# Microsoft Corp. (MSFT)

## Dividend Discount Model (DDM)

Intermediate level

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

### Intrinsic Stock Value (Valuation Summary)

Microsoft Corp., dividends per share (DPS) forecast

US\$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 12.16%
0 DPS01 1.80
1 DPS1 1.98 = 1.80 × (1 + 10.22%) 1.77
2 DPS2 2.19 = 1.98 × (1 + 10.43%) 1.74
3 DPS3 2.42 = 2.19 × (1 + 10.65%) 1.72
4 DPS4 2.69 = 2.42 × (1 + 10.87%) 1.70
5 DPS5 2.99 = 2.69 × (1 + 11.08%) 1.68
5 Terminal value (TV5) 307.41 = 2.99 × (1 + 11.08%) ÷ (12.16%11.08%) 173.19
Intrinsic value of Microsoft Corp.’s common stock (per share) \$181.80
Current share price \$185.35

Based on: 10-K (filing date: 2019-08-01).

1 DPS0 = Sum of the last year dividends per share of Microsoft Corp.’s common stock. See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 1.97% Expected rate of return on market portfolio2 E(RM) 11.16% Systematic risk of Microsoft Corp.’s common stock βMSFT 1.11 Required rate of return on Microsoft Corp.’s common stock3 rMSFT 12.16%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

3 rMSFT = RF + βMSFT [E(RM) – RF]
= 1.97% + 1.11 [11.16%1.97%]
= 12.16%

### Dividend Growth Rate (g)

#### Dividend growth rate (g) implied by PRAT model

Microsoft Corp., PRAT model

Average Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
Selected Financial Data (US\$ in millions)
Common stock cash dividends 14,103  12,917  12,040  11,329  10,063  9,271
Net income 39,240  16,571  21,204  16,798  12,193  22,074
Revenue 125,843  110,360  89,950  85,320  93,580  86,833
Total assets 286,556  258,848  241,086  193,694  176,223  172,384
Stockholders’ equity 102,330  82,718  72,394  71,997  80,083  89,784
Financial Ratios
Retention rate1 0.64 0.22 0.43 0.33 0.17 0.58
Profit margin2 31.18% 15.02% 23.57% 19.69% 13.03% 25.42%
Asset turnover3 0.44 0.43 0.37 0.44 0.53 0.50
Financial leverage4 2.80 3.13 3.33 2.69 2.20 1.92
Averages
Retention rate 0.40
Profit margin 21.32%
Asset turnover 0.45
Financial leverage 2.68

Dividend growth rate (g)5 10.22%

Based on: 10-K (filing date: 2019-08-01), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-02), 10-K (filing date: 2016-07-28), 10-K (filing date: 2015-07-31), 10-K (filing date: 2014-07-31).

2019 Calculations

1 Retention rate = (Net income – Common stock cash dividends) ÷ Net income
= (39,24014,103) ÷ 39,240 = 0.64

2 Profit margin = 100 × Net income ÷ Revenue
= 100 × 39,240 ÷ 125,843 = 31.18%

3 Asset turnover = Revenue ÷ Total assets
= 125,843 ÷ 286,556 = 0.44

4 Financial leverage = Total assets ÷ Stockholders’ equity
= 286,556 ÷ 102,330 = 2.80

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.40 × 21.32% × 0.45 × 2.68 = 10.22%

#### Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$185.35 × 12.16%\$1.80) ÷ (\$185.35 + \$1.80) = 11.08%

where:
P0 = current price of share of Microsoft Corp.’s common stock
D0 = the last year dividends per share of Microsoft Corp.’s common stock
r = required rate of return on Microsoft Corp.’s common stock

#### Dividend growth rate (g) forecast

Microsoft Corp., H-model

Year Value gt
1 g1 10.22%
2 g2 10.43%
3 g3 10.65%
4 g4 10.87%
5 and thereafter g5 11.08%

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 10.22% + (11.08%10.22%) × (2 – 1) ÷ (5 – 1) = 10.43%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 10.22% + (11.08%10.22%) × (3 – 1) ÷ (5 – 1) = 10.65%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 10.22% + (11.08%10.22%) × (4 – 1) ÷ (5 – 1) = 10.87%