Microsoft
Valuecrucher places a value of US$28.91 per Microsoft share with a range of US$25.84 and US$32.20. This is very close to the current price of US$29.47.
Revenues Growth
Revenues growth has increased over the past few years with growth of 8.0% in the 04/05 period and 11.3% in the 05/06 period. For this valuation we have used revenues growth of 10% for the nest three years and a terminal growth of 4%, slightly higher than the historical economic growth rate.
EBIT Margins
EBIT margins for Microsoft have hovered around 40% for the past couple of years. (33.1%, 42.0%, and 41.2%, in 04, 05, and 06, respectively). Because the EBIT margins have been fairly stable, we have used EBIT margins of 40% for the next three years.
Discount Rate (WACC)
The WACC is assumed to be 10%. Microsoft’s WACC is lower than Google and Yahoo!’s due to its position in the market and its certainty of cash flows. Because Microsoft does not have any long-term liabilities we can assume that WACC = return on equity. To come up with the WACC of 10%, we have used a simple CAPM model with the inputs: beta = 0.79, 30-year govt. bond yield = 4.5% (risk free rate) and the assumption that the market risk premium is 6.5%. This gives the return on equity as 9.635%, which we have adjusted upwards to 10%.
Terminal Growth
Terminal growth is assumed to be 4%