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Valuation of Equity: An Illustration of Microsoft

Module 9. Valuation of Equity: An Illustration of Microsoft. Di (Wendy) Wang. Background. Brief Overview. Founded in April 4, 1975 by Bill Gates, Paul Allen Headquarter: Redmond, WA Operating segments: --Windows Division --Server and Tools --Online Service Division

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Valuation of Equity: An Illustration of Microsoft

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  1. Module 9 Valuation of Equity: An Illustration of Microsoft Di (Wendy) Wang

  2. Background

  3. Brief Overview • Founded in April 4, 1975 by Bill Gates, Paul Allen • Headquarter: Redmond, WA • Operating segments: • --Windows Division • --Server and Tools • --Online Service Division • --Microsoft Business Division • --Entertainment and Devices Division • Net income as of June 30, 2013: $21,863 million • Total assets as of as of June 30, 2013: $142,431 million

  4. Strengths • Brand reputation • --named as the company with the best reputation for CSR for the 2nd year • Brand loyalty • --92% of the desktop operating system market share • Strong distribution channels • --OEM(original equipment manufacturers) pre-install software on new PCs, smart phones, and other intelligent devices that are sold to end customers • --distributors and resellers • --online

  5. Weaknesses • Slow innovation • --ex-CEO Gates admit that Microsoft failed to "get out in the lead very early" in the mobile market, labeling the way the company developed its mobile products later than others as "clearly a mistake" --missed the opportunity to be the first player in online advertising • Dependency on hardware manufacturers • --depends on computer hardware manufacturers to develop products that run Windows Operating System • Poor M&A strategy • --in 1997, Microsoft purchased Seattle-based aQuantive for $6.3 billion in cash— at the time the largest acquisition in the software giant’s history • --five years later in 2002, Microsoft took a $6.2 billion writedown, largely tied to aQuantive

  6. Opportunities • Providing services for enterprises • --businesses look to Microsoft’s business applications like Microsoft Dynamics, Office, Exchange, SharePoint, Lync, Yammer, and its business intelligence solutions • Developing new form factors that have increasingly natural ways to use them • --including touch, gesture, and speech • Establishing Windows platform across the PC, tablet, phone, server, and cloud • --delivering seamless services and experiences across devices • --e.g. Windows 8: designed to unite the light, thin, and convenient aspects of a tablet with the power of a PC

  7. Threats • Lawsuits • -- a large number of antitrust and unfair competition class action lawsuits filed against Microsoft in various state, federal, and Canadian courts on behalf of various classes of direct and indirect purchasers of its PC operating system and certain other software products between 1999 and 2005 • --patent and intellectual property claims • Traditional businesses are in a period of transition • -- Windows operating system • -- competitors are developing new devices, services, and platforms • Customer preference evolves rapidly • -- cloud-based services

  8. Estimating the Value of Equity For Microsoft, Therefore, the value of equity is: $265,773+$69,298=$335,071

  9. Using Analyst’s Forecasts-ValueLine

  10. Using Analyst’s Forecasts-ValueLine Assumed earnings growth rate= Assumed dividends growth rate=

  11. Valuing MSFT ValueLine Forecasts for 2014 through 2018 MSFT Multiyear Forecasts of Earnings, Dividends and Implied Book Value per Share

  12. Valuing MSFT using Dividend Discount Model

  13. Equity Estimate using Residual Income Model = 35.18

  14. Long-term Growth in Earnings/Sales? Let Vo=$39.55(3/18/2014 closing price), we could calculate the implied residual income growth rate g=4.72%

  15. Long-term Growth in Earnings/Sales?

  16. Mid-Year Adjustment • For Microsoft, • Half year growth rate= (12.5469%/2) • $282,446 =$265,773*[1+ (12.5469%/2)]

  17. Sensitivity Analysis Initial Valuation Assumptions

  18. Sensitivity Analysis Sell Buy Market Value of Microsoft: 326.88 billion

  19. Sources: • Microsoft Form10-K For the Fiscal Year Ended June 30, 2011 • http://apps.shareholder.com/sec/viewerContent.aspx?companyid=MSFT&docid=8062497 • Microsoft Form10-K For the Fiscal Year Ended June 30, 2012 • http://apps.shareholder.com/sec/viewerContent.aspx?companyid=MSFT&docid=8733512 • Microsoft Form10-K For the Fiscal Year Ended June 30, 2013 • http://apps.shareholder.com/sec/viewerContent.aspx?companyid=MSFT&docid=9422625

  20. THANK YOU!

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