Microsoft Valuation
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Exhibit A - MSFT Co. Stock valuation ($ in thousands) Fiscal Year Ended Revenues Direct Operating Exp SG&A
EBITDA Depreciation & Amort. EBIT
Taxes (~35%) Debt Free Earnings Plus: Depreciation & Amort. Less: CAPEX (Increase) in Working Capital
Unlevered Free Cash Flow
Discount Factor Discount Factor Discount Factor
-0.04 FY1992 2,759,000 (1,296,000) (90,000) 1,373,000 (112,000) 1,261,000 (333,000) 928,000
Actual FY1993 3,753,000 (1,794,000) (119,000) 1,840,000 (151,000) 1,689,000 (448,000) 1,241,000
FY1994 4,649,000 (2,160,000) (166,000) 2,323,000 (237,000) 2,086,000 (576,000) 1,510,000
FY1995E 5,811,250 (2,673,175) (230,740) 2,907,335 (290,563) 2,616,773 (706,529) 1,910,244
112,000 (317,000) 0 723,000
151,000 (236,000) 0 1,156,000
237,000 (278,000) 0 1,469,000
290,563 (348,675) 0 1,852,131
363,203 (435,844) 0 2,291,583
454,004 (544,805) 0 2,831,700
567,505 (681,006) 0 3,494,063
1,730,964 1,714,937 1,699,203
2,001,557 1,964,663 1,928,779
2,311,511 2,247,895 2,186,592
2,665,604 2,568,240 2,475,282
7% 8% 9%
Projected FY1996E FY1997E 7,264,063 9,080,078 (3,341,469) (4,176,836) (320,729) (445,813) 3,601,865 4,457,429 (363,203) (454,004) 3,238,662 4,003,426 (874,439) (1,080,925) 2,364,223 2,922,501
FY1998E 11,350,098 (5,221,045) (619,680) 5,509,373 (567,505) 4,941,868 (1,334,304) 3,607,564
PV of FCF 8,709,635 8,495,734 8,289,856
Exhibit B - Industry Beta Comparison Company
Ticker Debt to Equity Tax Rate Levered Beta Unlevered Beta None 0.2 35% 1.07 1.37 ASD 0.87 40% 0.82 0.73 AMWD 0.16 40% 0.76 1.09 MAS 0.2 40% 1.28 1.78 BGG 0.21 40% 0.66 0.91 CUM 0.61 40% 1.09 1.13 DDC 0.21 40% 1.30 1.79 Industry Average 0.99 1.26 Relever Industry Average for Kohler 0.2 40% Err:522 Err:522
msft American Standard American Woodmark masco Briggs & Stratton Cummins Diesel Detroit Diesel
Bl = Bu x [1 + (1 – tax rate) x (D / E)], or Bu = Bl / [1 + (1 – tax rate) x (D / E)]
Exhibit C - MSFT. - Cost of Capital Cost of Equity (Ke) Risk Free Rate (Rf) 10yr Treasury 04/1998 Mkt Risk Premium Size Premium Beta Ke =5.64% + 1.07(8.5% +1%)
5.64 8.5 1 1.07 Ke =
Cost of Debt (Kd) Estimated All-In Cost for Company Effective Tax Rate Kd = 6.5% * (1-40%)
8.50% 35% Kd=
Cost of Preferred (Kp) Balance Sheet does not show any Preferred Stock Kp= Equity: $54*581M shares Debt: Total Value: WACC = WACC =
15.81%
6%
0% 29,994,000,000 913,000,000 30,907,000,000 Kd (1-T)(D/V) + Ke(E/V) 15.4%
97% 3%
Exhibit D - DCF Analysis: Using Perpetuity Growth Rate for Terminal Value (in $ thousands) Discount Rate Perpetuity Growth Rate 2001E Unlevered FCF Terminal Value
2% 3,494,063 44,549,300
10% 3% 3,494,063 51,412,638
4% 3,494,063 60,563,754
2% 3,494,063 39,599,378
11% 3% 3,494,063 44,986,058
4% 3,494,063 51,911,789
2% 3,494,063 35,639,440
12% 3% 3,494,063 39,987,607
4% 3,494,063 45,422,816
PV of Terminal Value PV of Free Cash Flow (Add Back)Cash and Cash Equivalents Implied Value of Enterprise
30,427,771 8,709,635 70,978 39,208,385
35,115,523 8,709,635 70,978 43,896,137
41,365,859 8,709,635 70,978 50,146,472
26,085,337 8,495,734 70,978 34,652,049
29,633,710 8,495,734 70,978 38,200,422
34,195,904 8,495,734 70,978 42,762,616
22,649,508 8,289,856 70,978 31,010,343
25,412,847 8,289,856 70,978 33,773,682
28,867,021 8,289,856 70,978 37,227,855
Average Value
38,986
DCF Analysis: Using EBITDA Multiple for Terminal Value (in $ thousands) Discount Rate EBITDA Multiple 2001E EBITDA Terminal Value
5 5,509,373 27,546,865
10% 8 5,509,373 44,074,984
12 5,509,373 66,112,476
5 5,509,373 27,546,865
11% 8 5,509,373 44,074,984
12 5,509,373 66,112,476
5 1,405,350 7,026,749
12% 8 1,405,350 11,242,799
12 1,405,350 16,864,198
PV of Terminal Value PV of Free Cash Flow (Add Back)Cash and Cash Equivalents Implied Value of Enterprise
18,814,879 8,709,635 70,978 27,595,493
30,103,807 8,709,635 70,978 38,884,420
45,155,711 8,709,635 70,978 53,936,324
18,145,973 8,495,734 70,978 26,712,686
29,033,557 8,495,734 70,978 37,600,270
43,550,336 8,495,734 70,978 52,117,048
4,465,626 8,289,856 70,978 12,826,461
7,145,002 8,289,856 70,978 15,505,836
10,717,503 8,289,856 70,978 19,078,337
Average Value
31,584
DCF Analysis: Using Sales Multiple for Terminal Value (in $ thousands) Discount Rate Sales Multiple 2001E Sales Terminal Value
1 11,350,098 11,350,098
10% 2 11,350,098 22,700,195
3 11,350,098 34,050,293
1 11,350,098 11,350,098
11% 2 11,350,098 22,700,195
3 11,350,098 34,050,293
1 11,350,098 11,350,098
12% 2 11,350,098 22,700,195
3 11,350,098 34,050,293
PV of Terminal Value PV of Free Cash Flow (Add Back)Cash and Cash Equivalents Implied Value of Enterprise
7,752,269 8,709,635 70,978 16,532,883
15,504,539 8,709,635 70,978 24,285,152
23,256,808 8,709,635 70,978 32,037,422
7,476,661 8,495,734 70,978 16,043,373
14,953,322 8,495,734 70,978 23,520,034
22,429,983 8,495,734 70,978 30,996,695
7,213,192 8,289,856 70,978 15,574,027
14,426,385 8,289,856 70,978 22,787,219
21,639,577 8,289,856 70,978 30,000,411
Average Value
23,531
EBITDA Depreciation & Amort. EBIT
Taxes (~35%) Debt Free Earnings Plus: Depreciation & Amort. Less: CAPEX (Increase) in Working Capital
Unlevered Free Cash Flow
Discount Factor Discount Factor Discount Factor
-0.04 FY1992 2,759,000 (1,296,000) (90,000) 1,373,000 (112,000) 1,261,000 (333,000) 928,000
Actual FY1993 3,753,000 (1,794,000) (119,000) 1,840,000 (151,000) 1,689,000 (448,000) 1,241,000
FY1994 4,649,000 (2,160,000) (166,000) 2,323,000 (237,000) 2,086,000 (576,000) 1,510,000
FY1995E 5,811,250 (2,673,175) (230,740) 2,907,335 (290,563) 2,616,773 (706,529) 1,910,244
112,000 (317,000) 0 723,000
151,000 (236,000) 0 1,156,000
237,000 (278,000) 0 1,469,000
290,563 (348,675) 0 1,852,131
363,203 (435,844) 0 2,291,583
454,004 (544,805) 0 2,831,700
567,505 (681,006) 0 3,494,063
1,730,964 1,714,937 1,699,203
2,001,557 1,964,663 1,928,779
2,311,511 2,247,895 2,186,592
2,665,604 2,568,240 2,475,282
7% 8% 9%
Projected FY1996E FY1997E 7,264,063 9,080,078 (3,341,469) (4,176,836) (320,729) (445,813) 3,601,865 4,457,429 (363,203) (454,004) 3,238,662 4,003,426 (874,439) (1,080,925) 2,364,223 2,922,501
FY1998E 11,350,098 (5,221,045) (619,680) 5,509,373 (567,505) 4,941,868 (1,334,304) 3,607,564
PV of FCF 8,709,635 8,495,734 8,289,856
Exhibit B - Industry Beta Comparison Company
Ticker Debt to Equity Tax Rate Levered Beta Unlevered Beta None 0.2 35% 1.07 1.37 ASD 0.87 40% 0.82 0.73 AMWD 0.16 40% 0.76 1.09 MAS 0.2 40% 1.28 1.78 BGG 0.21 40% 0.66 0.91 CUM 0.61 40% 1.09 1.13 DDC 0.21 40% 1.30 1.79 Industry Average 0.99 1.26 Relever Industry Average for Kohler 0.2 40% Err:522 Err:522
msft American Standard American Woodmark masco Briggs & Stratton Cummins Diesel Detroit Diesel
Bl = Bu x [1 + (1 – tax rate) x (D / E)], or Bu = Bl / [1 + (1 – tax rate) x (D / E)]
Exhibit C - MSFT. - Cost of Capital Cost of Equity (Ke) Risk Free Rate (Rf) 10yr Treasury 04/1998 Mkt Risk Premium Size Premium Beta Ke =5.64% + 1.07(8.5% +1%)
5.64 8.5 1 1.07 Ke =
Cost of Debt (Kd) Estimated All-In Cost for Company Effective Tax Rate Kd = 6.5% * (1-40%)
8.50% 35% Kd=
Cost of Preferred (Kp) Balance Sheet does not show any Preferred Stock Kp= Equity: $54*581M shares Debt: Total Value: WACC = WACC =
15.81%
6%
0% 29,994,000,000 913,000,000 30,907,000,000 Kd (1-T)(D/V) + Ke(E/V) 15.4%
97% 3%
Exhibit D - DCF Analysis: Using Perpetuity Growth Rate for Terminal Value (in $ thousands) Discount Rate Perpetuity Growth Rate 2001E Unlevered FCF Terminal Value
2% 3,494,063 44,549,300
10% 3% 3,494,063 51,412,638
4% 3,494,063 60,563,754
2% 3,494,063 39,599,378
11% 3% 3,494,063 44,986,058
4% 3,494,063 51,911,789
2% 3,494,063 35,639,440
12% 3% 3,494,063 39,987,607
4% 3,494,063 45,422,816
PV of Terminal Value PV of Free Cash Flow (Add Back)Cash and Cash Equivalents Implied Value of Enterprise
30,427,771 8,709,635 70,978 39,208,385
35,115,523 8,709,635 70,978 43,896,137
41,365,859 8,709,635 70,978 50,146,472
26,085,337 8,495,734 70,978 34,652,049
29,633,710 8,495,734 70,978 38,200,422
34,195,904 8,495,734 70,978 42,762,616
22,649,508 8,289,856 70,978 31,010,343
25,412,847 8,289,856 70,978 33,773,682
28,867,021 8,289,856 70,978 37,227,855
Average Value
38,986
DCF Analysis: Using EBITDA Multiple for Terminal Value (in $ thousands) Discount Rate EBITDA Multiple 2001E EBITDA Terminal Value
5 5,509,373 27,546,865
10% 8 5,509,373 44,074,984
12 5,509,373 66,112,476
5 5,509,373 27,546,865
11% 8 5,509,373 44,074,984
12 5,509,373 66,112,476
5 1,405,350 7,026,749
12% 8 1,405,350 11,242,799
12 1,405,350 16,864,198
PV of Terminal Value PV of Free Cash Flow (Add Back)Cash and Cash Equivalents Implied Value of Enterprise
18,814,879 8,709,635 70,978 27,595,493
30,103,807 8,709,635 70,978 38,884,420
45,155,711 8,709,635 70,978 53,936,324
18,145,973 8,495,734 70,978 26,712,686
29,033,557 8,495,734 70,978 37,600,270
43,550,336 8,495,734 70,978 52,117,048
4,465,626 8,289,856 70,978 12,826,461
7,145,002 8,289,856 70,978 15,505,836
10,717,503 8,289,856 70,978 19,078,337
Average Value
31,584
DCF Analysis: Using Sales Multiple for Terminal Value (in $ thousands) Discount Rate Sales Multiple 2001E Sales Terminal Value
1 11,350,098 11,350,098
10% 2 11,350,098 22,700,195
3 11,350,098 34,050,293
1 11,350,098 11,350,098
11% 2 11,350,098 22,700,195
3 11,350,098 34,050,293
1 11,350,098 11,350,098
12% 2 11,350,098 22,700,195
3 11,350,098 34,050,293
PV of Terminal Value PV of Free Cash Flow (Add Back)Cash and Cash Equivalents Implied Value of Enterprise
7,752,269 8,709,635 70,978 16,532,883
15,504,539 8,709,635 70,978 24,285,152
23,256,808 8,709,635 70,978 32,037,422
7,476,661 8,495,734 70,978 16,043,373
14,953,322 8,495,734 70,978 23,520,034
22,429,983 8,495,734 70,978 30,996,695
7,213,192 8,289,856 70,978 15,574,027
14,426,385 8,289,856 70,978 22,787,219
21,639,577 8,289,856 70,978 30,000,411
Average Value
23,531
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