<1. What is your investment life for msft? 25 years? Infinite?>
I'm not sure I understand this question. If what you mean is what is the "horizon" of the investment, I did not explicitly indicate one. The income projections are for 10 years, but that is irrelavant, do to the dynamic nature of the industry, so I picked a much shorter 3 year horizon for the DCF matrix. These are the values reflected in the DCFvaluation matrix analysis.
<2. What is risk premium you assigned to msft comparing to long bond>
There is no risk premium assigned to Microsoft in my model, at least not one that is explicitly derived from it's investment quality as compared to the long bond. The risk free rates that I input are
1.) short term taxable risk free,
2.) short term non- taxable risk free,
3.) Long term taxable fisk free
These rates are used as benchmark value to
1.) compare the absolute return of MSFT as compared to holding a risk free investment (implictly caluated by the model),
2.) to independantly ascertain the investment income and accurately calculate cash flows for cash rich companies (MSFT) and companies with high debt service (as in LBO"s and LBO prospect analysis and valuation)
In order for one to speculate upon future interest rates, one cosiderably weakens the reliabiltiy of the model in question. Any and all speculation and assumption leads to a less reliable result. The proper way to ascertain values in an environment with several uncertain variables is to create a scenario/sensitivity analysis. Therefore you have elimanted much speculation and nearly all assumptions (depending on the power of your computer) can be played out in a variety of scenarios. I am against attempting to explicitly calculate the risk of a corporation by tacking points on a long bond. To do this you have to guess, I don't care how smart you are. That is how Milken made a fortune in junk bonds. He demonstrated that banks, brokers and lending institutions did not know how to value many companies, they could not properly predict and value the results of future cash flows, and growth prospects because hey relied on the old school balance sheet method of valuation. he was right, therefore he became rish and made many others rich with him while recycling many companies through the injection of debt that the experts said the company couldn't handle, Turner communication. MCI, McCaw celluelar, etc.
<3. Given that short term for msft is fairly predictable, do you use different risk discount rates for near term and for long term?>
All discount rates used are those of the present. Again, to guess future rates is to wantonly assume when it is not necessary. When conducts a Disounted Cash Flow analysis, one is valuing the company as of the time the analysis is conducted, ex. I buy 100 shares of MSFT today, I want to know what the value of MSFT is right now as a function of projected cash flows, and as compared it to what I would receive if I held my money at the risk free rate for a similar amount of time. The discounting factors and risk free rate that you choose are the ones that are reallity for you when you make your investment, not in future scenarios.
<4. What growth rate you used for msft? 5. Considering that no company can grow 20% forever, do you assign different growth rates for msft for the near term and long term?>
The income, expense and revenue projections, and thier year by year anticipated rates of increase are in the income and cash flow statements of the model. see rcmfinancial.com
As for the actual rates used to determine valuation, I used the Perpetual growth method, which proffers a sensitivity analysis/scenario of values with points at multiples of 4, 5 and 6 for results see rcmfinancial.com
The Sensitivlty analysis offers EBITDA values at 5x, 24, 43, 62, 81, and 100x in a pivot table using target prices per share ranging form $10.00 to $215. see rcmfinancial.com
<6. Do you believe that technology companies such as msft, appl and sybs can have same evaluation model as for regular companies?>
If the evaluation model is empirically based on cash flows, DAMN SKIPPY. Cash flow anlaysis rarely steers you wrong, if conducted properly and if accurate, lucent data is input. If the company is making money, they are making money, PERIOD. The losing investors are those that allow subjectivity and the markets opinion at the present moment sway their actions, often in an unprofitable manner. I use to be a broker, belive me stocks get hit (especially small cap stocks) for reasons that are far from fundamental (at one time, a trader tanked one small cap stock held in the inventory of his friend at another firm because he caught him doing the nasty with his girfriend the night before, now try to chart that with Fibonacci :-))
With a decent capitaliztion (to prevent wanton and random manipulation) the true value of a stock will eventually emerge because enough people in the know will take advantage of any arbitarge situations, and once those not in the know witness the results a mad rush can entail (see my boom/bust story in eralier posts).
Keep in mind though, their are several methods of DCF valuation, which befit different situations. My models use EBIT, EBITDA, and perpetual growth. Perpetual growth is what I use for software comapnies.
A boring, but very comprehensive piece on corporarte valuation is incorprated in the text of the book Mergers, Restructuring and Corporate Control and of course the standard cash flow and valuation texts that are abound. I find that many successful buyout artists are masters at the corporate valuation game, consistently out guessing the market as to the true valuation of thier prospects, therefore, I tend to become a student of thier methods.
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