To begin follow these steps:

1. Enter the numbers from your company's balance sheet and income statement for each year, starting with
the most recent year through the prior five years (Example: if the most recent is 2017 then go back through
2013).

2. Ratios auto-calculate but you may wish to make an adjustment if necessary. You will only use the ratios for
explanatory or analysis purposes in your report. There is nothing more to do with them in this workbook.

3. Create your prospective analysis by changing the growth rate for Revenue, the percentage of Revenue for
Gross Profit and Operating expenses, and then add Other Income or expense items. You can do this in the
cells highlighted in yellow. This will give you your projected net income, which you will then use to discount
to present value on the "dcf" tab later. The default number for Revenue in the prospective analysis is the
most recent year's Revenue number plus 2.5%. You may change it.

4. On the "discount rate" tab you are welcome to leave the number as is or go through and make adjustments.
In most cases you will need access to data that is unavailable or requires a paid subscription, which is why
you're allowed to keep the default values. If you're able to obtain any of those figures then you may use them.
The detail was provided to expose you to the concepts, but not actually require the research since it may be
cost prohibitive.

5. The "dcf" tab feeds your projected Net Income figures from the "prospective analysis" tab. To that number
you will add back depreciation since it's a non-cash item and then subtract expected capital expenditures or
and planned debt reductions. You may estimate these if you're unable to find any projection by the company.
It is not required that these be fully accurate since you don't have access to management's plans. Enter those
numbers in the yellow highlighted cells. You shouldn't have to change any other cells in that tab.

6. On the last tab, "valuation summary", the only values you need to change are the cells in yellow for the DLOC
and the DLOM. You may leave these as the default values since these also require access to data that may
be only acquired via subscription or purchase. If you're able to find material supporting a change in those
values then you're free to do so. The goal in introducing them in this manner is to get you exposed to the
concepts, not the actual calculation as that is beyond the scope of this course.

Consider these factors when working through the model:

1. The financial statements you encounter in the annual report will look differently than they do in this model.
Categories will be different than what you find in the annual report, so just use your best judgement when
classifying them and if you need to lump certain costs together then do so. (Example: your company
shows Cost of Sales of $100k, G&A of $50k, and Marketing expense of $10k. Combine the G&A and
Marketing in the single line on the income statement called "General, Administrative and other non-operating
expenses" in the amount of $60k. This places Marketing into the "Other" catch all category.

2. You may insert any "Key Assumptions" that you want to convey using the space below the balance sheet,
income statement, or prospective analysis. This could be anything from combining certain line items to
explaining apparent anomalies.

3. Make sure to net your interest income and expense on the income statement. So in some years you may have
a positive balance and a negative in others.

4. The "Normalization adjustments" listed on the "income statement" tab are referring to the adjustments discussed
in module three. To recap - Normalization adjustments are changes that you as an analyst can make in order to
"normalize" any anomalies or non-recurring items that may have been reported in the financial statements. For
example, if your company was exposed to a natural disaster and you know management does not expect that
type of major expense in the future then you can add it back under this section. Another example would be
a class-action lawsuit that resulted in a major settlement. While companies are always subject to lawsuits, one tha
results in a material settlement may be removed if it's unexpected to occur again in the near future.
ach year, starting with
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Microsoft Corp.
Balance Sheets (in millions)
December 31, 2017 through 2021

Common-size analysis
2017 2018 2019 2020 2021 2017 2018 2019 2020 2021

Assets

Current Assets
Cash and cash equivalents $ 152,342,000 $ 169,662,000 $ 175,552,000 $ 181,915,000 $ 184,406,000 71.3 % 67.0 % 63.1 % 62.0 % 58.0 %
Accounts receivable, net 20,178,000 26,481,000 29,524,000 32,011,000 38,043,000 9.4 10.5 10.6 10.9 12.0
Inventory 1,458,000 2,662,000 2,063,000 1,895,000 2,636,000 0.7 1.1 0.7 0.6 0.8
Other current assets 3,589,000 7,442,000 14,723,000 13,138,000 15,075,000 1.7 2.9 5.3 4.5 4.7
Total current assets 177,567,000 206,247,000 221,862,000 228,959,000 240,160,000 83.1 81.5 79.7 78.0 75.5

Property, plant & equipment, net 26,078,000 32,090,000 38,663,000 46,043,000 56,594,000 12.2 12.7 13.9 15.7 17.8

Other assets
Intangibles 2,859,000 6,751,000 10,146,000 11,482,000 13,393,000 1.3 2.7 3.6 3.9 4.2
Other assets 7,048,000 8,053,000 7,550,000 7,038,000 7,800,000 3.3 3.2 2.7 2.4 2.5
Total other assets 9,907,000 14,804,000 17,696,000 18,520,000 21,193,000 4.6 5.9 6.3 6.3 6.7

Total Assets $ 213,552,000 $ 253,141,000 $ 278,221,000 $ 293,522,000 $ 317,947,000 99.9 % 100.1 % 99.9 % 100.0 % 100.0 %

Liabilities and Stockholders' Equity

Current Liabilities
Accounts payable $ 47,648,000 $ 58,488,000 $ 69,420,000 $ 72,310,000 $ 88,657,000 22.3 % 23.1 % 25.0 % 24.6 % 27.9 %
Accrued expenses & other current liabilities 5,894,000 10,738,000 15,047,000 14,660,000 17,337,000 2.8 4.2 5.4 5.0 5.5
Current portion of debt and leases 1,746,000 3,998,000 5,516,000 3,749,000 8,072,000 0.8 1.6 2.0 1.3 2.5
Total current liabilities 55,288,000 73,224,000 89,983,000 90,719,000 114,066,000 25.9 28.9 32.4 30.9 35.9

Long-Term Liabilities
Long-term debt and lease obligations 121,746,000 117,642,000 114,806,000 110,697,000 103,134,000 57.0 46.5 41.3 37.7 32.4
Other long-term liabilities 3,144,000 5,211,000 7,581,000 10,632,000 13,427,000 1.5 2.1 2.7 3.6 4.2
Total long-term liabilities 124,890,000 122,853,000 122,387,000 121,329,000 116,561,000 58.5 48.6 44.0 41.3 36.6

Total Liabilities 180,178,000 196,077,000 212,370,000 212,048,000 230,627,000 84.4 77.5 76.3 72.2 72.5

Stockholders' Equity
Common stock, less treasury 61,567,000 82,718,000 102,330,000 118,304,000 141,988,000 28.8 32.7 36.8 40.3 44.7
Additional paid in capital 67,452,000 71,223,000 78,520,000 80,552,000 83,111,000 31.6 28.1 28.2 27.4 26.1
Retained earnings 8,945,000 13,682,000 24,150,000 34,566,000 57,055,000 4.2 5.4 8.7 11.8 17.9
Other comprehensive income (loss) 3,415,000 5,211,000 7,581,000 10,632,000 13,427,000 1.6 2.1 2.7 3.6 4.2
Total Stockholders' Equity 141,379,000 172,834,000 212,581,000 244,054,000 295,581,000 66.2 68.3 76.4 83.1 92.9

$ 321,557,000 $ 368,911,000 $ 424,951,000 $ 456,102,000 $ 526,208,000 150.6 % 145.8 % 152.7 % 155.3 % 165.4 %
 $ (108,005,000) $ (115,770,000) $ (146,730,000) $ (162,580,000) $ (208,261,000)

*Key Assumptions:
Microsoft Corp.
Statements of Income (in millions)
December 31, 2017 through 2021

Common-size analysis
2017 2018 2019 2020 2021 2017 2018 2019 2020 2021

Sales $ 96,020,000 $ 110,180,000 $ 125,500,000 $ 143,020,000 $ 168,090,000 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of Sales 34,620,000 38,970,000 42,910,000 46,080,000 52,230,000 36.1 35.4 34.2 32.2 31.1

Gross Profit 61,400,000 71,210,000 82,590,000 96,940,000 115,860,000 63.9 64.6 65.8 67.8 68.9

General, administrative and

non-operating expenses 2,830,000 2,350,000 397,000,000 (135,000,000) 357,000,000 2.9 2.1 316.3 (94.4) 212.4

Operating Income 58,570,000 68,860,000 (314,410,000) 231,940,000 (241,140,000) 61.0 62.5 (250.5) 162.2 (143.5)

Other Income (Expense)

Interest (expense) - - - - - - - - - -
Gain (loss) on sale of assets 2,220,000 2,730,000 2,690,000 2,590,000 2,350,000 2.3 2.5 2.1 1.8 1.4
Other - - - - - - - - - -
2,220,000 2,730,000 2,690,000 2,590,000 2,350,000 2.3 2.5 2.1 1.8 1.4

Normalization adjustments
Non-recurring items 36,630,000 44,830,000 54,220,000 65,260,000 80,820,000 38.1 40.7 43.2 45.6 48.1
Legal settlements 81,343,000 72,242,000 6,666,200 59,578,000 50,074,000 84.7 65.6 5.3 41.7 29.8
Other 16,543,000 13,427,000 10,632,000 7,581,000 5,211,000 17.2 12.2 8.5 5.3 3.1
134,516,000 130,499,000 71,518,200 132,419,000 136,105,000 101.9 77.8 13.8 47.0 32.9

Net income, before tax $ 60,790,000 $ 71,590,000 $ (311,720,000) $ 234,530,000 $ (238,790,000) 165.2 % 142.8 % (234.6) % 211.0 % (109.2) %
Microsoft Corp.
Financial and Operating Ratios
December 31, 2017 through 2021

2017 2018

Liquidity Ratios
Current Ratio 3.21 2.82
Quick Ratio 3.12 2.68
Working Capital $ 122,279,000 $ 133,023,000

Activity Ratios
Receivable Turns 4.76 4.72
Days in Receivables 76.70 77.30
Revenues/Working Capital 0.79 0.83
Revenues/Fixed Assets 3.68 3.43
Revenues/Total Assets 0.45 0.44
Inventory Turns 65.86 41.39
Days in Inventory 5.50 8.80
Payables Turns 0.73 0.67
Days in Payables 502.40 547.80

Coverage/Leverage Ratios
Fixed Assets/Equity 0.18 0.19

Profitability Ratios
Return on Equity 0.4 % 0.4 %
Return on Total Assets 0.3 % 0.3 %
Net Profit on Revenues 165.2 % 142.8 %

N/A - Not applicable

Change in sales #DIV/0! #REF!###
 2019 2020 2021

2.47 2.52 2.11

2.28 2.36 1.95
$ 131,879,000 $ 138,240,000 $ 126,094,000

4.48 4.65 4.80

81.40 78.50 76.10
0.95 1.03 1.33
3.25 3.11 2.97
0.45 0.49 0.53
60.83 75.47 63.77
6.00 4.80 5.70
0.62 0.64 0.59
590.50 572.80 619.60

0.18 0.19 0.19

(1.5) % 1.0 % (0.8)

(1.1) % 0.8 % (0.8)
(234.6) % 211.0 % (109.2)
#REF!### #REF!### -100.00%
Microsoft Corp.
Projected Income Statement (In millions)

2022 2023

Revenue $ 172,292,300 $ 176,599,600

Growth 2.5% 2.5%

Gross profit 12,060,461 12,361,972

Percentage of revenue 7.0% 7.0%

Operating expenses 8,614,615 8,829,980

Percentage of revenue 5.0% 5.0%

Other income (expense)

Interest income (expense) 168,088,000 143,015,000
Other 916,000 959,000
169,004,000 143,974,000
Percentage of revenue 98.1% 81.5%

Net income $ 172,449,846 $ 147,505,992

*Key Assumptions:
 2024 2025 2026 Terminal

$ 181,014,600 $ 185,540,000 $ 190,178,500 $ 194,933,000

2.5% 2.5% 2.5% 2.5%

12,671,022 12,987,800 13,312,495 13,645,310

7.0% 7.0% 7.0% 7.0%

9,050,730 9,277,000 9,508,925 9,746,650

5.0% 5.0% 5.0% 5.0%

125,843,000 45,317,000 176,251,000 -

429,000 699,000 238,000 -
126,272,000 46,016,000 176,489,000 -
69.8% 24.8% 92.8% 0.0%

$ 129,892,292 $ 49,726,800 $ 180,292,570 $ 3,898,660

Microsoft Corp.
Development of Discount Rate and Capitalization Rate

Rate Note
Risk-free long term U.S. Government bond rate 2.6 % (A)
Equity risk premium 6.0 (B)
Industry premium estimate 1.5 (C)
Specific company risk 3.0 (D)

Cost of equity (Discount rate) 13.1 Sum of (A) - (D)

Less: Long-term sustainable growth rate (2.5) (E)

Capitalization rate 10.6 %

(A) Yield on the twenty-year U.S. Treasury bond as of December 31, 20XX, per the U.S. Treasury
(B) Long-horizon expected return of large stocks over risk free securities, U.S. Equity Risk Premium (6.0%)
(C) SIC code XX, 1.5%
(D) Appraiser's judgement concerning company-specific risk
(E) Estimated long-term growth rate based on inflation, Federal Reserve Bank of Philadelphia

Sources:
United States Treasury
***You may use other sources to update any of these values; list the applicable source if used. Existing
values are actual figures obtained from sources used in prior years. You may use these as default
values since a detailed development of the discount rate is beyond the scope of this class.
Microsoft Corp.
Discounted Cash Flow Method (In millions)

Projected for Years Ending December 31,

2022

Forecasted Net Income $ 172,449,846

Plus:
Depreciation 18
Less:
Capital expenditures 7
Debt reduction 16

Net Cash Flow $ 172,449,887

Present value of cash flows $ 152,475,585

Discount rate: 13.1%

Terminal period cash flows

Capitalization rate: 10.6%

Capitalized terminal cash flow

Net present value of terminal cash flow, discounted into perpetuity

Net present value - five years ending YE: 2026

Net present value of terminal cash flow

Total indication of value (rounded)

1
for Years Ending December 31,

2023 2024 2025 2026

$ 147,505,992 $ 129,892,292 $ 49,726,800 $ 180,292,570

15 13 10 7

7 7 7 7
16 16 16 16

$ 147,506,030 $ 129,892,328 $ 49,726,833 $ 180,292,600

$ 115,314,671 $ 89,783,325 $ 30,390,678 $ 97,423,758

$ 485,388,000
19,874,700

$ 505,262,700

2 3 4 5
 Terminal
Value

$ 3,898,660

7
16

$ 3,898,688

$ 3,898,688
10.6%

$ 36,780,078

$ 19,874,700
Microsoft Corp.
Final Computation of Value
As of December 31, 2018

Income Approach:
Discounted Cash
Flow Method

Indicated Value of Equity $ 505,262,700

Weight 100

Weighted Value (rounded) $ 505,262,700

Indicated value with voting rights $ 505,262,700

Less: DLOC (Discount for Lack of Control) 15.0% (75,789,405)

Marketable, minority value 429,473,295

Less: DLOM (Discount for Lack of Marketability) 25.0% (107,368,324)

Nonmarketable, minority value $ 322,104,971

Value of a one-percent interest (in millions) $ 3,221,050

*if valuing an interest greater than 50% then the DLOC will not apply
%