기업분석#(Microsoft,마이크로소프트)

  Executive Summary

 

  This paper is an analyst report of the intrinsic value of Microsoft as of May, 2015, which supports our recommendation of buying the stock. We had analyzed the company’s ratios with five methods.

 

  First, through the 2- stage dividend discount model, we found the intrinsic value of 42.91, DDM with earnings multiple terminal value, we got the intrinsic value 52.86. On the Multi-stage dividend discount model, we got 52.00. For the free cash flow to the firm model, we found 58.109 and free cash flow to equity investors, we got 205.687. On the value line table, there is the market value of 47.60.

 

  By using those data, we can see that most of the intrinsic value that we calculated is more than the current market value, so we concluded them as undervalued stock, and recommended to buy the stock. In addition, along with the decision making, we had analyzed the company’s ratios connected with earnings and also analysis of the company and industry to see if the recommendation will make sense in the long-run.

 

     Economic and Industry Analysis

 

Microsoft is an American multinational technology company founded in Redmond, Washington, that develops, manufactures, licenses, supports and sells computer software,  consumer electronics and personal computers and services. It is the world's largest software maker measured by its revenues. It is also one of the world's most valuable companies. Microsoft was founded by Bill Gates and Paul Allen on April 4, 1975. It rose to dominate the personal computer operating system market in the mid-1980s. The company's 1986 initial public offering, and succeeding rise in its share price.

 

Fundamental Analysis of the Microsoft co.

 

1)    2-stage method

Given dividend in year 2016 ($1.36) and 2019 ($1.72), dividend in 2017 and 2018 was calculated under the assumption that the dividends will grow at a constant rate of 8.14% through the four year. After 2017, we assumed that the dividend will grow at a constant rate of 3.6% (terminal growth rate). With discount rate 7.20% which was calculated above, the PV of all the projected future cash flow (intrinsic value) with growth rate 3.6% and discount rate 7.20% using 2-stage model is $42.91 per share.

 

2)    EPS growth method

 With expected EPS 2015 and P/E ratio 2015, price of the stock in 2019 is $63.00. Using the same discount rate (7.20%) with 2-stage method, the present value of terminal value in 2019 is $47.71. And when by adding the PV of expected dividends from 2016 to 2019, the intrinsic value using price from EPS is $52.86 per share.

 

3)    Multi-stage method

On the assumption, the dividend growth rate will decrease from 2020 (8.14%) to 2029 (4.07%) and then will keep constant (3.62%) from year 2030, with the discount rate 7.20% and PV of all future cash flow (intrinsic value) is $52.00 per share.

 

 4) Free cash Flow method (FCFF and FCFF)

In calculating intrinsic value with Free Cash Flow method, we assumed that the after tax profit, depreciation, P/E ratio, capital spending per share, long-term debt, shares outstanding, earnings per share and the working capital will grow in same rate from 2016 to 2019. Calculating cost of debt by averaging 10 and 20 years’ rate on AAA rated long term corporate bonds (10 year average - 5.19 and 20 year average - 9.95). Other factors used are all same as we assumed for other valuation methods. With after tax profit, interest (long term debt * (1-tax rate) * cost of debt), change in working capital, depreciation and capital spending which can be earned by capital spending per share * shares outstanding, we calculated free cash flow to the firm by after tax profit + interest – change in working capital + depreciation – capital spending and free cash flow to equity by FCFF – interest + change in long term debt from 2016 to 2019 and terminal value assuming that the company’s cash flow will grow at same rate from 2020 (2019 FCFF or FCFE * (1+growth rate)/ (WACC – growth rate). We calculated the discount rate, WACC (portion of debt to value * 1-tax rate * cost of debt + portion of equity * cost of equity). Portion of debt was calculated debt/market value equity where market value equity is P/E * after tax profits (portion of equity is then 1- portion of debt). By discounting each cash flow with WACC, we got intrinsic value for FCFF and FCFE. We subtract long term debt 2015 from PV (FCFF) and divide it by shares outstanding and got intrinsic value of $58.109 per share. Consequently, dividing FCFE by shares outstanding the intrinsic value per share is $205.687.