National Economics University

Advanced Educational Program

FINANCIAL ANALYSIS REPORT

MICROSOFT

Lecturer: Le Duc Hoang

Course: Seminar in Finance - Class: Advanced Finance 60B
Group 7: Pham Hien Mai, Bui Dieu Linh, Le Thi Nguyet Ha,
Nguyen Thi Quynh Ngoc, Tran Ngoc Minh Chau

Hanoi, October 2021

COMPANY OVERVIEW
Microsoft Corporation (NASDAQ: MSFT) is a technology company. The history of Microsoft began on
April 4, 1975 and is headquartered in Redmond, Washington, when it was founded by Bill Gates and
Paul Allen in Albuquerque. The Company develops and supports a range of software products,
services, devices, and solutions. The Company's segments include Productivity and Business
Processes, Intelligent Cloud, and More Personal Computing. The Company's products include
operating systems; cross-device productivity applications; server applications; business solution
applications; desktop and server management tools; software development tools; and video games.
It also designs, manufactures, and sells devices, including personal computers (PCs), tablets, gaming
and entertainment consoles, other intelligent devices, and related accessories. It offers an array of
services, including cloud-based solutions that provide customers with software, services, platforms,
and content, and it provides solution support and consulting services. It markets and distributes its
products and services through original equipment manufacturers, direct, and distributors and
resellers. Microsoft ranked No. 21 in the 2020 Fortune 500 rankings of the largest United States
corporations by total revenue; it was the world's largest software maker by revenue as of 2016. It is
considered one of the Big Five companies in the U.S. information technology industry, along with
Google, Apple, Amazon, and Facebook.

MISSION
Microsoft’s corporate mission is “to empower every person and every organization on the planet to
achieve more.” This mission statement shows that the business is all about empowerment of people
and organizations. Such empowerment is achieved through the utility of the company’s computing
products.
● Empowering communities: Microsoft focuses on the intended purpose of its products on the
users – empowerment. The company deals with a wide range of products with varying
benefits.
● Exceeding expectations: Microsoft lays a lot of emphasis on going beyond what their
customers expect them to do.
● Every person and organization: While doing what it does best, Microsoft remains aware of its
market. By making clear that it does not exclude anyone, the company re-emphasizes its
determination to do more as reflected in the second component of its mission statement.
 VISION
Microsoft’s corporate vision is “to help people and businesses throughout the world realize their full
potential.” This vision statement shows that the company presents its business and computing
products as tools that people and business organizations can use for their development.
● Throughout the world: The first element of this vision statement reveals that Microsoft is not
a local or regional company. The firm targets the entire global market, and there is no
limitation to who can benefit from the products of the company. Microsoft has something for
everyone ranging from individuals to businesses of all types and sizes.
● Realize full potential: In this second element, the company brings out the intricate details of
what all its tools, devices and software are meant to do. Helping its clients to enhance their
skills and potential is what defines Microsoft, and that is why the company prioritizes
innovations that are customer-centric.
CORE VALUE
Microsoft’s core values are “innovation, trustworthy computing, diversity and inclusion, corporate
social responsibility, philanthropies, and environment.” The presence of these values has enabled
the management to direct all workers towards the mission and vision of the firm. These values aid the
company in various ways.
Microsoft understands the importance of creating an innovative culture to thrive in the
computer technology sector. This directly contributes to the presence of products that help customers
with dependable computing. To have a healthy impact across the globe, Microsoft has learned the art
of diversifying and being inclusive to ensure the company has a global image that does not alienate
anyone.
It also enhances this reputation by staying true to its responsibility to the society through
programs that empower and give back to the communities as shown in its fourth and fifth corporate
values. As a sustainable company, Microsoft’s success is directly related to the environmental
friendliness associated with its products as well.

PESTLE ANALYSIS
1. Political Factors
Microsoft had to do strong lobbying with the governments of different countries so that there is a
positive image of the company in government circles. The company has paid more than $10 million in
two years towards lobbying to build a favourable image of the company in political circles. Microsoft
grabbed the attention of governments due to the anti-trust related issues. The government put the
blame on Microsoft for creating a monopoly as Microsoft is offering bundling software and it was
alleged that Microsoft made it difficult for the consumers to uninstall its browser and use a competing
browser.
2. Economic Factors
The GDP of the country, its people's disposable income, and inflation are the important factors which
can provide both the opportunity and threat to the company.
Microsoft is a worldwide known company and its Windows 10 is the world's most used operating
system. In the 2008 recession, when the financial crisis was at its peak, Microsoft business was
affected so much that it had to lay off 5000 employees. The increasing income of people in developing
countries provides a great opportunity for Microsoft as many people are buying laptops and
computers as on most of the computers Microsoft operates.
3. Social Factors
The adoption of computers and laptops has seen a dramatic increase in recent years in every part of
the world. The company needs to adapt itself according to changes in the customer preferences,
trends and cultures. When there was a boom in laptop and computer sales, it benefited a lot to
Microsoft as its operating system became everyone’s favourite in no time. But now people are using
mobile phones more than anything. For people, mobile phones have become a necessary part of their
life. But Microsoft doesn’t grasp this change and focuses mainly on laptops and computers. Microsoft's
major products are compatible with computers only and not for the mobiles and it is necessary for
Microsoft to focus now on smartphone users to increase its sales.
4. Technological Factors
Microsoft is the world leader in technological innovation. It is the first company in the world which
introduces operating systems which revolutionize the world. It introduced the feature of the Start
button which became so popular that it had to relaunch it after Microsoft scrapped it in 2012. It
launched the once most popular web browser ‘Internet Explorer’. Internet Explorer opens up the
window to the world. With its exceptional features, people can find any information within seconds
and can communicate with people sitting in other parts of the world. It revolutionized the information
age. Microsoft is continuously improving its operating system to give a seamless experience to its
customers. Its latest Windows 10 is the world’s most used operating system.
5. Legal Factors
Microsoft is the world’s largest company in the world. So, its chances of getting in legal issues is very
high. The total lawsuit playouts it has given till now amounts to a whopping 9 billion. The company
entangled into legal imbroglio when its 8,600 current and former employees filed lawsuit against the
company for gender discrimination. The lawsuit said that Microsoft systematically discriminated
against female engineers and IT employees. It was alleged that one out of 120 gender discrimination
complaints made by female Microsoft employees was looked upon by the Microsoft internal
complaint investigation team. In 2018, a person sues Microsoft after a forced Windows upgrade
destroys his PC. The person purchased the Asus laptop in which Microsoft Windows 7 was preinstalled
but the computer became non-functional when the upgrade to Windows 10 failed. The company
needs to be very careful in today's time to satisfy the customer's needs while at the same time keeping
in mind that nobody is discriminated against on any basis.
6. Environmental Factors
Since every major company is going green in today’s world, it is obvious for Microsoft (the world’s
largest company by market capitalization) to take the green initiative as a priority project. In 2019,
Microsoft has been ranked as the world’s most environmentally friendly company according to the
reports published by Just Capital. Microsoft is giving grants to use AI to address global warming.
Microsoft has given grants of 500,000 to universities to stimulate research on environmentally
sensitive computing.
Microsoft is a 100% carbon neutral company. It also charges an internal carbon tax on its own
business for the dual purpose of its units to be more environmentally conscious and to pay for the
climate change from the tax collected. Microsoft has committed to spend 50 million$ in the five years
to support projects that will use Microsoft AI and machine learning technology to tackle
environmental challenges.

PART 1: COMPETITOR ANALYSIS

A. Industry overview
The technology industry is the category of stocks relating to the research, development, or distribution
of technologically based goods and services. This sector contains businesses revolving around the
manufacturing of electronics, creation of software, computers, or products and services relating to
information technology.
The technology industry offers a wide range of products and services for both customers and
other businesses. Consumer goods like personal computers, mobile devices, wearable technology,
home appliances, televisions, and so on are continually being improved and sold to consumers with
new features.
On the business side, companies are dependent on innovations coming out of the technology
industry to create their enterprise software, manage their logistics systems, protect their databases,
and generally provide the critical information and services that allow companies to make strategic
business decisions.
 There are 3 critical issues for the technology industry to consider in 2021: (1) Redoubling
digital transformation efforts, (2) Reorienting and reskilling the workforce, (3) Reexamining where and
how manufacturing happens:
Using data from Kantar and Bloomberg, a recent brand report released by BrandZ shows which
tech companies are proving their worth to consumers during COVID-19 chaos. With data covering
almost 4 million consumers, BrandZ also reveals that the tech sector leads the world’s 100 most valued
brands in terms of financial power and consumer sentiment.
Here’s how the top 10 tech brands (shortened) from the report stack up:

Rank Company Brand value (2020) Change (%)

#1 Apple $352 Billion +14%

#2 Microsoft $327 Billion +30%

#3 Google $324 Billion +5%

#4 Tencent $151 Billion +15%

#5 Facebook $147 Billion -7%

#6 IBM $84 Billion -3%

#7 SAP $58 Billion 0%

#8 Instagram $42 Billion +47%

#9 Accenture $41 Billion +6%

#10 Intel $37 Billion +17%

Out of the top five tech brands, Microsoft made the biggest moves with 30% brand value
growth. Other big movers in the top 20 were Instagram (owned by Facebook), Adobe, and LinkedIn
(owned by Microsoft), rising 47%, 29%, and 31%, respectively.
While the brand value growth rates of tech giants aren’t entirely immune to the effects of
COVID-19, the likes of Apple, Microsoft, and Google are growing steadily, surpassed only by e-
commerce leader Amazon.
 B. Rival’s overview
Microsoft Corporation’s (MSFT) primary competitors include some of the most prominent technology
companies in the industry. The list includes well-known brands such as Apple (AAPL), Google (GOOG),
SAP SE (SAP), IBM (IBM) and Oracle (ORCL), among others. Because Microsoft is a diversified
corporation that offers many types of products and services, the company faces stiff competition in
several key areas of the technology sector.
Microsoft got its start by focusing on software, and although the company has branched out
into other areas, it still has a strong emphasis in this field. Some of the most successful software
corporations in the world, such as Oracle and the German firm SAP SE, compete directly with Microsoft
for the lucrative business services market.
Microsoft is also an important player in the hardware field. Its products include tablets
designed to compete with similar devices made by other companies, such as Apple. The company
makes a variety of computer accessories as well, which brings it in direct competition with several
firms that specialize in this area, such as Logitech.
Therefore we choose Apple and Oracle as Microsoft’s main rivals due to thier diversified
sectors.

1. Competitors’ profiles
1.1. Apple (NASDAQ: AAPL)

Apple is the tech company founded by Steve

Jobs, Steve Wozniak, and Ronald Wayne in
California in 1977, which became famous after
popularizing a different kind of interface,
which was more friendly and graphical. It is
one of the world’s most valuable brands, with
successful products and unique designs. It
produces and commercializes devices like
smartphones, computers, tablets, and
wearables, and it developed the iOS operating
system in 2007, which runs in all its products.

1.2. Oracle (NYSE: ORCL)

Oracle is a tech corporation that was

established in 1977 by Larry Ellison, Bob Miner
and Ed Oates, in Santa Clara, California. It was
born as Software Development Laboratories
and, in 1982, it changed its name to Oracle. In
1986, it became a public company. The
company’s goal is to help individuals and
enterprises to manage, store and take
advantage of data. It employs 136,000 people
and generates annual revenues of $ 49.6
billion.
 2. Making comparisons
2.1. Microsoft vs. Apple
Microsoft recently announced the Surface Book, the first laptop built by the company, during an event
in early October. It was directly compared to Apple's MacBook Pro laptop. And anyone making
comparisons in Surface Book reviews is making comparisons with the MacBook Pro, too.
There's also the Surface Pro 4 that Microsoft announced during the same event, which is
designed more like a tablet but still works very much like a full computer. It's forcing Apple to alter its
iPad strategy by releasing the large, productivity-driven iPad Pro because the Surface Pro tablets are
posing a real threat to Apple.
That's how Microsoft is "the only one that's got software and hardware capability" to compete
with Apple.
2.2. Microsoft vs. Oracle
It competes with Microsoft in the cloud industry, where it is positioned in the sixth position of the
Enterprise Public Cloud Adoption 2017-2018 with 10% of market share. Oracle Cloud Platform enables
fast delivery with scale and reliability. It also offers a variety of cloud computing solutions (SaaS, PaaS
and IaaS) for businesses of all sizes.
Oracle’s strength is the high switching costs that companies using its software will face if they
move. That’s a great moat when it comes to defending its legacy revenue streams, but it’s not going
to generate growth. Until we see revenue growth or a breakdown of the growth Oracle’s cloud services
are experiencing, there is little reason to believe the company can grow much more than 10% a year.

3. SWOT Analysis
3.1. Microsoft

3.2. Apple & Oracle

Company Strengths Weaknesses

- Brand identity - Incompatibility

- Innovative products
- Loyal customer base
- Brand value reputation
Apple - Marketing advertising
- Distribution chain
- Customer focus
- Matching customers’ expatiation
- Dependency on other few
products
- Limited distribution network
- Premium pricing
- Lack of competition
- Lack of marketing and promotion
 - Strong and stable financial - Excessively reliance on brand
performance perception and brand image.
- First mover advantage in
database segment
- One stop solution for products
Oracle - Cloud platform leveraged to
transform and unlock new value
- Widely connected stakeholders
from various domain and regions
- Undisputable brand awareness
and presence

PART 2: FINANCIAL STATEMENT & SUPPLEMENTARY DATA

INCOME STATEMENTS

(In millions, except per share amounts)

Year Ended June 30, 2020 2019 2018 2017 2016

Revenue:

Product $68,041 $66,069 $64,497 $63,811 $67,336

Service and other 74,974 59,774 45,863 32,760 23,818

Total revenue 143,015 125,843 110,360 96,571 91,154

Cost of revenue:

Product 16,017 16,273 15,420 15,175 17,880

Service and other 30,061 26,637 22,933 19,086 14,900

Total cost of revenue 46,078 42,910 38,353 34,261 32,780

Gross margin 96,937 82,933 72,007 62,310 58,374

Research and development 19,269 16,876 14,726 13,037 11,988

Sales and marketing 19,598 18,213 17,469 15,461 14,635

General and administrative 5,111 4,885 4,754 4,481 4,563

Impairment and restructuring 306 1,110

Operating income 52,959 42,959 35,058 29,025 26,078

Other income, net 77 729 1,416 876 (439)

 Income before income taxes 53,036 43,688 36,474 29,901 25,639

Provision for income taxes 8,755 4,448 19,903 4,412 5,100

Net income $44,281 $39,240 $16,571 $25,489 $20,539

Earnings per share:

Basic $5.82 $5.11 $2.15 $3.29 $2.59

Diluted $5.76 $5.06 $2.13 $3.25 $2.56

Weighted average shares

outstanding:

Basic 7,610 7,673 7,700 7,746 7,925

Diluted 7,683 7,753 7,794 7,832 8,013

Cash dividends declared per $1.68 $1.56 $1.44

common share
Refer to accompanying notes.

COMPREHENSIVE INCOME STATEMENTS

(In millions)

Year Ended June 30, 2020 2019 2018 2017 2016

Net income $44,281 $39,240 $16,571 $25,489 $20,539

Other comprehensive income

(loss), net of tax:

Net change related to (38) (173) 39 (218) (238)

derivatives

Net change related to 3,990 2,405 (2,717) (1,116) (228)

investments

Translation adjustments and (426) (318) (178) 167 (262)

other

Other comprehensive income 3,526 1,914 (2,856) (1,167) (728)

(loss)

Comprehensive income $47,807 $41,154 $13,715 $24,322 $19,811

Refer to accompanying notes. Refer to Note 19 – Accumulated Other Comprehensive Income (Loss)
for further information.
BALANCE SHEETS

(In millions)

June 30, 2020 2019 2018 2017 2016

Assets

Current assets:

Cash and cash equivalents $13,576 $11,356 $11,946 $7,663 $6,510

Short-term investments 122,951 122,463 121,822 125,318 106,730

Total cash, cash equivalents, 136,527 133,819 133,768 132,981 113,240

and short-term investments

Accounts receivable, net of 32,011 29,524 26,481 22,431 18,277

allowance for doubtful
accounts of $788 and $411,
$377, $345 and $426

Inventories 1,895 2,063 2,662 2,181 2,251

Other current assets 11,482 10,146 6,751 5,103 5,892

Total current assets 181,915 175,552 169,662 162,696 139,660

Property and equipment, net of 44,151 36,477 29,460 23,734 18,356

accumulated depreciation of
$43,197, $35,330, $29,223 and
$24,179 and $19,800

Operating lease right-of-use 8,753 7,379 6,686 6,555

assets

Equity investments 2,965 2,649 1,862 6,023 10,431

Goodwill 43,351 42,026 35,683 35,122 17,872

Intangible assets, net 7,038 7,750 8,053 10,106 3,733

Other long-term assets 13,138 14,723 7,442 6,076 3,416

Total assets $301,311 $286,556 $258,848 $250,312 $193,468

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable $12,530 $9,382 $8,617 $7,390 $6,898

Short-term debt 0 9,072 12,904

 Current portion of long-term 3,749 5,516 3,998 1,049 0
debt

Accrued compensation 7,874 6,830 6,103 5,819 5,264

Short-term income taxes 2,130 5,665 2,121 718 580

Short-term unearned revenue 36,000 32,676 28,905 24,013 27,468

Securities lending payable (98) 97 294

Other current liabilities 10,027 9,351 8,744 7,684 5,949

Total current liabilities 72,310 69,420 58,488 55,745 59,357

Long-term debt 59,578 66,662 72,242 76,073 40,557

Long-term income taxes 29,432 29,612 30,265 13,485

Long-term unearned revenue 3,180 4,530 3,815 2,643 6,441

Deferred income taxes 204 233 541 5,734 1,476

Operating lease liabilities 7,671 6,188 5,568 5,372

Other long-term liabilities 10,632 7,581 5,211 3,549 13,640

Total liabilities 183,007 184,226 176,130 162,601 121,471

Commitments and
contingencies

Stockholders’ equity:

Common stock and paid-in 80,552 78,520 71,223 69,315 68,178

capital – shares authorized
24,000; outstanding 7,571,
7,643, 7,677 and 7,708 and
7,808

Retained earnings 34,566 24,150 13,682 17,769 2,282

Accumulated other 3,186 (340) (2,187) 627 1,537

comprehensive income (loss)

Total stockholders’ equity 118,304 102,330 82,718 87,711 71,997

Total liabilities and $301,311 $286,556 $258,848 $250,312 $193,468

stockholders’ equity
Refer to accompanying notes.
CASH FLOWS STATEMENTS

(In millions)

Year Ended June 30, 2020 2019 2018 2017 2016

Operations

Net income $44,281 $39,240 $16,571 $25,489 $20,539

Adjustments to reconcile net

income to net cash from
operations:

Asset impairments 0 0 630

Depreciation, amortization, 12,796 11,682 10,261 8,778 6,622

and other

Stock-based compensation 5,289 4,652 3,940 3,266 2,668

expense

Net recognized gains on (219) (792) (2,212) (2,073) (223)

investments and derivatives

Deferred income taxes 11 (6,463) (5,143) (829) 2,479

Changes in operating assets and liabilities:

Accounts receivable (2,577) (2,812) (3,862) (1,216) 562

Inventories 168 597 (465) 50 600

Other current assets (2,330) (1,718) (952) 1,028 (1,212)

Other long-term assets (1,037) (1,834) (285) (917) (1,110)

Accounts payable 3,018 232 1,148 81 88

Unearned revenue 2,212 4,462 5,922 3,820 2,565

Income taxes (3,631) 2,929 18,183 1,792 (298)

Other current liabilities 1,346 1,419 798 356 (179)

Other long-term liabilities 1,348 591 (20) (118) (406)

Net cash from operations 60,675 52,185 43,884 39,507 33,325

Financing

Repayments of short-term 0 0 (7,324) (4,963) 7,195

debt, maturities of 90 days or
less, net
 Proceeds from issuance of 0 0 7,183 44,344 13,884
debt

Cash premium on debt (3,417) 0 0

exchange

Repayments of debt (5,518) (4,000) (10,060) (7,922) (2,796)

Common stock issued 1,343 1,142 1,002 772 668

Common stock repurchased (22,968) (19,543) (10,721) (11,788) (15,969)

Common stock cash dividends (15,137) (13,811) (12,699) (11,845) (11,006)

paid

Other, net (334) (675) (971) (190) (369)

Net cash used in financing (46,031) (36,887) (33,590) 8,408 (8,393)

Investing

Additions to property and (15,441) (13,925) (11,632) (8,129) (8,343)

equipment

Acquisition of companies, net (2,521) (2,388) (888) (25,944) (1,393)

of cash acquired, and
purchases of intangible and
other assets

Purchases of investments (77,190) (57,697) (137,380) (176,905) (129,758)

Maturities of investments 66,449 20,043 26,360 28,044 22,054

Sales of investments 17,721 38,194 117,577 136,350 93,287

Other, net (1,241) 0 (98) 97 203

Net cash used in investing (12,223) (15,773) (6,061) (46,781) (23,950)

Effect of foreign exchange (201) (115) 50 19 (67)

rates on cash and cash
equivalents

Net change in cash and cash 2,220 (590) 4,283 1,153 915
equivalents

Cash and cash equivalents, 11,356 11,946 7,663 6,510 5,595

beginning of period

Cash and cash equivalents, $13,576 $11,356 $11,946 $7,663 $6,510

end of period

Refer to accompanying notes.

PART 3: MANAGEMENT BOARD
FOUNDER

In 1975 Bill Gates and Paul G. Allen, two boyhood friends from Seattle, converted BASIC, a popular
mainframe computer programming language, for use on an early personal computer (PC), the Altair.
Shortly afterward, Gates and Allen founded Microsoft, deriving the name from the words
microcomputer and software. Allen quit his job as a programmer in Boston and Gates left Harvard
University, where he was a student, to focus on their new company, which was based in Albuquerque
because the city was home to electronics firm MITS, maker of the Altair 8800.

By the end of 1978, Microsoft’s sales topped

more than $1 million and in 1979 the business
moved its headquarters to Bellevue,
Washington, a suburb of Seattle, where Gates
and Allen grew up. The company went on to
license its MS-DOS operating system to IBM for
its first personal computer, which debuted in
1981. Afterward, other computer companies
started licensing MS-DOS, which had no
graphical interface and required users to type
in commands in order to open a program. In
1983, Allen departed Microsoft after being
diagnosed with Hodgkin’s lymphoma; he was
successfully treated for the disease and went
on to pursue a variety of other business
ventures. Microsoft relocated to Washington
State in 1979 and eventually grew into a major
multinational technology corporation. In 1987,
the year after Microsoft went public, 31-year-
old Gates became the world’s youngest
billionaire.
CURRENT EXECUTIVE BOARD
1. Satya Nadella - Chairman and Chief Executive Officer
Satya Nadella is Chairman and Chief Executive
Officer of Microsoft. Joining Microsoft in 1992,
he quickly became known as a leader who
could span a breadth of technologies and
businesses to transform some of Microsoft’s
biggest product offerings. Most recently,
Nadella was executive vice president of
Microsoft’s Cloud and Enterprise group. In this
role he led the transformation to the cloud
infrastructure and services business, which
outperformed the market and took share from
competition. Previously, Nadella led R&D for
the Online Services Division and was vice
president of the Microsoft Business Division.

2. Brad Smith - President and Vice Chair

As Microsoft’s president and vice chair, Brad

Smith leads a team of more than 1,500
business, legal and corporate affairs
professionals located in 54 countries and
operating in more than 120 nations. He plays a
key role in spearheading the company’s work
on critical issues involving the intersection of
technology and society, including
cybersecurity, privacy, artificial intelligence,
environmental sustainability, human rights,
immigration and philanthropy.

3. Amy Hood - Executive Vice President and Chief Financial Officer

Amy Hood is the executive vice president and
chief financial officer at Microsoft and is
responsible for leading the company’s
worldwide finance organization, including
business operations, acquisitions, treasury, tax
planning, global real estate, accounting and
reporting, internal audit and investor relations.
Through her tenure the company has
advanced momentum in the cloud and helped
digitally transform the company. She is deeply
involved in the company’s operations, as well
as the strategy development and overall
execution of the company’s successful
acquisitions of LinkedIn and GitHub.
 4. Christopher Young - Executive Vice President, Business Development, Strategy& Ventures

Christopher Young is executive vice president

of business development, strategy and
ventures at Microsoft. He is responsible for
driving growth across the company by
establishing strategic partnerships, setting
corporate strategy and identifying high impact
investments through Microsoft’s corporate
venture arm.

5. Chris Capossela - Chief Marketing Officer and Executive Vice President, Marketing and
Consumer Business

Chris Capossela is Microsoft’s chief marketing

officer and executive vice president of
worldwide consumer business. As the chief
marketing officer, Capossela runs marketing
across both the consumer and commercial
businesses, which includes marketing for all
Microsoft services and products, business
planning, brand, advertising, events,
communications and research. As leader of the
worldwide consumer business, Capossela
oversees the Consumer Channel Sales and
Marketing team, Microsoft Advertising Sales
and Microsoft Stores. These teams are
responsible for driving revenue, growth and
share across the consumer business.

PART 4: FINANCIAL RATIO COMPARISON

A. Liquidity Ratios
Liquidity Ratios provide information about a company's ability to meet short-term obligations. Since
many technology companies do not make a profit or even generate revenue, it is extremely important
to analyze how well a technology company can meet its short-term financial obligations.

1. Current Ratio
2020 2019 2018 2017 2016
MSFT 2.52 2.53 2.90 2.48 2.35
AAPL 1.36 1.54 1.12 1.28 1.35
ORCL 3.03 2.49 3.96 3.08 3.74
 Current ratio = (current assets / current liabilities)
This ratio is the most common liquidity ratio for measuring a company's ability to pay its short-
term financial obligations. It is also the least conservative of the liquidity ratios. In the technology
industry, it is important to have a high current ratio since the business normally needs to fund all of
its operations from current assets, such as the cash received from investors.
MSFT has a stable performance throughout the years, which is better than AAPL but not as
good as ORCL. This could be the result of ORCL’s main field, in which the company was not a
manufacturer and were focusing on Research & Development activity. In general, a good current ratio
is typically anywhere between 1.5 and 2. MSFT and ORCL could be paying short-term obligations well
within a year. In addition, the COVID-19 pandemic had a larger effect on ORCL’s ratio than MSFT’s.

2. Quick Ratio
2020 2019 2018 2017 2016
MSFT 2.33 2.35 2.74 2.37 2.22
AAPL 1.22 1.38 0.99 1.09 1.22
ORCL 2.83 2.31 3.78 2.95 3.57

Quick ratio = (Current Assets − Inventory)/ Current Liabilities

This ratio indicates that the company is fully equipped with exactly enough assets to be
instantly liquidated to pay off its current liabilities.
A result of 1 is considered to be the normal quick ratio. The trend and ranking in having a
better Quick ratio of the 3 companies is the same as Current ratio. It indicates that ORCL and MSFT
are always fully equipped with exactly enough assets to be instantly liquidated to pay off their current
liabilities.
 3. Cash Ratio
2020 2019 2018 2017 2016
MSFT 1.89 1.93 2.29 2.06 1.91
AAPL 0.86 0.95 0.57 0.74 0.85
ORCL 2.50 2.03 3.50 2.73 3.26

Cash ratio = (cash + marketable securities) / current liabilities)

This ratio is the most conservative of all the liquidity ratios. This is the most important liquidity
ratio for a technology. It is also the hardest evaluator of whether a company can meet its short-term
obligations.
ORCL always had the highest indicator because the company normally only has cash and not
other current assets, such as inventory, to meet its current obligations. Additionally, the 3 companies
had a large number of market securities and market capitalization as well as MSFT and ORCL had lots
of deals on acquisitions and investments. They are all included in the liquidity calculations, so the
numbers fluctuated throughout the years.

4. Cash Conversion Cycle

2020 2019 2018 2017 2016
MSFT -2.00 24.00 31.00 24.00 26.00
AAPL -61.00 -63.00 -84.00 -86.00 -71.00
ORCL 33 36 42 37 38

Cash conversion cycle = Days inventory outstanding + Days sales outstanding

- Days payable outstanding
 This is a metric that shows you the amount of time (measured in days) that it takes for
businesses to convert investments in inventory to cash. Also referred to as the net operating cycle or
the cash cycle, the cash conversion cycle formula can help you understand exactly how long each
dollar gets tied up in production/sales before it’s converted to cash.
MSFT and ORCL were doing fine with stable indicators during the period, keeping it stay under
45 days - the average CCC of the industry. MSFT had a better grasp than ORCL on inventory
management, sales, and payables. MSFT finally got a negative CCC (which is very strong) in 2020,
despite the impacts of COVID-19 pandemic. Noticeably, AAPL has always had a negative CCC. However,
its trend was upward.

B. Solvency Ratio
Opposite of liquidity ratios, Solvency ratios measure the long-term solvency of a company. These types
of ratios take into account long-term debt and any equity investments, both of which highly impact
technology companies.

1. Debt-to-Asset Ratio
2020 2019 2018 2017 2016
MSFT 0.24 0.27 0.31 0.37 0.28
AAPL 0.35 0.32 0.31 0.31 0.27
ORCL 0.62 0.52 0.44 0.43 0.39

Debt-to-assets = Total debt / Total assets

This is a leverage ratio that measures the amount of total assets that are financed by creditors
instead of investors. Basically it illustrates how a company has grown and acquired its assets over time.
MSFT and AAPL had a much lower percentage of assets funded by borrowing compared with
the percentage of resources that are funded by the investors than ORCL. Noticeably, MSFT had
downward trends while the rest’s trends were upward. It always had enough funds to meet its current
debt obligations and to assess whether it can pay a return on its investment. In 2020, MSFT’s ratio was
only half of ORCL’s.

2. Debt-to-Equity Ratio
2020 2019 2018 2017 2016
MSFT 0.62 0.77 0.97 1.23 0.76
AAPL 1.72 1.19 1.07 0.86 0.68
ORCL 5.93 2.58 1.31 1.08 0.93
 Debt-to-equity = Total debt / Total equity
Technology companies make large amounts of investments in other technology companies
and take on investments and debt from other organizations to fund product development. So, this
ratio is extremely important for the analysis of technology companies.
MSFT and AAPL were financing their operations through debt versus wholly owned funds at a
low rate, which is very good. Especially, MSFT had a downward trend and its shareholder equity had
the ability to cover all outstanding debts in the event of a business downturn. From 2018, ORCL’s ratio
rocketed and reached a number of nearly ten times MSFT's ratio. This can be the result from acquiring
other companies or funds, normally through outside investments or by issuing debt.

3. Debt-to-EBITDA
2020 2019 2018 2017 2016
MSFT 1.08 1.42 1.75 2.37 1.66
AAPL 1.44 1.38 1.37 1.56 1.21
ORCL 4.21 3.25 3.52 3.64 2.84

Net Debt to EBITDA = (Total Debt − Cash & Equivalents) / EBITDA

This ratio is a measurement of leverage, showing how many years it would take for a company
to pay back its debt if net debt and EBITDA are held constant.
MSFT and AAPL could cover their debts well as they always keep this indicator under 3 years.
MSFT reached a peak of 2.5 in 2017 and then decreased to 1 after 3 years, which was lower than AAPL.
From 2016, ORCL’s ratio was nearly 3, which serves as “red flags” and indicates that the company may
be financially distressed in the future. In the 5-year period, this warning came true as it rose steadily
and reached a peak of over 4 years. This company was in an insolvent status for a long time.
 4. Interest Coverage Ratio
2020 2019 2018 2017 2016
MSFT 21.47 17.27 14.35 11.42 16.89
AAPL 24.35 19.38 23.50 28.59 43.15
ORCL 5.68 5.5 6.38 6.39 6.4

Interest coverage ratio = EBIT / Interest expenses

This ratio is a measurement to determine how easily a company can pay interest on its
outstanding debt. Lenders, investors, and creditors often use this formula to determine a company's
riskiness relative to its current debt or for future borrowing.
The ability to pay the interest due on outstanding debt of MSFT and AAPL was great
meanwhile ORCL was only acceptable with roughly equal numbers throughout the period. In 2016,
the AAPL’s ratio was nearly 3 times MSFT’s. However, AAPL had a downward trend while MSFT grew
significantly. Within 5 years, the 2 companies’ ratios had become very close to each other.

C. Profitability Ratios
While many technology companies are not initially profitable, even large ones like Amazon, it is
necessary to look at their margins; other ratios which are a good indicator of future profitability even
if there are no current operating profits.

1. Net Profit Margin

2020 2019 2018 2017 2016
MSFT 33.47% 33.02% 28.31% 13.52% 23.81%
AAPL 21.73% 21.49% 22.72% 21.12% 20.73%
ORCL 26.34% 27.62% 9.70% 25.60% 23.69%
 Net profit margin = (Net income / Revenue) x 100
This ratio measures how much net income or profit is generated as a percentage of revenue.
The net profit margin illustrates how much of each dollar in revenue collected by a company translates
into profit. It’s essential and demonstrates the overall success of the business.
The profitability of MSFT and ORCL fluctuated while that of AAPL remained stable at around
20%, which is a good level. In 2018, ORCL’s ratio dipped from the safe zone to 10% - an acceptable
rate - as its lower-margin hardware business continued to get smaller, shifting the focus for
infrastructure business to the cloud. MSFT witnessed a great uptrend and became the market leader
by helping along their cloud computing divisions and expanding the already-high operating margins.

2. Return on Asset
2020 2019 2018 2017 2016
MSFT 15.40% 14.70% 6.60% 11.20% 11.30%
AAPL 17.60% 16.10% 16.00% 14.00% 14.90%
ORCL 9.70% 9.50% 2.60% 7.50% 8.20%

Return on assets = Net income / Total assets

This ratio is an indicator of how profitable a company is relative to its total assets. It gives the
idea as to how efficient a company's management is at using its assets to generate earnings.
MSFT and AAPL can well utilize its assets in terms of profitability while ORCL’s performance
was fine, compared with the benchmark in the technology sector. In 2018, the ratio of MSFT and ORCL
witnessed a plunge because their Revenue and Net income halved off, while Total assets increased.
However, they recovered quickly in the next year to the new high level. MSFT is on its way to narrow
the gap with AAPL.

3. Return on Equity
2020 2019 2018 2017 2016
MSFT 39.50% 41.80% 20.10% 34.40% 27.30%
AAPL 75.20% 53.80% 48.70% 36.30% 35.60%
ORCL 67.20% 38.80% 7.00% 18.90% 19.10%
 Return on equity = Net income / Average shareholder’ equity
This ratio is a measure of financial performance calculated by dividing net income by
shareholders' equity. Because shareholders' equity is equal to a company’s assets minus its debt, ROE
is considered the return on net assets. It is considered a gauge of a corporation's profitability and how
efficient it is in generating profits.
The 3 companies saw an upward trend. AAPL had a big uptrend, doubling the ratio, due to the
steady growth in Revenue and Net income for the popular and trendy product lines during the whole
period. MSFT generated profit efficiently but not as rapidly as ORCL. Moreover, ORCL had a significant
decline and restructure in Shareholder’s Equity. From 2018 to 2020, ORCL’s indicators rose by about
ten times in only 2 years and finally surpassed MSFT.

D. Activity Ratios
An activity ratio is a type of financial metric that indicates how efficiently a company is leveraging the
assets on its balance sheet, to generate revenues and cash. In this study, we focus on Microsoft and
Apple because these two companies operate in this field more than Oracle, which has a very low level
of inventory.

1. Inventory Turnover
2020 2019 2018 2017 2016
MSFT 24.32 20.80 14.41 15.71 14.56
AAPL 41.75 39.40 41.39 29.05 61.6
ORCL 37.62 24.98 20.3 24.9 35.28

Inventory turnover = Cost of goods sold / Average inventory

 This ratio shows how many times a company has sold and replaced inventory during a given
period. Inventory turnover can help businesses make better decisions on pricing, manufacturing,
marketing, and purchasing new inventory.
The 3 companies managed costs associated with sales efforts well as they had much
considerable demand for their products. MSFT, with a steady uptrend, did not sell goods as quickly as
AAPL and ORCL. AAPL managed its stocks really well meanwhile ORCL had little inventory so that they
could balance easier.

2. Net Fixed Asset Turnover

2020 2019 2018 2017 2016
MSFT 0.5 0.47 0.44 0.42 0.5
AAPL 0.84 0.76 0.71 0.66 0.7
ORCL 0.38 0.34 0.29 0.3 0.34

Net fixed assets turnover ratio = Net sales / Average fixed assets
This ratio is used to measure operating performance. It compares net sales to fixed assets and
measures a company's ability to generate net sales from its fixed-asset investments, namely property,
plant, and equipment. A higher fixed asset turnover ratio indicates that a company has effectively used
investments in fixed assets to generate sales.
The 3 companies all had assets available to cover operational expenses or business costs with
the best-performance ranking: AAPL, MSFT, ORCL. The explanation could be that ORCL is more in the
utilities sector, where the ideal rate of Net fixed asset turnover ratio of the benchmark is lower.
Meanwhile, AAPL has lots of manufacturing, retailing activities and MSFT is somewhere between.
Moreover, AAPL’s ratio saw an upward trend due to the growth of Net sales of retail stores chain,
which was the field that MSFT and ORCL did not focus on.

3. Receivables Turnover
2020 2019 2018 2017 2016
MSFT 4.47 4.26 4.17 4.54 4.67
AAPL 17.03 11.35 11.45 12.82 13.69
ORCL 7.04 7.69 7.55 7.12 6.88
 Receivables turnover = Net credit sales / Average accounts receivable
This ratio is an accounting measure used to quantify a company's effectiveness in collecting
its accounts receivable, or the money owed by customers or clients. It measures how well a company
uses and manages the credit it extends to customers and how quickly that short-term debt is collected
or is paid.
MSFT was efficient at collecting on its payments due with a stable and smallest indicator
throughout the years. ORCL’s ratio ranged around 7, which is acceptable in this industry, but not so
good for a company with little inventory to generate credit sales. Noticeably, AAPL could not improve
their revenue collection process efficiency due to the commitment with partners and customers. Its
ratio ranged from 11 to 14 then reached a peak of over 17, giving them a “red flag”.

E. Valuation Ratios
Valuation metrics are most useful when thinking about the future, and therefore, the ratios financial
metrics we choose for valuation should be based on what the consensus expects in terms of earnings,
cash flow, etc. While views of earnings potential may differ, it’s good to know what the market expects
so you can understand what is built into the price.
So, this study focuses on the analysis of P/E and EV/EBITDA ratio rather than other ratios, as
a result of the difference in each firm’s main activity and revenue source.

1. Price-to-Sales ratio
2020 2019 2018 2017 2016
MSFT 10.79 8.16 6.87 5.51 4.41
AAPL 7 3.8 4.11 3.47 2.82
ORCL 4.34 4.38 4.84 4.94 4.5

Price-to-Sales ratio = Market value per share / Sales per share

This is a valuation ratio that compares a company’s stock price to its revenues. It is an indicator of the
value that financial markets have placed on each dollar of a company’s sales or revenues. The ratio
shows how much investors are willing to pay per dollar of sales.

2. Market-to-Book value ratio

2020 2019 2018 2017 2016
MSFT 13.04 10.03 9.16 6.07 5.59
AAPL 29.39 10.93 10.18 5.94 4.74
ORCL 14.04 7.94 4.11 3.47 3.53

Market-to-Book value ratio = Market price per share / Book value per share
This ratio is an indicator of market sentiment regarding the relationship between a company’s
required rate of return and its actual rate of return. A ratio >1 means that the market thinks that future
profitability will be greater than the required rate of return - assuming that book value reflects the fair
values of the asset.

3. Price-to-Earnings ratio
2020 2019 2018 2017 2016
MSFT 34.85 26.16 45.72 20.88 19.58
AAPL 33.45 17.9 18.32 16.46 13.29
ORCL 16.73 15.6 53.17 19.76 18.74

Price-to-Earnings ratio = Market value per share / Earnings per share

This is the ratio for valuing a company that measures its current share price relative to its
earnings per share. It is used to determine the relative value of a company's shares. A high P/E ratio
could mean that a company's stock is overvalued, or else that investors are expecting high growth
rates in the future.
The 3 companies had the same starting point in the “safe zone”, which is a lot under the
benchmark’s P/E, and AAPL’s ratio was always. AAPL was quite undervalued all the time. From 2019,
it rose by nearly 50%, so technically, there was not as much room for growth as before.
In 2018, MSFT and ORCL reached a peak after a big boost of over 100%. The expectation of
investors for software companies like these two was really high and it reflected on the stock price.
Within 2 years, MSFT declined to the rate that is very close to the benchmark due to the increasing
EPS. Meanwhile, ORCL’s stock price witnessed a crash in the mid-2020 so it nearly came back to the
starting point. This situation gave them more potential to grow and could be concluded as a quite
undervalued.

4. EV-to-EBITDA ratio
2020 2019 2018 2017 2016
MSFT 22.47 17.59 15.16 12.67 10.63
AAPL 25.59 13.37 14 11.93 9.38
ORCL 11.59 12.41 13.46 13.87 12.41

EV-to-EBITDA ratio = EV / EBITDA

This is a ratio used to determine the value of a company. It looks at a company the way a
potential acquirer would by considering the company's debt. What's considered a "good" or "bad"
enterprise multiple will depend on the industry. The EV-to-EBITDA takes into account a company's
debt and cash levels in addition to its stock price and relates that value to the firm's cash profitability.
The 3 companies had higher ratios compared to the benchmark, especially MSFT and AAPL.
This ratio often incorporates the balance sheet and considers debt, but the statement does not reflect
in these cases, meanwhile ORCL - had the highest Debt ratio - also had the lowest EV/EBITDA. Because
of the slight increase in EPS but significant decline in market capitalization, ORCL’s ratio decreased and
made its value quite fair.
From 2017, MSFT and AAPL had very high ratios due to the strong rise in stock price, which
reflected the expectations of investors. Noticeably, within a year, AAPL’s market capitalization
rocketed and doubled the old number. This can be considered as these 2 companies were
fundamentally overvalued. However, valuation metrics are most useful when thinking about the
future. So the expected value of MSFT and AAPL, along with the optimis for technology retailers after
COVID-19 seem to be continued.
 PART 5: STOCK PRICE ESTIMATION
NASDAQ: MSFT
Oct 01, 2021
Market Price: $289.10

A. Discounted Cashflow Method

A discounted cash flow model (“DCF model”) is a type of financial model that values a company by
forecasting its cash flows and discounting the cash flows to arrive at a current, present value. The DCF
has the distinction of being both widely used in academia and in practice. This model estimates a
company’s intrinsic value (value based on a company’s ability to generate cash flows) and is often
presented in comparison to the company’s market value.

1. Free Cash Flow to the Firm (FCFF)

1.1. WACC Assumptions
Value Weight Required rate of return Calculation

Equity (fair value) 2,172,555 0.96 10.63%

Debt and finance lease liabilities 82,541 0.04 3.32% = 3.83% x (1-13.4%)
(fair value)
Equity (fair value) = No. shares of common stock outstanding × Current share price
= 7,514,891,248 × $289.10
= $2,172,555,059,796.80
Debt and finance lease liabilities (fair value).
Required rate of return on equity is estimated by using CAPM.
Required rate of return on debt.
Required rate of return on debt is after tax.
Estimated (average) effective income tax rate
= (13.80% + 16.50% + 9.80% + 16.90% + 8.40% + 15.00%) ÷ 6
= 13.40%
WACC = 10.37%

1.2. Growth rate

● PRAT Model
Average 2021 2020 2019 2018 2017 2016
Interest expense 2,346 2,591 2,686 2,733 2,222 1,243
Net income 61,271 44,281 39,240 16,571 21,204 16,798
Effective income tax rate
(EITR) 13.80% 16.50% 9.80% 16.90% 8.40% 15.00%
Interest expense, after
tax 2,022 2,163 2,423 2,271 2,035 1,057
Add: Common stock cash
dividends 16,871 15,483 14,103 12,917 12,040 11,329
Interest expense (after tax) and
dividends 18,893 17,646 16,526 15,188 14,075 12,386
EBIT(1 – EITR) 63,293 46,444 41,663 18,842 23,239 17,855
Short-term debt — — — — 9,072 12,904
Current portion of long-
term debt 8,072 3,749 5,516 3,998 1,049 —
Current finance lease
liabilities 791 540 317 176 113 25
Long-term debt,
excluding current portion 50,074 59,578 66,662 72,242 76,073 40,783
Long-term finance lease
liabilities 11,750 8,956 6,257 4,125 2,425 761
Stockholders’ equity 141,988 118,304 102,330 82,718 72,394 71,997
Total capital 212,675 191,127 181,082 163,259 161,126 126,470
Retention rate (RR) 0.7 0.62 0.6 0.19 0.39 0.31
Return on invested
capital (ROIC) 29.76% 24.30% 23.01% 11.54% 14.42% 14.12%

Averages
RR 0.47
ROIC 19.53%
FCFF growth rate (g) 9.18%
where:
Interest expense, after tax = Interest expense × (1 – EITR)
EBIT(1 – EITR) = Net income + Interest expense, after tax
RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
g = RR × ROIC

● Single-stage model
g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (2,255,096 × 10.37% – 54,552) ÷ (2,255,096 + 54,552) = 7.76%

● Forecast
Year Value gt
1 g1 9.18%
2 g2 8.82%
3 g3 8.47%
4 g4 8.11%
5 and thereafter g5 7.76%
 1.3. FCFF forecast
Terminal Value
Year Value value Calculation (10.37%)
1 FCFF0 54,552
1 FCFF1 59,557 = 54,552 × (1 + 9.18%) 53,963
2 FCFF2 64,811 = 59,557 × (1 + 8.82%) 53,207
3 FCFF3 70,299 = 64,811 × (1 + 8.47%) 52,292
4 FCFF4 76,003 = 70,299 × (1 + 8.11%) 51,224
5 FCFF5 81,900 = 76,003 × (1 + 7.76%) 50,014
Terminal = 81,900 × (1 + 7.76%) ÷
5 value 3,385,639 (10.37% – 7.76%) 2,067,514
Intrinsic value of capital 2,328,215
Less: Debt and finance lease
liabilities (fair value) 82,541
Intrinsic value 2,245,674
Stock price $298.83

2. Free Cash Flow to Equity (FCFE)

2.1. Required rate of return
Rate of return on LT Treasury Composite RF 1.96%
Expected rate of return on market portfolio E(RM) 11.85%
Systematic risk of Microsoft Corp.’s common stock β 0.88
Required rate of return on Microsoft Corp.’s common stock r 10.63%
where: r = RF + β [E(RM) – RF]

2.2. Growth rate

● PRAT Model
Average 2021 2020 2019 2018 2017 2016
Common stock cash
dividends 16,871 15,483 14,103 12,917 12,040 11,329
Net income 61,271 44,281 39,240 16,571 21,204 16,798
Revenue 168,088 143,015 125,843 110,360 89,950 85,320
Total assets 333,779 301,311 286,556 258,848 241,086 193,694
Stockholders’ equity 141,988 118,304 102,330 82,718 72,394 71,997
Retention rate 0.72 0.65 0.64 0.22 0.43 0.33
Profit margin 36.45% 30.96% 31.18% 15.02% 23.57% 19.69%
Asset turnover 0.5 0.47 0.44 0.43 0.37 0.44
Financial leverage 2.35 2.55 2.8 3.13 3.33 2.69
Retention rate 0.5
Profit margin 26.15%
Asset turnover 0.44
Financial leverage 2.81
FCFE growth rate (g) 16.22%

● Single-stage Model
g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (2,172,555 × 10.63% – 50,614) ÷ (2,172,555 + 50,614) = 8.12%
● Forecast
Year Value gt
1 g1 16.22%
2 g2 14.20%
3 g3 12.17%
4 g4 10.14%
5 and thereafter g5 8.12%

2.3. FCFE Forecast

Terminal Value
Year Value value Calculation (10.63%)
1 FCFE0 50,614
1 FCFE1 58,826 = 50,614 × (1 + 16.22%) 53,171
2 FCFE2 67,177 = 58,826 × (1 + 14.20%) 54,883
3 FCFE3 75,353 = 67,177 × (1 + 12.17%) 55,645
4 FCFE4 82,996 = 75,353 × (1 + 10.14%) 55,398
5 FCFE5 89,731 = 82,996 × (1 + 8.12%) 54,136
Terminal
5 value 3,851,632 = 89,731 × (1 + 8.12%) ÷ (10.63% – 8.12%) 2,323,749
Intrinsic value 2,596,982
Stock price $345.50

B. Comparable Method
A comparable company analysis (CCA) is a process used to evaluate the value of a company using the
metrics of other businesses of similar size in the same industry. CCA operates under the assumption
that similar companies will have similar valuation multiples, such as EV/EBITDA. Analysts compile a
list of available statistics for the companies being reviewed and calculate the valuation multiples in
order to compare them. A company's valuation ratio determines whether it is overvalued or
undervalued. If the ratio is high, then it is overvalued. If it is low, then the company is undervalued.
 1. Comparable companies selection
1.1. Choosing criteria
• Geography: Multinational companies
• Industry: Technology (Software / Hardware / Both)
• Financial size: Public companies with the same size of earnings and market capitalization
1.2. Peers decision
Ticker Company

AAPL Apple

ORCL Oracle

FB Facebook

AMZN Amazon

BABA Alibaba

GOOGL Alphabet
2. Metrics and Multiples: EV/Revenue, EV/EBITDA, P/E
3. Calculations
• Valuation multiples for each company

• Application of the median number

4. Implied share prices

• Using EV/Revenue: 140.58
• EV/EBITDA: 228.34
• P/E: 248.06
Average: $205.66/share
 C. Conclusion

MSFT is a bit overvalued and the results do not contradict with the answer in Part 4.

PART 6: SHARE REPURCHASE CONSIDERATION

A - Advantages & Disadvantages of the Repo
A share repurchase is when a public company purchases its own shares in the marketplace. Along with
dividends, share repurchases are a way that a company may return cash to its shareholders. It is a way
for a company to re-invest in itself.
1. Advantages
- Increase EPS on the remaining shares, benefiting shareholders after reducing the number of shares
available in the market
- Create a level of support for the stock, especially during a recessionary period or during a market
correction.
- Increase in stock value by creating a supply shock via a share repurchase.
- A way for a company to protect itself from a hostile takeover
2. Disadvantages
- The impact on earnings per share can give an artificial lift to the stock and mask financial problems
that can be revealed easily.
- This price increase may look good at first but will decrease to equilibrium when the market realizes
that the company has done nothing to increase its actual value.

B - Impacts on the financial statements

In general, a share repurchase has an obvious effect on a company’s Financial Statement:
• Reduce outstanding shares
• Reduce the company’s cash holdings, total asset base on Balance Sheet (cash expended).
• Shrink shareholders’ equity on the liabilities
• Improve performance metrics: ROA and ROE
However, buybacks do not impact the income statement line items (i.e., it is not recorded as
an expense), only the published EPS figure reported beneath the net income.
1. Impact on Book Value per Share:
If Market Price per Share is greater than Book Value per Share, Book Value per Share will decrease. If
Market Price per Share is less than Book Value per Share, Book Value per Share will increase.
This happens because the shares are repurchased at or above the market value, so when the
market price is more than the book value, more money is spent to buy shares having less value which
erodes the book value for remaining shares.
2. Impacts on Earnings per share
After repurchase, the number of shares outstanding will fall. The changes in earnings will decide
whether the EPS will rise or fall. If the company uses its own funds, the earnings will fall. If the company
uses borrowed funds, it will incur interest costs, the earnings will reduce equivalent to the after-tax
cost of borrowed funds.
An intuitive approach is to compare the earnings yield (EPS/Price per share) with the after-tax
yield on own funds or after-tax cost of borrowed funds. If earnings yield is higher, EPS will rise and vice
versa after the repurchase.
 Calculations
• Tax rate: 13.83%
• Credit spread: 0.75%
• Market risk premium: 5.5%
• 10-year US Treasury Bond: 1.5%

In case Microsoft uses the debt by issuing bonds to finance this plan
Assuming using debt for 5% share repurchase, Rd = 5.609%, which is smaller than earning yields
(P/E=35.87%); therefore, EPS increases. However, WACC at 5% share repurchase is higher than current
WACC, which decreases in value of the firm.

3. Tax shield
In many ways, a buyback is similar to a dividend because the company is distributing money to
shareholders albeit in an alternative way. Traditionally, a major advantage that buybacks had over
dividends was that they were taxed at the lower capital-gains tax rate. Dividends, on the other hand,
are taxed as ordinary income tax rates when received.
Tax rates and their effects typically change annually; thus, investors consider the annual tax rate on
capital gains versus dividends as ordinary income when looking at the benefits.
Calculations
• Tax rate: 13.83%
• Credit spread: 0.75%
• Market risk premium: 5.5%

The higher share repurchase, the higher tax expense. If we issue debt to buy back shares, size of the
tax shield gets larger because interest expense is higher. The tax shield gap is largest (48.1) with 10%
share repurchases.

C. Recommendations
1. Buying methods
• Open market stock buyback
A company buys back its shares directly from the market. The transactions are executed via the
company’s brokers. The buyback of shares generally happens over a long period of time as a large
number of shares must be bought. At the same time, unlike other methods, stock buybacks via open
market do not impose any legal obligations on a company to complete the buyback program.
Thus, a company enjoys the flexibility to cancel the stock buyback program at any time. The primary
advantage of the open market stock buyback is its cost-effectiveness because a company buys back
its shares at the current market price and doesn’t need to pay a premium.
• Fixed-price tender offer
A company makes a tender offer to the shareholders to buy back the shares on a fixed date and at a
fixed price. The price of the tender offer almost always includes a premium relative to the current
share price. Then, those shareholders who are interested in selling their stocks submit their number
of shares for sale to the company. Generally, a fixed price tender offer can allow completing a stock
buyback within a short period of time.
• Dutch auction tender offer
In a Dutch auction, a company makes a tender offer to the shareholders to buy back shares and
provides a range of possible prices, with setting the minimum price of a range above the current
market price. Then, the shareholders make their bids by specifying the number of shares and the
minimum price at which they are willing to sell their shares. A company reviews the bids received from
the shareholders and determines the suitable price within a previously specified price range to
complete the buyback program.
The main advantage of the Dutch auction is that it allows a company to identify the buyback price
directly from shareholders. Additionally, using such a method, the stock buyback program can be
completed within a relatively short time frame.
• Direct negotiation
A company directly approaches one or several large shareholders to buy back the company’s shares
from them. In such a scenario, the purchase price of the shares includes a premium. Note that the key
benefit of this method is that a company can negotiate the buyback price directly with a shareholder.
Due to this reason, this method can be highly cost-effective under certain conditions. However, direct
negotiations with shareholders can also be time-consuming.
2. Consultations
We suggest MSFT to buyback shares. As the stock price of MSFT is considered to be quite
overvalued, a share buyback could be a signal that MSFT is undervalued. If the company’s
management believes that, we may decide to do it to increase the price of the remaining shares.
Moreover, dividend payments do not provide much flexibility to the company’s
management since they must be paid on certain dates, and all common shareholders must be paid.
On the other hand, stock buybacks generally provide a high degree of flexibility since they do not
specify the amounts that must be paid or dates when the transactions must occur.

As we can see from the data, using excess cash can give us the lowest WACC (5.593%). However, to
get that minimum WACC, we have to buy 24.42% of share buyback and it is not fit with our criteria
which is a buyback of 5-10%.
Therefore, 5% of share buyback using debt financing is the optimal decision because WACC
would be lowest, which can optimize the firm value. Earnings per share increase a bit along with
the percentage of buyback at 5%.
PART 7: M&A DECISION CONSIDERATION
A - Microsoft’s M&A strategy
We believe that applying Artificial Intelligence in Education is one of Microsoft’s M&A
Rationale and criteria.
1. In Artificial Intelligence sector
Microsoft's vision for AI (artificial intelligence) is about people. It's about amplifying human ingenuity
through intelligent technology that will reason with, understand and interact with people and,
together with people, help us solve some of society's most fundamental challenges.
Microsoft believes that enterprises can achieve far more with a comprehensive AI strategy
rather than incremental changes through isolated use cases. Our vision for the enterprise is to enable
every company to transform by bringing AI to every application, every business process and every
employee – and as a result, achieve more than it ever thought possible.
Microsoft offers a wide array of Conversational AI technologies to support the creation of
intelligent bots: from a simple QnA bot, to a robust virtual agent that can learn continually and
maintain a seamless, personalised conversation across channels. Regardless of their needs, Microsoft
is helping enterprises build conversational interfaces that interact with users in more natural ways,
enabling them to create outstanding customer experiences and help employees maximise their time.
In addition to providing tools for developers to build their own bots, Microsoft is investing in
the next generation of enterprise-ready virtual assistants, so organisations can start reaping the
benefits of a conversational AI experience immediately. Using industry-leading AI technology,
Microsoft virtual assistants are able to better serve the needs of both enterprise customers and
employees. For customers, they understand user intent and navigate complex multi-turn dialogues in
a natural, conversational style – all while maintaining consistency with the customer across channels
and over time. These assistants also support customer service agents, for example, by providing
context on the issue at hand and making recommendations to expedite optimal outcomes.
2. In Education sector
In recent years, some of the world’s fastest growing companies have deployed artificial intelligence to
solve specific business problems. In fact, according to new market research from Microsoft on how AI
will change leadership, these high-growth companies are more than twice as likely to be actively
implementing AI as lower-growth companies. What’s more, high-growth companies are further along
in their AI deployments, with about half planning to use more AI in the coming year to improve
decision making compared to about a third of lower growth companies. Still, less than two in 10 of
even high-growth companies are integrating AI across their operations, the research found.
On the road to developing a strategy, executives and other business leaders are often stalled
by questions about how and where to begin implementing AI across their companies; the cultural
changes that AI requires companies to make; and how to build and use AI in ways that are responsible,
protect privacy and security, and comply with government rules and regulations.

B. Suggestion of acquisition
Microsoft should have an eye on Coursera (NYSE: COUR)
1. About Coursera
Coursera Inc. (COUR) is an online education provider that offers students access to massive open
online courses, specializations, and even degrees. Founded in 2012 by Stanford computer science
professors Andrew Ng and Daphne Koller, Coursera doesn’t create educational content. Rather, the
company partners with universities and other organizations to provide them with an online platform
that students pay to access. Coursera is partnered with over 200 universities, businesses, and
nonprofits. They plan to expand in Latin America, and most recently, partnered with universities in
Mexico, Colombia, and Argentina to expand its reach.
 2. Reason for suggestion
Strong revenue growth
One of Coursera's advantages is that it operates in the high-growth online education industry.
Forecasts predict the global e-learning market will expand from 2019's $101 billion to more than $370
billion by 2026.
The pandemic helped accelerate this market growth. Last year, Coursera saw a boost to its
revenue and registered users (whom it calls learners) as more people and institutions turned to online
learning as a solution to pandemic-related stay-at-home restrictions.
Coursera's 2020 revenue rose 59% year over year to reach $293.5 million, nearly double
2019's 30% year-over-year growth. Last year's outsize results continued into the first quarter of 2021.
Coursera generates revenue from three sources: individual consumers, enterprise customers, and its
degree program. Consumers and enterprise clients pay a monthly subscription fee for access to the
company's learning platform and its slew of courses, although the former can make one-time
purchases for individual classes. The degree segment involves the company collecting fees from
educational institutions using Coursera's platform to offer online learning.
Equally strong user growth
Coursera's revenue growth was fueled by a meteoric rise in learners. The company had 81.5 million
registered learners at the end of the first quarter, a 56% year-over-year increase from last year's 52.4
million.
The pandemic's impact to Coursera's user growth is apparent when comparing last year to
pre-pandemic years.
Making money by attracting paying users relatively cheaply
Coursera is known for its free courses: Of the company’s roughly 77 million users, just 3.6 million have
paid for a course or other offering. But Coursera’s business model allows the company to spend less
than competitors to attract those paying users, analysts say.
In 2020, about 50% of Coursera’s degree students were previously registered on the site and
more than 30% of the company’s enterprise leads came from the consumer platform, according to
the company.
The company also has the potential to increasingly benefit from network effects — or the idea
that each additional user makes the platform more attractive to other users — as it grows. Each new
client creates an opportunity to expand the company’s content library, increasing the appeal of the
platform for other clients.
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