Editing Microsoft Corporation (section)

== Valuation ==

=== What is the expected return of an investment in the company? ===
The Stockhub users estimate that the expected return of an investment in the company over the next five years is 12%, which equates to an annual return of 2.3% (with dividends reinvested). In other words, an £1,000 investment in the company is expected to return £1,120 in five years time. The assumptions used to estimate the return figure can be found in the table below.

=== 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.
|}

=== Other Key Inputs ===
{| class="wikitable"
|+
!Description
!Value 
!Commentary
|-
| colspan="3" |
==== Market Capitalisation ====
|-
|Current Market Capitalisation($)
|2.593T
|As at 27th July 2023, the current value of Microsoft Corporation is $2.593 Trillion<ref>https://uk.finance.yahoo.com/quote/MSFT?p=MSFT</ref>.
|-
|Which time period do you want to use to estimate the expected return?
|Between now and five years time
|Research suggests that following a market crash, the average amount of time it takes for the price of a stock market to return to its pre-crash level (i.e. the recovery period) is at least three years. Accordingly, Stockhub suggests that to account for general market cyclicity, it's best to estimate the expected return of the company between now and five years time.
|-
| colspan="3" |
==== Perpetual Growth Rate ====
|-
|Perpetual Growth Rate used(%)
|2.5%
|The OECD suggests that the global economy is expected to grow by approximately 2.7% in 2023<ref>https://www.oecd.org/newsroom/global-economic-outlook-improving-albeit-to-a-low-growth-recovery.htm</ref>, and so it doesn't make much sense to use a value larger than this. Therefore, to be conservative the StockHub user suggests a value of 2.5%.
|}

=== Sensitivity Analysis ===
The main inputs that result in the greatest change in the expected return of the Microsoft corporation investment are, in order of importance (from highest to lowest):

# The Discount Rate - we have used a default value of 8%
# The Perpetual Growth Rate - we have used a default value of 2.5% 

Below we have detailed the effects of a 50% change to both the discount rate an the perpetual growth rate, an investor should consider values which are most suitable to them. 
{| class="wikitable"
|+
|}

==== Sensitivity Analysis applied to Microsoft Stock - Expected returns over the next 5 years ====
{| class="wikitable"
!Main input
!50% Lower
!Unchanged
!50% Higher
|-
|The Discount rate
|310%
|12%
|(38)%
|-
|Perpetual Growth Rate
|(8)%
|12%
|38%
|}