
  -3,949
  -4,124
  -4,309
  -4,504
  -4,709
  -4,926
Prev. year cash balance distribution, $m
 
  122,780
  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
 
  79,496
  41,370
  46,714
  52,294
  58,111
  64,165
  70,462
  77,007
  83,807
  90,873
  97,267
  104,900
  112,837
  121,094
  129,690
  138,642
  147,970
  157,698
  167,846
  178,440
  189,505
  201,068
  213,156
  225,801
  239,032
  252,883
  267,389
  282,584
  298,507
  315,197
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
 
  76,219
  37,873
  40,654
  43,059
  45,043
  46,567
  47,603
  48,131
  48,143
  47,641
  46,191
  44,765
  42,903
  40,653
  38,075
  35,232
  32,196
  29,042
  25,844
  22,674
  19,601
  16,683
  13,971
  11,500
  9,299
  7,378
  5,739
  4,372
  3,258
  2,373
Current shareholders' claim on cash, %
  100
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0

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 28.6
Price to Sales 6.8
Price to Book 8.4
Price to Tangible Book
Price to Cash Flow 15.4
Price to Free Cash Flow 19.4
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 105.1%
Total Debt to Equity 119.1%
Interest Coverage 15
Management Effectiveness
Return On Assets 10.4%
Ret/ On Assets - 3 Yr. Avg. 9.1%
Return On Total Capital 14.9%
Ret/ On T. Cap. - 3 Yr. Avg. 13.2%
Return On Equity 29.4%
Return On Equity - 3 Yr. Avg. 21.9%
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 13.1% 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 47.9%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $25183 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 20.9%.

Life of production assets of 5.2 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 -30.5%. 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 - $72394 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 7715.39 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 $608.0 billion.

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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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