Question

Assume the free cash flow to common equity for Microsoft is for the terminal year. Also...

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)

-
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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.
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