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Microsoft Corporation
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=== What are the key assumptions used to estimate the return? === The key assumptions used to generate this prediction include the discount rate, revenue estimates and the perpetual growth rate. Considering that the company is at maturity we would typically use a lower discount rate to account for the fact we do not expect to see large scale growth in the company. Below we have detailed relevant discount rate values for companies in the varying growth stages. {| class="wikitable" |+ !Description !Value !Commentary |- |Which valuation model was used? |Discounted Cash Flow |Research suggests that in terms of estimating the expected return of an investment over a period of 12-months or more, the approach that is more accurate is the discounted cash flow approach, so that's the approach that he Stockhub users suggest to use here. Microsoft does pays cash dividends, however the companies ability to pay these dividends is not a point of concern. Accordingly, the Stockhub users suggest using the free cash flow valuation method (rather than the dividend discount model). |- |Which Financial forecasts were used? |Avg. estimates taken from Yahoo Finance<ref>https://uk.finance.yahoo.com/quote/MSFT?p=MSFT</ref> |We have used experts forecasts to predict revenue over the next two years and then used forecasting methods to predict values up to 5 years into the future. |- | colspan="3" | ==== Growth Stage 1 (Startup) ==== |- |Discount Rate(%) |30% |There are two key risk parameters for a firm that need to be estimated: its cost of equity and its cost of debt. A key way to estimate the cost of equity is by looking at the beta (or betas) of the company in question, the cost of debt from a measure of default risk (an actual or synthetic rating) and apply the market value weights for debt and equity to come up with the cost of capital. |- |Probability of Success(%) |70% |Research suggests that for a company in this growth stage (i.e. stage 1), the rate is suitable 70% of the time. |- | colspan="3" | ==== Growth Stage 2 (Growth) ==== |- |Discount Rate(%) |15% |There are two key risk parameters for a firm that need to be estimated: its cost of equity and its cost of debt. A key way to estimate the cost of equity is by looking at the beta (or betas) of the company in question, the cost of debt from a measure of default risk (an actual or synthetic rating) and apply the market value weights for debt and equity to come up with the cost of capital. |- |Probability of Success(%) |80% |Research suggests that for a company in this growth stage (i.e. stage 2), the rate is suitable 80% of the time. |- | colspan="3" | ==== Growth Stage 3 (Maturity) ==== |- |Discount Rate(%) |10% |There are two key risk parameters for a firm that need to be estimated: its cost of equity and its cost of debt. A key way to estimate the cost of equity is by looking at the beta (or betas) of the company in question, the cost of debt from a measure of default risk (an actual or synthetic rating) and apply the market value weights for debt and equity to come up with the cost of capital. |- |Probability of Success(%) |100% |Research suggests that for a company in this growth stage (i.e. stage 3), the rate is suitable 100% of the time. |- | colspan="3" | ==== Growth Stage 4 (Renewal/Decline) ==== |- |Discount Rate(%) |<10% |There are two key risk parameters for a firm that need to be estimated: its cost of equity and its cost of debt. A key way to estimate the cost of equity is by looking at the beta (or betas) of the company in question, the cost of debt from a measure of default risk (an actual or synthetic rating) and apply the market value weights for debt and equity to come up with the cost of capital. |- |Probability of Success(%) |100% |Research suggests that for a company in this growth stage (i.e. stage 4), the rate is suitable 100% of the time. |}
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