# Microsoft Corp. (NASDAQ:MSFT)

## Dividend Discount Model (DDM)

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 12.87%
0 DPS01 2.42
1 DPS1 2.92 = 2.42 × (1 + 20.66%) 2.59
2 DPS2 3.46 = 2.92 × (1 + 18.51%) 2.72
3 DPS3 4.03 = 3.46 × (1 + 16.35%) 2.80
4 DPS4 4.60 = 4.03 × (1 + 14.20%) 2.83
5 DPS5 5.15 = 4.60 × (1 + 12.04%) 2.81
5 Terminal value (TV5) 692.40 = 5.15 × (1 + 12.04%) ÷ (12.87%12.04%) 377.90
Intrinsic value of Microsoft Corp. common stock (per share) \$391.65
Current share price \$325.26

Based on: 10-K (reporting date: 2022-06-30).

1 DPS0 = Sum of the last year dividends per share of Microsoft Corp. 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 3.99% Expected rate of return on market portfolio2 E(RM) 13.77% Systematic risk of Microsoft Corp. common stock βMSFT 0.91 Required rate of return on Microsoft Corp. common stock3 rMSFT 12.87%

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]
= 3.99% + 0.91 [13.77%3.99%]
= 12.87%

### Dividend Growth Rate (g)

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

Microsoft Corp., PRAT model

Average Jun 30, 2022 Jun 30, 2021 Jun 30, 2020 Jun 30, 2019 Jun 30, 2018 Jun 30, 2017
Selected Financial Data (US\$ in millions)
Common stock cash dividends 18,552 16,871 15,483 14,103 12,917 12,040
Net income 72,738 61,271 44,281 39,240 16,571 21,204
Revenue 198,270 168,088 143,015 125,843 110,360 89,950
Total assets 364,840 333,779 301,311 286,556 258,848 241,086
Stockholders’ equity 166,542 141,988 118,304 102,330 82,718 72,394
Financial Ratios
Retention rate1 0.74 0.72 0.65 0.64 0.22 0.43
Profit margin2 36.69% 36.45% 30.96% 31.18% 15.02% 23.57%
Asset turnover3 0.54 0.50 0.47 0.44 0.43 0.37
Financial leverage4 2.19 2.35 2.55 2.80 3.13 3.33
Averages
Retention rate 0.57
Profit margin 28.98%
Asset turnover 0.46
Financial leverage 2.72

Dividend growth rate (g)5 20.66%

Based on: 10-K (reporting date: 2022-06-30), 10-K (reporting date: 2021-06-30), 10-K (reporting date: 2020-06-30), 10-K (reporting date: 2019-06-30), 10-K (reporting date: 2018-06-30), 10-K (reporting date: 2017-06-30).

2022 Calculations

1 Retention rate = (Net income – Common stock cash dividends) ÷ Net income
= (72,73818,552) ÷ 72,738
= 0.74

2 Profit margin = 100 × Net income ÷ Revenue
= 100 × 72,738 ÷ 198,270
= 36.69%

3 Asset turnover = Revenue ÷ Total assets
= 198,270 ÷ 364,840
= 0.54

4 Financial leverage = Total assets ÷ Stockholders’ equity
= 364,840 ÷ 166,542
= 2.19

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.57 × 28.98% × 0.46 × 2.72
= 20.66%

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

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$325.26 × 12.87%\$2.42) ÷ (\$325.26 + \$2.42)
= 12.04%

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

#### Dividend growth rate (g) forecast

Microsoft Corp., H-model

Year Value gt
1 g1 20.66%
2 g2 18.51%
3 g3 16.35%
4 g4 14.20%
5 and thereafter g5 12.04%

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)
= 20.66% + (12.04%20.66%) × (2 – 1) ÷ (5 – 1)
= 18.51%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 20.66% + (12.04%20.66%) × (3 – 1) ÷ (5 – 1)
= 16.35%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 20.66% + (12.04%20.66%) × (4 – 1) ÷ (5 – 1)
= 14.20%