In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

Intrinsic Stock Value (Valuation Summary)
Weighted Average Cost of Capital (WACC)
FCFF Growth Rate (g)

Microsoft Corp., free cash flow to the firm (FCFF) forecast

US$ in millions, except per share data

Year	Value	FCFF_t or Terminal value (TV_t)	Calculation	Present value at 12.79%
0¹	FCFF₀	57,724
1	FCFF₁	68,315	= 57,724 × (1 + 18.35%)	60,567
2	FCFF₂	79,540	= 68,315 × (1 + 16.43%)	62,520
3	FCFF₃	91,085	= 79,540 × (1 + 14.52%)	63,475
4	FCFF₄	102,561	= 91,085 × (1 + 12.60%)	63,366
5	FCFF₅	113,517	= 102,561 × (1 + 10.68%)	62,181
5	Terminal value (TV₅)	5,955,334	= 113,517 × (1 + 10.68%) ÷ (12.79% – 10.68%)	3,262,112
Intrinsic value of Microsoft Corp. capital				3,574,220
Less: Debt and finance lease liabilities (fair value)				63,267
Intrinsic value of Microsoft Corp. common stock				3,510,953

Intrinsic value of Microsoft Corp. common stock (per share)				$472.51
Current share price				$399.04

Based on: 10-K (reporting date: 2023-06-30).

¹ 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.

Microsoft Corp., cost of capital

	Value¹	Weight	Required rate of return²	Calculation
Equity (fair value)	2,965,041	0.98	13.00%
Debt and finance lease liabilities (fair value)	63,267	0.02	3.19%	= 3.75% × (1 – 14.85%)

Based on: 10-K (reporting date: 2023-06-30).

¹ US$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 7,430,436,229 × $399.04
= $2,965,041,272,820.16

Debt and finance lease liabilities (fair value). See details »

² Required rate of return on equity is estimated by using CAPM. See details »

Required rate of return on debt. See details »

Required rate of return on debt is after tax.

Estimated (average) effective income tax rate
= (19.00% + 13.10% + 13.80% + 16.50% + 9.80% + 16.90%) ÷ 6
= 14.85%

WACC = 12.79%

FCFF growth rate (g) implied by PRAT model

Microsoft Corp., PRAT model

	Average	Jun 30, 2023	Jun 30, 2022	Jun 30, 2021	Jun 30, 2020	Jun 30, 2019	Jun 30, 2018
Selected Financial Data (US$ in millions)
Interest expense		1,968)	2,063)	2,346)	2,591)	2,686)	2,733)
Net income		72,361)	72,738)	61,271)	44,281)	39,240)	16,571)

Effective income tax rate (EITR)¹		19.00%	13.10%	13.80%	16.50%	9.80%	16.90%

Interest expense, after tax²		1,594)	1,793)	2,022)	2,163)	2,423)	2,271)
Add: Common stock cash dividends		20,226)	18,552)	16,871)	15,483)	14,103)	12,917)
Interest expense (after tax) and dividends		21,820)	20,345)	18,893)	17,646)	16,526)	15,188)

EBIT(1 – EITR)³		73,955)	74,531)	63,293)	46,444)	41,663)	18,842)

Current portion of long-term debt		5,247)	2,749)	8,072)	3,749)	5,516)	3,998)
Current finance lease liabilities		1,197)	1,060)	791)	540)	317)	176)
Long-term debt, excluding current portion		41,990)	47,032)	50,074)	59,578)	66,662)	72,242)
Long-term finance lease liabilities		15,870)	13,842)	11,750)	8,956)	6,257)	4,125)
Stockholders’ equity		206,223)	166,542)	141,988)	118,304)	102,330)	82,718)
Total capital		270,527)	231,225)	212,675)	191,127)	181,082)	163,259)
Financial Ratios
Retention rate (RR)⁴		0.70	0.73	0.70	0.62	0.60	0.19
Return on invested capital (ROIC)⁵		27.34%	32.23%	29.76%	24.30%	23.01%	11.54%
Averages
RR	0.67
ROIC	27.33%

FCFF growth rate (g)⁶	18.35%

Based on: 10-K (reporting date: 2023-06-30), 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).

¹ See details »

2023 Calculations

² Interest expense, after tax = Interest expense × (1 – EITR)
= 1,968 × (1 – 19.00%)
= 1,594

³ EBIT(1 – EITR) = Net income + Interest expense, after tax
= 72,361 + 1,594
= 73,955

⁴ RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [73,955 – 21,820] ÷ 73,955
= 0.70

⁵ ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 73,955 ÷ 270,527
= 27.34%

⁶ g = RR × ROIC
= 0.67 × 27.33%
= 18.35%

FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value₀ × WACC – FCFF₀) ÷ (Total capital, fair value₀ + FCFF₀)
= 100 × (3,028,308 × 12.79% – 57,724) ÷ (3,028,308 + 57,724)
= 10.68%

where:

Total capital, fair value₀ = current fair value of Microsoft Corp. debt and equity (US$ in millions)
FCFF₀ = the last year Microsoft Corp. free cash flow to the firm (US$ in millions)
WACC = weighted average cost of Microsoft Corp. capital

FCFF growth rate (g) forecast

Microsoft Corp., H-model

Year	Value	g_t
1	g₁	18.35%
2	g₂	16.43%
3	g₃	14.52%
4	g₄	12.60%
5 and thereafter	g₅	10.68%

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

Calculations

g₂ = g₁ + (g₅ – g₁) × (2 – 1) ÷ (5 – 1)
= 18.35% + (10.68% – 18.35%) × (2 – 1) ÷ (5 – 1)
= 16.43%

g₃ = g₁ + (g₅ – g₁) × (3 – 1) ÷ (5 – 1)
= 18.35% + (10.68% – 18.35%) × (3 – 1) ÷ (5 – 1)
= 14.52%

g₄ = g₁ + (g₅ – g₁) × (4 – 1) ÷ (5 – 1)
= 18.35% + (10.68% – 18.35%) × (4 – 1) ÷ (5 – 1)
= 12.60%

Microsoft Corp. (NASDAQ:MSFT)

Present Value of Free Cash Flow to the Firm (FCFF)

Intrinsic Stock Value (Valuation Summary)

Weighted Average Cost of Capital (WACC)

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

FCFF growth rate (g) implied by single-stage model

FCFF growth rate (g) forecast