Question

Assume the free cash flow to common equity for Microsoft is for the terminal year. Also assume that Microsoft will grow at a constant rate of 3 percent and that Microsoft’s cost of equity is 8 percent. Compute Microsoft’s terminal value using the information below.

Microsoft Corporation	2011	2010	2009
Net income…………………..	$23,958	$18,846	-
Stockholders’ equity………..	57,083	46,175	$39,558
Dividends…………………....	5,394	4,547	-
Net common stock issued….	(7,656)	(7,682)	-

Answer 1

Free cash flow (Net income) for year 2011				23958
Free cash flow (Net income) after year 2011 will increase at a constant rate of 6.0%
Growth rate = 3% or				0.03
ke = 8% or				0.08
free cash flow for year 2012 = FCF 2011 * (1+g)
		23958 * (1+0.03)
		24676.74
Terminal value of business = FCF for year 2012 / (ke -g)
		24676.74	/(0.08-0.08)
		493534.8
So, Microsoft's Terminal value is $493,534.80.