Cash flow valuation models, Part 2

Microsoft, the world’s largest software company in the world, founded in 1975, by Bill Gates and Paul Allen had during the year of 2009, amazing revenue of approximately US$ 58.5 billion. The following pages will analyze Microsoft’s ability to turn assets into profit.

Forecast Model Assumptions for Sales

According to Soffer & Soffer (2003) forecasting free cash flows requires an analysis of historical results as well as knowledge of the businesses and the industry’s expectations and the ability to interpret the information gathered.

Cash Flow Models

The forecasting process is completed in four steps. First it is necessary to develop the equations that will be used, known as modeling the cash flows. In order to be consistent the process for calculating future assumptions should be done in exactly the same manner as the calculations of historical ratios. The chosen ratios in this example are the revenue growth rate, the gross margin percentage, operating margin percentage, and the effective tax rate, and the asset turnover rate.

Model Assumptions & Computations

The next step is to calculate the ratios for the historical amounts and, using assumptions about likely future events, calculate future ratios using the same methods as the historical ratios. The assumptions used to forecast results in this report are explained here.

One of the most important ratios to consider when forecasting future results is the sales growth because revenues from the company’s primary, or core, activities are the foundations of its free cash flows. The calculations completed in the accompanying Excel spread sheet are based on information from Microsoft Corporation’s 10-K filing, retrieved from the Security & Exchange Commission’s website (Securities & Exchange Commission, 2010). The figures show that Microsoft’s sales revenue grew 15% in 2007, according to Datamonitor (2010), 18% in 2008 but shrunk by 3% in 2009 in comparison to the industry...

Microsoft, the world’s largest software company in the world, founded in 1975, by Bill Gates and Paul Allen had during the year of 2009, amazing revenue of approximately US$ 58.5 billion. The following pages will analyze Microsoft’s ability to turn assets into profit.

Forecast Model Assumptions for Sales

According to Soffer & Soffer (2003) forecasting free cash flows requires an analysis of historical results as well as knowledge of the businesses and the industry’s expectations and the ability to interpret the information gathered.

Cash Flow Models

The forecasting process is completed in four steps. First it is necessary to develop the equations that will be used, known as modeling the cash flows. In order to be consistent the process for calculating future assumptions should be done in exactly the same manner as the calculations of historical ratios. The chosen ratios in this example are the revenue growth rate, the gross margin percentage, operating margin percentage, and the effective tax rate, and the asset turnover rate.

Model Assumptions & Computations

The next step is to calculate the ratios for the historical amounts and, using assumptions about likely future events, calculate future ratios using the same methods as the historical ratios. The assumptions used to forecast results in this report are explained here.

One of the most important ratios to consider when forecasting future results is the sales growth because revenues from the company’s primary, or core, activities are the foundations of its free cash flows. The calculations completed in the accompanying Excel spread sheet are based on information from Microsoft Corporation’s 10-K filing, retrieved from the Security & Exchange Commission’s website (Securities & Exchange Commission, 2010). The figures show that Microsoft’s sales revenue grew 15% in 2007, according to Datamonitor (2010), 18% in 2008 but shrunk by 3% in 2009 in comparison to the industry...