Complete a firm valuation for Microsoft.

Value the stock using

1) Dividend Discount Model

2) Valuation Using Multiples

To value the firm using the DDM model, you will need to estimate/obtain the following parameters: D1, r, and g.

o Your D1 will be the expected divined per share for 2020. You can use your firms financial statements to analyze its dividends over the past several years and use its current dividends (paid out in 2019) to compute 2020 expected dividend. Remember, D1 = Do * (1+g). You will need your g calculated in order to obtain D1.

o You will compute your r from CAPM equation. Detailed directions on how to do that are provided in a separate PPT file entitled CAPM+CompValuation and posted in Company Valuation Project folder on Blackboard. Also, it will be covered in class together with Chapter 8.

o Your g estimate will not be a result of a precise calculation, but rather, your best estimate given your thorough analysis of both quantitative and qualitative information.

• You will pull up the analyst reports to assess what dividend growth rates different agencies are predicting.

• Your will read extensively to assess if your company appears to be a high growth or a low growth firm. Is it launching a new product some time soon? What are the growth prospects for your firm? And so forth.

• You will look at historical dividends for several years and compute retroactive annual growth rates for your firm by using the formula D1 = Do * (1+g) and solving for g.

• You will also compute g from the following formula: g = ROE * plowback ratio.

• Finally, you will assess the differing levels of growth rates that you obtained by the above means, and decide on the growth rate to use in your DDM formula, to compute

  D1 from Do.

Remember that DDM formula assumes a constant g the growth rate that

should coincide with that of the economy (see Chapter 7 PPT).

** Notes on valuation using multiples: Valuation using multiples is typically intended as an alternative to other models, such as DDM model. It uses the industry P/E ratio to compute the stock price of your firm. To value your firm using multiples, you will multiply your firms most recent earnings per share (or its estimate for the next year) by the industry P/E ratio (not your own firms P/E ratio!). If unable to locate P/E ratio for your industry, you may alternatively apply the average P/E obtained from P/Es of your main competitors. The latter method will be less precise, however.