Current Price: ~ $38/share
Yield: ~ 2.44%
Microsoft Corporation is engaged in developing, manufacturing, licensing and supporting software products, services and entertainment, and device hardware products.
Estimated WACC for the firm today is 9.89% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
Year
|
FCF $Millions
|
2004
|
13517
|
2005
|
15793
|
2006
|
12826
|
2007
|
15532
|
2008
|
18430
|
2009
|
15918
|
2010
|
22096
|
2011
|
24639
|
2012
|
29321
|
2013
|
24576
|
Average Annual Growth FCF: ~ 8.6%
CAGR FCF: ~ 6.9%
Consensus Forecast Industry 5-Year Growth: ~ 18% per year
Consensus Forecast Company 5-Year Growth: ~ 7% per year
Internal Growth Rate: ~ 12.2%
Sustainable Growth Rate: ~ 24.6%
Scenario 1
- Start at $24576 million FCF
- Assume a 5-year growth rate in FCF of 7% per year, then no growth or 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
The firm's future free cash flows, discounted at a WACC of 9.89%, give a present value for the entire firm (Debt + Equity) of $346267 million. If the firm's fair value of debt is estimated at $14600 million, then the fair value of the firm's equity could be $331667 million. $331667 million / 8350 million outstanding shares is approximately $40 per share and a 20% margin of safety is $32/share.
Year
|
FCF $Millions
|
0
|
24576
|
1
|
26296
|
2
|
28137
|
3
|
30107
|
4
|
32214
|
5
|
34469
|
Terminal Value
|
372954
|
The firm's future free cash flows, discounted at a WACC of 9.89%, give a present value for the entire firm (Debt + Equity) of $346267 million. If the firm's fair value of debt is estimated at $14600 million, then the fair value of the firm's equity could be $331667 million. $331667 million / 8350 million outstanding shares is approximately $40 per share and a 20% margin of safety is $32/share.
Scenario 2
All else being equal,
All else being equal,
- Assume a 5-year growth rate in FCF of 10.5% per year, then 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
Year
|
FCF $Millions
|
0
|
24576
|
1
|
27156
|
2
|
30008
|
3
|
33159
|
4
|
36640
|
5
|
40488
|
Terminal Value
|
452404
|
- Present Value of the entire firm (Debt + Equity): $407272 million
- Value of Equity: $392672 million or $47/share
- 20% margin of safety is $38/share
Sources
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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