Free Cash Flows FCF n The Microsoft Example

Net Operating Profit after Taxes (NOPAT) NOPAT = EBIT(1 - Tax rate) NOPAT 2006

Net Operating Working Capital (NOWC) Operating NOWC = CA CL NOWC 06 NOWC 05

CAPEX (capital expenditures) n Called Net fixed assets or Net Plant and Property (NPP)

Free Cash Flow (FCF) for 2005 FCF = NOPAT + Depreciation – NWC –

Use the Weighted Average Cost of Capital (WACC) to find the Value of Microsoft

Subtract out Long Term Debt n For our purposes here, we are calling Microsoft’s

Per Share Value Calculating the Price per share: Divide the calculated value by the

Compare to Today’s Stock Price is $28. 48. n Therefore, we conclude that Microsoft

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Free Cash Flows (FCF) n The Microsoft Example we did in class on Wednesday, September 5 2007. n See the Word document: – “From Microsoft Financial Statements - Annual Rpt 2006” for the numbers used in class. 1

Net Operating Profit after Taxes (NOPAT) NOPAT = EBIT(1 - Tax rate) NOPAT 2006 = $16, 472 (1 - 0. 31) = $11, 366 2

Net Operating Working Capital (NOWC) Operating NOWC = CA CL NOWC 06 NOWC 05 = ($6, 714 + $1, 478 + $9, 316) - ($2, 909 + $1, 938) = $12, 661 = ($4, 851 + $491 + $7, 180) - ($2, 086 + $1, 662) = $8, 744 DNWC = $12, 661 – $8, 744 = $3, 887 3

CAPEX (capital expenditures) n Called Net fixed assets or Net Plant and Property (NPP) or Property and Equipment, Net n NPP 2006 = $3, 044 n NPP 2005 = $2, 346 n CAPEX = $3, 044 - $2, 346 = $698 4

Free Cash Flow (FCF) for 2005 FCF = NOPAT + Depreciation – NWC – CAPEX = $11, 366 + $903 - $3, 877 - $698 = $7, 694 In class my numbers may have been a little different? 5

Use the Weighted Average Cost of Capital (WACC) to find the Value of Microsoft n Value = FCF/WACC n Value = $7, 694/. 10 n Value = $76, 940 million 6

Subtract out Long Term Debt n For our purposes here, we are calling Microsoft’s Long Term Unearned Revenue their Long Term Debt. SO: n Equity Value = $76, 940 - $1, 764 n Equity Value = $75, 173 7

Per Share Value Calculating the Price per share: Divide the calculated value by the number of shares outstanding: • Calculated Price: $75, 178/9, 380 * • Thus the Calculated Price = $8. 01 * I went to Yahoo Finance, put in the ticker symbol (MSFT), hit enter, clicked on key statistics and looked at the number of shares outstanding (down the list a bit). 8

Compare to Today’s Stock Price is $28. 48. n Therefore, we conclude that Microsoft is a very overpriced stock and not a buy today. In fact, we may even say an owner of stock needs to sell their shares. n n Remember that we are only using one year’s Free Cash Flow. We really want to use more than one year’s data but you now understand HOW we calculate the VALUE of a company! 9