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Free Cash Flows (FCF)

This document details the analysis of Microsoft’s Free Cash Flow (FCF) using their 2006 annual report data, which was discussed in class on September 5, 2007. Key components include the calculation of NOPAT, NOWC, CAPEX, and FCF, ultimately estimating Microsoft's equity value. The findings indicate a calculated per-share price of $8.01, compared to its market price of $28.48 at the time, suggesting that Microsoft stock was significantly overpriced. This thorough approach demonstrates the importance of understanding the value of a company through FCF analysis.

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Free Cash Flows (FCF)

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

  2. NOPAT = EBIT(1 - Tax rate) NOPAT2006 = $16,472 (1 - 0.31) = $11,366 Net Operating Profit after Taxes (NOPAT)

  3. NOWC06 = ($6,714 + $1,478 + $9,316) - ($2,909 + $1,938) = $12,661 NOWC05 = ($4,851 + $491 + $7,180) - ($2,086 + $1,662) = $8,744 Operating CA Operating CL NOWC = - Net Operating Working Capital (NOWC) DNWC = $12,661 – $8,744 = $3,887

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

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

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

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

  8. 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).

  9. Compare to Today’s Stock Price • Today’s Stock Price is $28.48. • 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. • 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!

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