Analysts: Alex Burke, Emily Emery, Raul Guevara, Boone Plager

Applied Portfolio Management

MSFT

Microsoft Corporation

BUY

Information Technology

Sector:

Report Date: Market Cap (mm) Return on Capital EPS (ttm) Current Price 12-mo. Target Price

$255,667 86.0% $2.79 $30.35 $34.00

Annual Dividend Dividend Yield Price/Earnings (ttm) Economic Value-Added (ttm) Free Cash Flow Margin

$0.72 2.4% 10.9 $20,389 38.3%

Business Description Microsoft Corporation develops, licenses, and supports a range of software products and services for various computing devices worldwide. The company’s Windows & Windows Live Division segment offers PC operating system that primarily includes Windows 7 and Windows Vista operating systems; Windows live suite of applications and Web services; and Microsoft PC hardware products. Its Microsoft’s Server and Tools segment provides Windows Server operating systems, Windows Azure, Microsoft SQL Server, SQL Azure, Windows Intune, Windows Embedded, Visual Studio, Silverlight, system center products, Microsoft consulting services, and product support services. This segment also offers enterprise Investment Thesis MSFT shows strong fundamentals with solid growth in revenue, EBIT, and NOPAT. EPS and DPS has seen considerable growth over the past three years. MSFT has maintained an impressive ROIC to WACC spread which will be great for increased value creation. MSFT has strong brand name recognition and 90% market share in operating systems for PC's. Additionally, they are expanding their progressive software design and home entertainment. MSFT holds their cash to give themselves financial flexibility in order to grow in a vast array of areas via acquisitions. MSFT has strong past fundamentals, growth in dividends, and a future outlook to expand dividends and EVA. With conservative assumptions, we find MSFT to be undervalued and give a BUY recommendation. ANNUALIZED 3-YEAR CAGR Total Revenue EBIT NOPAT Earnings Per Share Dividends Per Share

5.0% 4.5% 8.3% 12.9% 13.3%

Margins and Yields

2007

Operating Margin Free Cash Flow Margin Earnings Yield Dividend Yield

37.1% 34.8% 5.1% 1.4%

39.8% 35.8% 9.6% 2.2%

2009 35.9% 32.6% 5.4% 1.7%

0.90 25.3% 6.0% 0.7% 1.2

MSFT

35% 30% 25% 20% 15% 10% 5% 0% -5% -10%

5/7/2012

Compared With: International Business Machines Accenture plc and the S&P 500 Index

IBM

ACN

MSFT

^SPX

40% 30% 20% 10% 0% -10% -20%

ROA

ROE

ROIC

100% 80%

Free Cash Flow Total Invested Capital Total Assets Economic Value-Added Market Value-Added

2008

Beta (S&P 500 Index) Annualized Alpha Institutional Ownership Short Interest (% of Shares) Days to Cover Short

12.9% 2.9% 14.3% 8.9% -3.3%

2010

60% 40% 20% 0% 2006

2007

2011

39.5% 38.3% 8.2% 2.0%

39.3% 38.3% 9.0% 2.1%

2008

EBIT

2009

2010

2011

Net Operating Profit After Tax

$30,000 $25,000 $20,000 $15,000

Per Share Metrics

2007

Earnings Dividends NOPAT Free Cash Flow

1.44 0.40 1.36 1.19

2008 1.90 0.44 1.92 1.18

Economic Value-Added

2009 1.63 0.52 1.74 2.32

2010

2011

2.13 0.52 2.10 2.04

2.73 0.64 2.67 1.87

$10,000 $5,000 $0 2006

Market Valued-Added $300,000

25

$20,000

$250,000

20

$15,000

2008

Price/Earnings

$25,000

$200,000

2007

2009

2010

2011

Price/Free Cash Flow

15

$150,000 $10,000

$100,000

$5,000 $0 2006

Datasource: Capital IQ

2007

2008

2009

2010

2011

10

$50,000

5

$0

0 2006

2007

2008

2009

2010

2011

20

28

PRVit® -- the Performance Risk Valuation investment technology

PRVit® is powered by EVA® and EVA Momentum®,

from EVA Dimensions LLC

MICROSOFT CORP

registered marks of EVA Dimensions LLC

Microsoft Corporation develops, licenses, and supports a range of software products and services for various computing devices worldwide. The company's Windows & Windows Live Division segment offers PC operating system that primarily includes Windows 7 and Windows Vista operating systems; Windows live suite of applications and Web services; and Microsoft PC hardware products. Its Microsoft's Server and Tools segment provides Windows Server operating systems, Windows Azure, Microsoft SQL Server, SQL Azure, Windows Intune, Windows Embedded, Visual Studio, Silverlight, system center products, Microsoft consulting services, and product support services. This segment also offers enterprise consulting services; and training and certification to developers and information technology professionals, as well as builds standalone and software development lifecycle tools for software architects, developers, testers, and project managers. The company's Online Services Division segment provides online information and content through Bing, MSN portals, and adCenter, as well as Atlas online tools for advertisers. Its Microsoft Business Division segment offers Microsoft office; Microsoft Exchange; Microsoft SharePoint; Microsoft Lync; Microsoft Dynamics ERP and CRM; and Microsoft Office Web Apps, as well as office 365, an online service, offering Microsoft Office, Exchange, SharePoint, and Lync. The company's Entertainment and Devices Division segment provides Xbox 360 entertainment platform, which includes the Xbox 360 gaming and entertainment console, Kinect for Xbox 360, Xbox 360 video games, Xbox LIVE, and Xbox 360 accessories; Mediaroom, an Internet protocol television software; and Windows Phone that provide Microsoft Office and Xbox LIVE functionality. It markets and distributes its products and services through original equipment manufacturers, distributors, and resellers, as well as through online. Microsoft was founded in 1975 and is headquartered in Redmond, Washington.

Performance Score (P) P1 Profitability

MSFT

25th

50th

75th

% Russell

23.9% 52.3%

-5.3% -3.4%

0.6% 0.7%

4.6% 4.8%

98 99

The growth rate in the firm's economic profit (its EVA) MSFT

25th

50th

75th

% Russell

2.8% 5.8% 3.8%

-1.0% -0.3% -1.9%

0.6% 0.7% 0.5%

2.4% 2.2% 2.6%

78 91 82

Risk Score (R) 47

R1

Lower is better

Volatility

Variability in stock price and the EVA profit margin

Stock Price Volatility EVA Margin Variability 2

R2

MSFT

25th

50th

75th

% Russell

24% 3.4%

36% 2.0%

46% 4.4%

57% 11.8%

5 42

Vulnerability 25th

50th

75th

% Russell

Free Cash Flow Rate Op Cash Gen Return

37% 148%

6% 54%

0% 23%

-10% 11%

3 5

Total Debt/Total Capital Total Debt/EBITDAR

15% 0.4

8% 0.7

25% 1.9

45% 3.5

36 14

Valuation Score (V)

32

88

V1

Wealth Ratios

Valuation multiples to book capital (as adjusted)

MVA Margin MVA Spread 5

Sell 0-19

MSFT

25th

50th

75th

% Russell

236% 464%

-8% -7%

37% 30%

129% 117%

86 93

V2 Wealth Multiples

Valuation multiples to cash flow, earnings, EVA

EBITDAR Multiple NOPAT Multiple Future Growth Reliance

MSFT

25th

50th

75th

% Russell

4.9 10.1 -10%

5.5 14.6 -13%

7.5 19.8 20%

10.2 27.3 62%

18 7 27

100

Sales vs. Capital

ROC vs. COC 140%

$70,000

120%

$60,000

$40,000 $30,000

$100,000

$20,000 $10,000

20%

$0

0% 3/07

3/08

3/09

Sales

3/10

Capital

3/11

3/12

40

20

100

80

3/09

ROC

3/10

40 20 0 Actual Valuation Vs. Russell 3000 (V=32nd Percentile)

80

MSFT

60

40

20

0 100

80

$0 3/08

60

MSFT PRVit Score Vs Industry 100

$50,000

3/07

3/11

COC

3/12

60

40 20 0 Actual Valuation Vs. Industry (V=8th Percentile) PRVit Scores

$20,000

100

$18,000

90

$16,000

80

$14,000

70

$12,000

60

$10,000

50

$8,000

40

$6,000

30

$4,000

20

$2,000

10

$0 3/07

3/08

Buy 80-100

60

$200,000

60%

Overweight 60-79

MSFT

Market Value Added (MVA) vs. EVA

80%

40%

Hold 40-59

80

$250,000

$150,000

100

49

MSFT PRVit Score Vs Market 94

100%

$50,000

(vs Industry)

0

The PRVit Matrix: depicts a company’s PRVit score by plotting its “intrinsic” value score – what PRVit rates the firm is truly worth based on its risk-adjusted performance, i.e., its comparative P-R score – against its actual valuation score – which reflects the company’s current trading multiples. Companies rated “Hold” plot along the diagonal, which is where the firms’ actual valuation multiples align with their intrinsic values. “Buys” plot in the upper right green zone, which is where PRVit rates the firms as worth more than their current share values, and “Sells” appear in the lower left red zone, where the firms’ P-R scores fall short of their V scores. The top grid rates the firms against the entire market, and the lower one ranks them against industry peers (which is the basis for the official “PRVit” score).

$80,000

Underweight 20-39

100

Lower is better

94

PRVit Score

MSFT's PRVit score is at the 100th percentile of all firms in its industry, which leads to a recommendation to Buy. MSFT is more attractively priced in relation to its true value than all but a few of the stocks in its industry.

Leveraged, negative cash flow firms are suspect MSFT

PRVit Score Industry (vs Market) Median

MSFT's outstanding performance (97th percentile vs. Russell 3000 companies), coupled with its moderate risk (52nd percentile), indicates a very high intrinsic valuation is warranted (91st percentile), which compared to its actual market valuation (32nd percentile at its $30.98 share price) makes for a PRVit score of 94th percentile vs. the market.

Higher is better

P2 Trend EVA Momentum (vs Cap) 3 Year Trend (ΔEVA/Cap) Last Quarter (ΔEVA/Cap)

52

$30.98

Financial strength in generating a return on capital over the full cost

EVA Margin (EVA/Sales) EVA Spread (EVA/Capital) 88

4-May-12

Intrinsic Value Vs. Russell 3000 (P(97)-R(52)=91st Percentile)

99

Share Price

Intrinsic Value Vs. Industry (P(95)-R(80)=77th Percentile)

97

Date

Software

MSFT

3/09

3/10

MVA

3/11

0

3/12

EVA

EVA Dimensions LLC l 15 Watersedge Court l Locust Valley, NY 11560 l Support Hot Line 1.888.500.3560 l [email protected] No part of this report may be reproduced or distributed in any form except to authorized licensees of EVA Dimensions LLC

Copyright 2010 All Rights Reserved

3/07

3/08

3/09

Vs Market

3/10

3/11

Vs Industry

3/12

Microsoft Corporation

NASDAQ: MSFT

Analysts: Alex Burke, Emily Emery, Raúl Guevara, Boone Plager Student Investment Fund Portfolio

Strategic Plan Product Innovation and Momentum  Cloud based computing solutions for the one third to one half of major US companies who plan to switch to the cloud for human resources, finances, sales and other operational applications  Kinect gaming system will revolutionize the way people interact with their gaming systems, movies, music, and other entertainment  Windows Phone is aimed at being more user friendly while running on a uniform operating system



MSFT will use the Windows 8 Tablet to cut into the IPad’s tablet market share by using the popular Windows operating system. This is viewed as easier to use to consumers and more familiar to more people Partnerships and Acquisitions  Bing integrating with Yahoo! accounting for about a quarter of all search inquiries  Nokia will provide assistance in designing relatively newer, more user friendly smart phones  Skype will provide an easier way for people to communicate by voice or video through the internet via PC’s, phones, and XBOX

Microsoft Corporation

NASDAQ: MSFT

Innovation for the Future  Smart devices will help people communicate more efficiently and effectively in more locations  Cloud based computing will make things easier and cheaper to access for consumers and businesses alike  Software that will ensure that all the smart devices will run on one consistent platform  Home entertainment that will combine all of the consumers watching, gaming, and musical needs Through product innovation, partnerships, and acquisitions, Microsoft plans to increase market share in the entertainment, gaming, information technology, smart device, and software sectors. Apple currently has the largest market share of tablets (70%) and second largest in smart phones (29.6%) and has done so by being first to the market. Microsoft has had a history of learning from costly mistakes made by their competitors, who had originally beat them to the market, and then gaining the majority of the market share (i.e. Lotus 123 vs. Excel, Netscape vs. Internet Explorer). This is viewed as an opportunity for Microsoft to gain a significant market share in both of these segments. Microsoft’s proposed strategy will allow them to continue enjoying growing profits and margins which will lead to faster and larger returns to their investors.

Historical Performance Microsoft, over the past three years has grown total revenue, EBIT, & NOPAT. Additionally, EPS and FCF increased at a compounded annual growth rate of 12.9%. DPS has increased at an average of 13.3% per year for the past three years. This is exceptional for the student investment fund, especially with our tax exempt status. Although EVA increased on average 9% per year, MVA decreased on average 3.3% per year. There was a four year decline in MVA that ended in 2010 where we saw a sharp correction by the market, increasing MVA in 2011.

Cumulative Stock Returns Trailing 24 Months  MSFT, IBM, ACN, and the IT sector in general all had strong run ups for the past 6 months

Microsoft Corporation



NASDAQ: MSFT

Recently, IBM outperformed MSFT which outperformed ACN

Cumulative Stock Returns vs. the Market  MSFT is outperforming the S&P by 25% since February 2012 and currently is outperforming the S&P by closer to 30%  MSFT has been increasing the spread between their returns and the S&P’s returns for the last 6 months

Microsoft Corporation

NASDAQ: MSFT

Earnings and Dividend Yields  MSFT has a dividend yield of 2.1%  MSFT has an earnings yield of 9.0% Both yield metrics increased consistently over the past three years, indicating growing fundamentals and is as much of a bargain as it was during the depths of the financial crisis in 2008.

Operating Efficiency Through Margins  MSFT’s gross profit margin is around 80%  MSFT’s operating profit margin is about 40% Since 2007, Microsoft has consistently held their margins at extremely high levels. Even during years of turbulence in the economy (2008 & 2009) we see that MSFT is able to have little to no decrease in efficiency.

Microsoft Corporation

NASDAQ: MSFT

Relative Valuation Microsoft’s P/E and P/FCF have been near steady at ten for the past two years. Microsoft has previously traded at higher relative valuation ratios indicating that this stock might be a bargain for the current earnings and free cash flows. With great growth potential and an extremely high ROIC-WACC spread, with these low relative valuation ratios it Microsoft is viewed as cheaply priced for its growing fundamentals. Other companies in the IT sector trade at P/E’s closer to 16. as a possible inefficiency in the market’s pricing of this stock as compared to Microsoft’s growing fundamentals.

Liquidity and Debt  MSFT only acquired short term debt in 1991, but paid it off the following year  Since 1991, MSFT did not accumulate any debt until 2009 and has since continued to increase and hold debt  MSFT has attributed their accumulation of debt to slightly shift their leverage, use the debt to buy back additional stock, and grow their dividend

Microsoft Corporation

NASDAQ: MSFT

Profitability  MSFT’s ROA, ROE, & ROIC have maintained impressive levels  ROA on average about 20%  ROE on average about 40%  ROIC on average about 70-90% Since 2006, Microsoft’s ROA, ROE and ROIC show high levels and outstanding consistency. This displays the ability generate profits on investments, equity, and expansions throughout the company. This also corroborates a potential for strong and long term economic growth.

Value Creation  EVA has increased by over 25% in the past 3 years  Although strong growth in EVA, MVA decreased from 2007-2010.  Since 2010 the market has appreciated MSFT and seen MVA grow

Microsoft Corporation

NASDAQ: MSFT

SWOT & Porter’s Summary & Catalysts Microsoft’s liquidity, reputable brand name, and high market share will enable Microsoft to continue to develop, promote, and profit from a strong product pipeline. Microsoft has several products and services recently released and still in development that will drive revenue growth. Microsoft has embraced the threat of competitor and market innovation to fuel their own evolution towards natural user interfaces, social networking, and cloud based computing. Microsoft’s high supplier power will ensure that these new products will have a place in the next generation of information technology. Though piracy remains a problem for Microsoft, it in no way threatens the company’s growth or profitability. Kinect for Windows -MSFT sold 18 million Xbox Kinect devices since the product’s release in November 2010. In February 2012, MSFT released the Kinect for Windows. MSFT chose to open the product for developers to explore the wide variety of uses for this device, including medical, education, and commercial and consumer applications. Already, developers have applied the Kinect device to enable doctors to navigate MRIs and CAT scans, train nurses to perform CPR, provide interactive lessons for schoolchildren, and test drive a concept vehicle. Additionally, Kinect for Windows offers a natural user interface that will enhance future Windows operating systems.

Windows 8 -The next iteration of the Windows operation system will represent a dramatic shift in the way that people interact with technology. Microsoft emphasized a natural user interface in Windows 8’s design. Windows 8 is being made to work on touch-based tablets, as well as mouse-and-keyboard desktops. Windows 8 allow users to access their personal settings on any PC, using the SkyDrive cloud. The tile desktop will integrate the user’s personal files with their social connections. Windows 8 will also include an improved resource management system. Tablets -Microsoft plans to release the Windows 8 Tablet in late 2012. Apple’s IPad has a stranglehold on the market share for tablets currently holding 70%. However, there is

Microsoft Corporation

NASDAQ: MSFT

demand out there for a more versatile and powerful mobile platform. Rivals like HP, Android, and Blackberry have failed to capitalize on this opportunity. Microsoft’s version of the tablet will run on windows which will provide a consistent interface and cross-platform applications that exist on both the desktop and tablet. This will provide easier and more user friendly access to applications for the regular consumer and businesses that use tablet computing. Microsoft plans to push Apple’s market share down below 50% by the middle of 2013.

Entertainment Hub – 60% of Xbox 360 users have Xbox live memberships. As of 2012, Xbox Live users now log more hours watching tv, movies, and playing music than playing video games, marking a shift from a video game system to an all-purpose entertainment hub. This year, Xbox Live will add 40 content providers including HBOgo, UFC, MLB.TV, Xfinity on Demand, and Vudu. Users will be able to search videos with voice commands through the Xbox Kinect. Additionally, Microsoft’s recent acquisition of Skype will enable video communication through the Xbox. Furthermore, MSFT plans to release the Xbox 720 within the near future (next three holiday seasons).

Office365 – Microsoft maintains a 90% market share in desktop productivity software with their Office series. Stock analysts have expressed concern over Microsoft’s ability to

Microsoft Corporation

NASDAQ: MSFT

maintain office software revenue due to increased competition. Microsoft has responded strongly to competition with Office365, an affordable and invaluable collaboration tool for businesses of all sizes. Office365 leverages Microsoft’s huge market share. Only Office365 will enable business to simultaneously create and edit Microsoft Office files in cloud. Office365 unifies Microsoft Exchange, SharePoint, Office, and Skype to provide large time & cost savings.

Model Assumptions In our model analysis of Microsoft we maintained conservative modeling assumptions. With these conservative assumptions in mind, our Intrinsic Value of Free Cash Flow Model estimates Microsoft’s intrinsic value at $43.57 per share for 2011, making Microsoft drastically undervalued. Income Statement Forecasting:  Revenue Growth: MSFT’s revenue growth has a 5-Year CAGR of 9.8% and nearly doubled its revenue growth from 2010 to 2011  Share Growth: In 2008 MSFT announced a plan to buy back $40 billion dollars in shares by 2013. They have since spent $27.8 billion dollars in share repurchases  Dividend Growth: MSFT has seen excellent dividend growth with a 5-Year CAGR of 12.8%. In 2010 MSFT froze their dividend due to negative revenue growth in 2009. After issuing a first quarter dividend of $.20 per share in 2012, it is estimated that the 2012 annual dividend will be $.80 per share up from $.64 per share in 2011

Microsoft Corporation

NASDAQ: MSFT

Balance Sheet:  Current Liabilities: Since 2008, MSFT has seen a downward trend in current liabilities as a percent of sales of -8.4%. We conservatively followed this trend in our forecasting.  Total Equity: MSFT has increased their total equity as a percent of sales by over 20% in the last 5 years. In our forecasting, we maintained steady conservative growth.

WACC Assumptions: A WACC of 8.7% was calculated using 1. Total Debt Cost of 4.5% 2. Cost of Equity: Cost of Equity of 8.9% was calculated using the following inputs:  Risk-Free Rate of 2.27%  Market Risk Premium of 7%  Beta of .95: MSFT has a 5-year beta of 1.00 and a 3-year beta of .9. To give a more accurate view of MSFT’s current volatility we smoothed the beta down slightly from the 5-year beta.

Microsoft Corporation 

NASDAQ: MSFT

Long-Term Growth Rate: We applied a conservative long-term growth rate for MSFT of 2% looking forward.

Microsoft Corporation

PRVit:

NASDAQ: MSFT

Microsoft Corporation

MSFT

Sector

Information Technology

Stock Price

$30.47

Historical Income Statements

Report Date

5/7/2012

Historical Balance Sheets

2006

2007

2008

2009

2010

2011

2006

2007

2008

2009

2010

2011

Total Revenue Cost of Goods Sold Gross Profit

44,282 7,650 36,632

51,122 10,693 40,429

60,420 11,598 48,822

58,437 12,155 46,282

62,484 12,395 50,089

69,943 15,577 54,366

Cash and Equivalents Short-Term Investments Total Cash & ST Invest.

6,714 24,382 31,096

6,111 14,944 21,055

10,339 10,832 21,171

6,076 23,665 29,785

5,505 31,042 36,559

9,610 41,761 51,371

SG&A Expense R&D Expense Dep. & Amort. Other Oper. Exp.

12,276 6,584 0 26,510

14,359 7,121 0 32,173

16,587 8,164 0 36,349

16,296 9,010 0 37,461

16,685 8,714 0 37,794

17,830 9,043 0 42,450

Total Receivables Inventory Prepaid Expenses Total Current Assets

9,316 1,478 0 49,010

11,338 1,127 0 40,168

13,589 985 0 43,242

11,192 717 0 49,280

13,014 740 0 55,676

14,987 1,372 0 74,918

Operating Income Interest Expense Other Non-Oper. Exp. EBT ex-Unusuals

17,772 0 119 19,401

18,949 (230) (76) 19,962

24,071 (106) 309 25,268

20,976 (38) (954) 20,728

24,690 (151) (165) 25,217

27,493 (295) (199) 27,899

Gross PPE Accumulated Depr. Net PPE Long-Term Investments

7,223 (4,179) 3,044 9,232

9,366 (5,016) 4,350 10,117

12,544 (6,302) 6,242 6,588

15,082 (7,547) 7,535 4,933

16,259 (8,629) 7,630 7,754

17,991 (9,829) 8,162 10,865

Total Unusual Exp. Earnings Before Tax

(1,139) 18,262

139 20,101

(1,454) 23,814

(907) 19,821

(204) 25,013

172 28,071

Goodwill Total Assets

3,866 69,597

4,760 63,171

12,108 72,793

12,503 77,888

12,394 86,113

12,581 108,704

Income Tax Expense Net Income

5,663 12,599

6,036 14,065

6,133 17,681

5,252 14,569

6,253 18,760

4,921 23,150

LIABILITIES AND EQUITY Accounts Payable

Diluted EPS Total Diluted Shares Dividends Per Share Effective Tax Rate Earnings Per Share Total Common Shares EBITDA EBIT EBITDAR Free Cash Flow/Share Year-end Stock Price

ASSETS

1.20 10,531 0.35

1.42 9,886 0.40

1.87 9,470 0.44

1.62 8,996 0.52

2.10 8,927 0.52

2.69 8,593 0.64

Accrued Expenses Short-Term Debt Total Current Liab. Long-Term Debt

31.0%

30.0%

25.8%

25.8%

25.0%

17.5%

Pension Benefits Total Liabilities

1.21 10,438 18,675 17,772 18,946 1.38 $28.11

1.44 9,742 20,385 18,949 20,710 1.83 $28.28

1.90 9,328 25,943 24,071 26,341 2.32 $19.67

1.63 8,945 23,267 20,976 23,742 2.13 $30.34

2.13 8,813 27,197 24,690 27,727 2.72 $25.98

2.73 8,490 30,030 27,493 30,555 3.16 $30.35

Total Revenue

Net Income

Preferred Equity Common Stock & APIC Retained Earnings Treasury Stock Total Common Equity Total Equity Total Liab. and Equity

Earnings Per Share

$80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0

MSFT Performance Analysis. Datasource: CapitalIQ

2011

4,197

3,283 1,182 26,147 4,939

3,575 1,208 28,774 11,921

0 29,493

0 32,074

0 36,507

0 38,330

0 39,938

0 51,621

0 59,005 (20,130) 0 40,104 40,104 69,597

0 60,557 (31,114) 0 31,097 31,097 63,171

0 62,849 (27,703) 0 36,286 36,286 72,793

0 62,382 (23,793) 0 39,558 39,558 77,888

0 62,856 (17,736) 0 46,175 46,175 86,113

0 63,415 (8,195) 0 57,083 57,083 108,704

$2.50

$30,000

EBIT

$25,000 $20,000 $15,000 $10,000 $5,000

$0.00 2010

4,025

3,156 3,684 27,034 3,746

EBITDA

$0.50 2009

3,324

2,934 0 29,886 0

$35,000

$1.00

2008

4,034

2,325 0 23,754 0

Dividends Per Share

$1.50

2007

3,247

1,938 0 22,442 0

$3.00

$2.00

2006

2,909

$0 2006

2007

2008

2009

2010

2011

Historical Performance, Page 1 of 4

2006

2007

2008

2009

2010

2011

Analysts: Alex Burke, Emily Emery, Raul Guevara, Boone Plager

Margins

2006

Gross Profit Margin Operating Profit Margin Net Profit Margin Free Cash Flow Margin

2007

82.7% 40.1% 28.5% 32.5%

Gross Profit Margin

2008

79.1% 37.1% 27.5% 34.8%

80.8% 39.8% 29.3% 35.8%

2009 79.2% 35.9% 24.9% 32.6%

2010

2011

80.2% 39.5% 30.0% 38.3%

Operating Profit Margin

Relative Valuation

77.7% 39.3% 33.1% 38.3%

Price/Earnings

90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

2006

Price/Earnings Price/Book Price/Free Cash Flow Earnings Yield Dividend Yield

2007

23.3 4.2 20.4 4.3% 1.2%

2008

19.6 4.4 15.5 5.1% 1.4%

Price/Free Cash Flow

2009

10.4 2.5 8.5 9.6% 2.2%

18.6 3.5 14.3 5.4% 1.7%

Earnings Yield

25

12%

20

10%

2010

2011

12.2 2.7 9.6 8.2% 2.0%

11.1 2.4 9.6 9.0% 2.1%

Dividend Yield

8%

15

6% 10

4%

5

2%

0 2006

2007

2008

Liquidity and Debt

2009

2006

2010

2011

2007

2008

2009

2010

1.45 1.41 82.09 61.34 0.0% 0.0% 227.08

1.82 1.80 69.91 81.50 9.5% 9.5% 552.00

2.13 2.10 76.02 84.44 10.7% 7.1% 163.51

3.0

3.0

85

2.5

2.5

80

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

65

0.0

60

Current Ratio Quick Ratio Days Sales Outstanding Inventory Turnover Long-Term Debt to Equity Total Debt to Assets Times Interest Earned

2007

0% 2006

2.18 2.12 76.79 29.96 0.0% 0.0% N/A

1.69 1.64 80.95 45.36 0.0% 0.0% 82.39

Current Ratio

2007

2008

Net Profit Margin

2009

2010

2009

2011

2011

2.60 2.56 78.21 50.98 20.9% 12.1% 93.20

Net Profit Margin Total Asset Turnover Equity Multiplier Return on Assets Return on Equity Return on Invested Capital

2007

2008

2009

Total Asset Turnover

2010

2007

2008

2009

2010

MSFT Performance Analysis. Datasource: CapitalIQ

2011

2010

29.3% 0.83 2.01 24.3% 48.7% 73.9%

24.9% 0.75 1.97 18.7% 36.8% 81.8%

30.0% 0.73 1.86 21.8% 40.6% 94.6%

33.1% 0.64 1.90 21.3% 40.6% 86.0%

Long-Term Debt to Equity

0%

80%

Historical Performance, Page 2 of 4

2011

5%

2.0

2011

2010

10%

2007

2008

ROA

1.5 2009

2009

2011

15%

100%

1.6 2008

2008

2010

20%

2.1

1.7

2009

Total Debt to Assets

Equity Multiplier

1.8

2007

2008

25%

2006

1.9

2006

2007

27.5% 0.81 2.03 22.3% 45.2% 76.4%

2011

0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 2006

28.5% 0.64 1.74 18.1% 31.4% 78.1%

90 80 70 60 50 40 30 20 10 0 2006

2007

Inventory Turnover

70

Free Cash Flow Margin

2006

2006

75

2011

45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

2010

Profitability

Days Sales Outstanding

Quick Ratio

0.0 2006

2008

2009

ROE

2010

2011

ROIC

60% 40%

20% 0% 2006

2007

2008

2009

2010

2011

Analysts: Alex Burke, Emily Emery, Raul Guevara, Boone Plager

Net Fixed Assets

Capital, NOPAT & FCF

Total Invested Capital

Net Oper. Working Capital Net Fixed Assets Total Invested Capital Net Oper. Profit After Tax Free Cash Flow Compared With: NOPAT Per Share International Business Machines Free Corp. Cash Flow Per Share Accenture plc Return on Invested Capital

$30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 2006

2007

2008

2009

Net Oper. Profit After Tax

2010

2011

$20,000 $15,000 $10,000 $5,000 $0 2008

Cost of Capital Equity Capitalization Total Debt Preferred Stock Value of All Securities Effective Tax Rate Risk-Free Rate Beta Market Risk Premium CAPM Cost of Equity

2009

2011 255,667

2010

Weight 95.1%

10,000 5,000 0 2010

MSFT Performance Analysis. Datasource: CapitalIQ

18,197 8,162 26,359 22,673 15,895 2.67 1.87 86.0%

MSFT

ACN

^SPX

40%

10% 0% -10% -20%

Value Creation Economic Value-Added

0.2% 0.0%

Market Valued-Added PV of Future FCFs Value of Non-Oper. Assets Total Intrinsic Firm Value Intrinsic Value of Equity Per Share Intrinsic Value Year-End Stock Price Over (Under) Valuation/Sh % Over (Under) Valued

8.7%

2011

Year-End Stock Price $35

250,000

$30

150,000

2009

2011

11,951 7,630 19,581 18,518 17,977 2.10 2.04 94.6%

20%

300,000

200,000

15,000

2008

2010

11,505 7,535 19,040 15,574 20,721 1.74 2.32 81.8%

30%

Market Valued-Added

20,000

2007

IBM

% Cost Wgt Cost 8.9% 8.5%

25,000

2006

2009

17,945 6,242 24,187 17,872 11,039 1.92 1.18 73.9%

2011

13,129 4.9% 4.5% 0 0.0% 0.0% 268,796 100.0% 17.5% Long-Term Growth Rate: 2.27% 2.0% 1.00 Alternative Beta: 7.0% 0.95 8.9% Weighted Average Cost of Capital:

Economic Value-Added

2008

13,004 4,350 17,354 13,259 11,610 1.36 1.19 76.4%

35% 30% 25% 20% 15% 10% 5% 0% -5% -10%

$25,000

2007

2007

12,661 3,044 15,705 12,261 N/A 1.17 N/A 78.1%

S&P 500 Index

MSFT

Free Cash Flow

2006

$15

50,000

$5

0

$0

2008 15,775

2009 13,924

2010 16,821

2011 20,389

197,584 220,037 31,096 251,133 251,133 $23.85 $28.11 $4.26 15.2%

250,837 227,499 21,055 248,554 248,554 $25.14 $28.28 $3.14 11.1%

219,923 236,179 21,171 257,350 257,350 $27.18 $19.67 ($7.51) -38.2%

171,988 235,929 29,741 265,670 258,240 $28.71 $30.34 $1.63 5.4%

155,481 238,401 36,547 274,948 268,827 $30.11 $25.98 ($4.13) -15.9%

198,584 243,169 51,371 294,540 281,411 $32.75 $30.35 ($2.40) -7.9%

69.4%

67.7%

65.2%

73.1%

85.9%

77.3%

Over (Under) Valuation/Sh

% Over (Under) Valued

$6 $4 $2 $0 ($2) ($4) ($6) ($8) ($10)

$20 $10

2007 11,755

Per Share Intrinsic Value

$25

100,000

2006 10,900

2006

2007

2008

2009

2010

2011

Historical Performance, Page 3 of 4

20% 10% 0% -10% -20% -30% -40% -50% 2006

2007

2008

2009

2010

2011

Analysts: Alex Burke, Emily Emery, Raul Guevara, Boone Plager

MSFT 2006

Microsoft Corporation 2007 2008

Sector 2010

2009

Information Technology 2011 Average

Manual

2012E

2013E

2014E

2015E

2016E

Total Revenue Cost of Goods Sold

44,282 7,650

51,122 10,693

60,420 11,598

58,437 12,155

62,484 12,395

69,943 15,577

9.6%

N/A

74,140

78,588

83,303

86,635

88,368

Gross Profit SG&A Expense R&D Expense Dep. & Amort. Other Oper. Exp.

36,632 12,276 6,584 0 26,510

40,429 14,359 7,121 0 32,173

48,822 16,587 8,164 0 36,349

46,282 16,296 9,010 0 37,461

50,089 16,685 8,714 0 37,794

54,366 17,830 9,043 0 42,450

79.4%

N/A

58,864

62,396

66,139

68,785

70,161

Operating Income Net Interest Expense Other Non-Oper. Exp. EBT ex-Unusuals

17,772 1,510 119 19,401

18,949 1,089 (76) 19,962

24,071 888 309 25,268

20,976 706 (954) 20,728

24,690 692 (165) 25,217

27,493 605 (199) 27,899

38.3%

N/A

28,414

30,118

31,926

33,203

33,867

Total Unusual Exp. Earnings Before Tax

(1,139) 18,262

139 20,101

(1,454) 23,814

(907) 19,821

(204) 25,013

172 28,071

Income Tax Expense Net Income

5,663 12,599

6,036 14,065

6,133 17,681

5,252 14,569

6,253 18,760

4,921 23,150

29.0%

30.0%

22,242

23,576

24,991

25,991

26,510

Basic EPS Total Common Shares Dividends Per Share

1.21 10,438 0.35

1.44 9,742 0.40

1.90 9,328 0.44

1.63 8,945 0.52

2.13 8,813 0.52

2.73 8,490 0.64

-4.0% 12.8%

N/A N/A

2.73 8,146 0.73

3.02 7,817 0.82

3.23 7,739 0.90

3.39 7,661 0.97

3.46 7,661 1.01

2007 1. Revenue Growth 2. Gross Margin 3. Operating Margin 4. Net Margin 5. Common Shares Growth 6. Dividend Growth

15.4% 79.1% 37.1% 27.5% -6.7% 14.3%

Historical Growth and Margins 2008 2009 2010 18.2% 80.8% 39.8% 29.3% -4.2% 10.0%

-3.3% 79.2% 35.9% 24.9% -4.1% 18.2%

6.9% 80.2% 39.5% 30.0% -1.5% 0.0%

1. Total Revenue

2011 11.9% 77.7% 39.3% 33.1% -3.7% 23.1%

Forecast Defaults to Historical Avg. User Can Enter 1 Manual Avg. or Year-by-Year Values Average Manual 2012E 2013E 2014E 2015E 2016E 9.6% 79.4% 38.3% 29.0% -4.0% 12.8%

6.0%

6.0%

6.0%

4.0%

2.0%

14.0%

12.0%

-1.0% 10.0%

-1.0% 8.0%

0.0% 4.0%

30.0%

2. Gross Profit

3. Operating Income

$100,000

$80,000

$40,000

$80,000

$60,000

$30,000

$40,000

$20,000

$20,000

$20,000

$10,000

$0

$0

$0

$60,000 $40,000

4. Net Income $30,000 $20,000 $10,000 $0

MSFT Performance Analysis. Datasource: CapitalIQ

5. Total Common Shares 12,000 10,000 8,000 6,000 4,000 2,000 0

6. Dividends Per Share $1.50 $1.00 $0.50 $0.00

Income Statement Forecast, Page 1 of 1

Analysts: Alex Burke, Emily Emery, Raul Guevara, Boone Plager

MSFT 2006

ASSETS

Microsoft Corporation 2007 2008

Information Technology 2011 Average

2014E

2015E

2016E

Cash and Equivalents Short-Term Investments Total Cash & ST Invest.

6,714 24,382 31,096

6,111 14,944 21,055

10,339 10,832 21,171

6,076 23,665 29,785

5,505 31,042 36,559

9,610 41,761 51,371

12.4%

N/A

9,195

9,747

10,332

10,745

10,960

Total Receivables Inventory Prepaid Expenses Total Current Assets

9,316 1,478 0 49,010

11,338 1,127 0 40,168

13,589 985 0 43,242

11,192 717 0 49,280

13,014 740 0 55,676

14,987 1,372 0 74,918

21.2% 1.6%

N/A N/A

15,729 1,217

16,673 1,290

17,673 1,367

18,380 1,422

18,748 1,451

86.1%

N/A

63,862

67,694

71,756

74,626

76,118

Gross PPE Accumulated Depr. Net PPE

7,223 (4,179) 3,044

9,366 (5,016) 4,350

12,544 (6,302) 6,242

15,082 (7,547) 7,535

16,259 (8,629) 7,630

17,991 (9,829) 8,162

11.1%

N/A

8,247

8,741

9,266

9,636

9,829

Long-Term Investments Goodwill Total Assets

9,232 3,866 69,597

10,117 4,760 63,171

6,588 12,108 72,793

4,933 12,503 77,888

7,754 12,394 86,113

10,865 12,581 108,704

134.1%

N/A

99,431

105,397

111,721

116,190

118,513

LIABILITIES AND EQUITY Accounts Payable Accrued Expenses Short-Term Debt Total Current Liabilities

4,847 2,909 1,938 0 22,442

5,572 3,247 2,325 0 23,754

6,968 4,034 2,934 0 29,886

6,480 3,324 3,156 3,684 27,034

7,308 4,025 3,283 1,182 26,147

7,772 4,197 3,575 1,208 28,774

11.3%

N/A

45.0%

N/A

Long-Term Debt Pension Benefits Total Liabilities

0 0 29,493

0 0 32,074

0 0 36,507

3,746 0 38,330

4,939 0 39,938

11,921 0 51,621

8.3%

N/A 0

Preferred Equity Common Stock & APIC Retained Earnings Treasury Stock Total Common Equity Total Equity Total Liab. and Equity

0 59,005 (20,130) 0 40,104 40,104 69,597

0 60,557 (31,114) 0 31,097 31,097 63,171

0 62,849 (27,703) 0 36,286 36,286 72,793

0 62,382 (23,793) 0 39,558 39,558 77,888

0 62,856 (17,736) 0 46,175 46,175 86,113

0 63,415 (8,195) 0 57,083 57,083 108,704

68.8%

N/A

2007 12.0% 22.2% 2.2%

2008 17.1% 22.5% 1.6%

2010 8.8% 20.8% 1.2%

2011 13.7% 21.4% 2.0%

1. Cash and Equivalents 2. Total Receivables 3. Inventory

2009

Sector 2010

Percent of Sales 2009 10.4% 19.2% 1.2%

1. Cash and Equivalents $15,000 $10,000

Manual

2012E

2013E

Note: Forecasting Payables + Accruals together in row 19 below 8,352 8,853 9,385 9,760 9,955 31,139

31,435

32,488

32,488

32,696

6,121 6,488 6,878 7,153 7,296 0 0 7,430 6,121 13,129 Note: Forecasting ST Debt + LT Debt together in row 22 above

57,829

61,692

65,810

68,875

70,694

Forecast Defaults to Historical Avg. User Can Enter 1 Manual Avg. or Year-by-Year Values Average Manual 2012E 2013E 2014E 2015E 2016E 12.4% 21.2% 1.6%

2. Total Receivables $20,000

3. Inventory $1,500

$15,000

$1,000

$10,000 $5,000 $0

MSFT Performance Analysis. Datasource: CapitalIQ

$500

$5,000

$0

$0

Balance Sheet Forecast, Page 1 of 2

Analysts: Alex Burke, Emily Emery, Raul Guevara, Boone Plager

4. Total Current Assets 5. Net PPE 6. Total Assets 7. Payables and Accruals 8. Total Current Liabilities 9. Total Debt 10. Total Equity

2007 78.6% 8.5% 123.6% 10.9% 46.5% 0.0% 60.8%

2008 71.6% 10.3% 120.5% 11.5% 49.5% 0.0% 60.1%

Percent of Sales 2009 84.3% 12.9% 133.3% 11.1% 46.3% 12.7% 67.7%

4. Total Current Assets $80,000

2010 89.1% 12.2% 137.8% 11.7% 41.8% 9.8% 73.9%

2011 107.1% 11.7% 155.4% 11.1% 41.1% 18.8% 81.6%

Forecast Defaults to Historical Avg. User Can Enter 1 Manual Avg. or Year-by-Year Values Average Manual 2012E 2013E 2014E 2015E 2016E 86.1% 11.1% 134.1% 11.3% 45.0% 42.0% 40.0% 39.0% 37.5% 37.0% 8.3% 68.8% 78.0% 78.5% 79.0% 79.5% 80.0%

5. Net PPE $150,000

$10,000 $8,000 $6,000 $4,000 $2,000 $0

$60,000 $40,000 $20,000 $0

7. Payables and Accruals

$100,000 $50,000 $0

8. Total Current Liabilities

$10,000

$40,000

$8,000

$30,000

$6,000

6. Total Assets

9. Total Debt $15,000 $10,000

$20,000

$4,000 $2,000

$10,000

$0

$0

$5,000 $0

10. Total Equity $80,000 $60,000 $40,000 $20,000 $0

MSFT Performance Analysis. Datasource: CapitalIQ

Balance Sheet Forecast, Page 2 of 2

Analysts: Alex Burke, Emily Emery, Raul Guevara, Boone Plager

MSFT 2006 Total Revenue Gross Profit Operating Income Net Income Retained Earnings Total Common Shares Total Diluted Shares Earnings Per Share Dividends Per Share

Cash and Equivalents Total Receivables Inventory Total Current Assets Net PPE Total Assets Payables and Accruals Total Current Liabilities Total Debt Total Equity

44,282 36,632 17,772 12,599 (20,130) 10,438 10,531 $1.21 $0.35

Microsoft Corporation

Sector

Historical Income Statement Highlights 2007 2008 2009 2010 51,122 40,429 18,949 14,065 (31,114) 9,742 9,886 $1.44 $0.40

60,420 48,822 24,071 17,681 (27,703) 9,328 9,470 $1.90 $0.44

58,437 46,282 20,976 14,569 (23,793) 8,945 8,996 $1.63 $0.52

2011

2012E

62,484 50,089 24,690 18,760 (17,736) 8,813 8,927 $2.13 $0.52

69,943 54,366 27,493 23,150 (8,195) 8,490 8,593 $2.73 $0.64

74,140 58,864 28,414 22,242 8,103 8,146 8,245 $2.73 $0.73

2012E

2006

Historical Balance Sheet Highlights 2007 2008 2009

2010

2011

6,714 9,316 1,478 49,010 3,044 69,597 4,847 22,442 0 40,104

6,111 11,338 1,127 40,168 4,350 63,171 5,572 23,754 0 31,097

5,505 13,014 740 55,676 7,630 86,113 7,308 26,147 6,121 46,175

9,610 14,987 1,372 74,918 8,162 108,704 7,772 28,774 13,129 57,083

10,339 13,589 985 43,242 6,242 72,793 6,968 29,886 0 36,286

Information Technology

6,076 11,192 717 49,280 7,535 77,888 6,480 27,034 7,430 39,558

Total Revenue

Report Date

Forecasted Income Statement Highlights 2013E 2014E 2015E

9,195 15,729 1,217 63,862 8,247 99,431 8,352 31,139 6,121 57,829

78,588 62,396 30,118 23,576 25,292 7,817 7,912 $3.02 $0.82

83,303 66,139 31,926 24,991 43,327 7,739 7,591 $3.23 $0.90

Forecasted Balance Sheet Highlights 2013E 2014E 2015E 9,747 16,673 1,290 67,694 8,741 105,397 8,853 31,435 6,488 61,692

10,332 17,673 1,367 71,756 9,266 111,721 9,385 32,488 6,878 65,810

10,745 18,380 1,422 74,626 9,636 116,190 9,760 32,488 7,153 68,875

Net Income

$100,000

$30,000

$80,000

$25,000

$10,000

$20,000

$5,000

$0

$0

Cash and Equivalents

$80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0

MSFT Performance Analysis. Datasource: CapitalIQ

88,368 70,161 33,867 26,510 80,656 7,661 6,989 $3.46 $1.01

2016E 10,960 18,748 1,451 76,118 9,829 118,513 9,955 32,696 7,296 70,694

Earnings Per Share

$15,000 $40,000

2016E

Dividends Per Share

$4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00

$20,000

$60,000

Total Current Assets

86,635 68,785 33,203 25,991 61,881 7,661 7,284 $3.39 $0.97

2006

5/7/2012

Total Assets

Total Equity

Net PPE 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0

$140,000 $120,000 $100,000 $80,000

$60,000 $40,000

$20,000 $0

Financial Analysis & Valuation, Page 1 of 5

Total Debt 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0

Analysts: Alex Burke, Emily Emery, Raul Guevara, Boone Plager

Margins

2006

Gross Profit Margin Operating Profit Margin Net Profit Margin Free Cash Flow Margin

2007

82.7% 40.1% 28.5% 32.5%

Gross Profit Margin

2008

79.1% 37.1% 27.5% 22.7%

2009

80.8% 39.8% 29.3% 18.3%

2010

79.2% 35.9% 24.9% 35.5%

80.2% 39.5% 30.0% 28.8%

Operating Profit Margin

2011

2012E

77.7% 39.3% 33.1% 22.7%

79.4% 38.3% 30.0% 32.0%

Net Profit Margin

90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

2013E

2014E

79.4% 38.3% 30.0% 29.6%

79.4% 38.3% 30.0% 29.6%

2015E

2016E

79.4% 38.3% 30.0% 30.3%

79.4% 38.3% 30.0% 30.9%

Free Cash Flow Margin

40% 35% 30% 25% 20% 15% 10% 5% 0%

Liquidity and Debt Days Sales Outstanding Inventory Turnover Total Debt to Equity Total Debt to Assets

2006

2007

76.79 29.96 0.0% N/A

N/A

Days Sales Outstanding

2008

80.95 45.36 0.0%

2009

82.09 61.34 0.0% N/A

80 75 70 65 60

2006 0.64 1.74 18.1% 31.4% 78.1%

Total Asset Turnover

2007 0.81 2.03 22.3% 45.2% 76.4%

MSFT Performance Analysis. Datasource: CapitalIQ

78.21 50.98 23.0% 12.1%

2012E 77.44 60.92 10.6% 6.2%

2008

2014E

77.44 60.92 10.5% 6.2%

77.44 60.92 10.5% 6.2%

2015E

2016E

77.44 60.92 10.4% 6.2%

Total Debt to Assets

15% 10% 5% 0%

2010

0.75 1.97 18.7% 36.8% 81.8%

0.73 1.86 21.8% 40.6% 94.6%

2011 0.64 1.90 21.3% 40.6% 86.0%

2012E 0.75 1.72 22.4% 38.5% 90.0%

Return on Equity

2013E

2014E

0.75 1.71 22.4% 38.2% 90.0%

0.75 1.70 22.4% 38.0% 90.0%

2015E

2016E

0.75 1.69 22.4% 37.7% 90.0%

Return on Assets

60%

100%

2.00

50%

80%

40%

0.75 1.68 22.4% 37.5% 90.0% Return on Equity

2.50

1.50

77.44 60.92 10.3% 6.2%

20%

2009

0.83 2.01 24.3% 48.7% 73.9%

2013E

25%

Equity Multiplier

0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0

2011

Total Debt to Equity 90 80 70 60 50 40 30 20 10 0

Profitability

76.02 84.44 13.3% 7.1%

Inventory Turnover

85

Total Asset Turnover Equity Multiplier Return on Assets Return on Equity Return on Capital

2010

69.91 81.50 18.8% 9.5%

Return on Capital

60%

30% 1.00

40%

20%

0.50

10%

20%

0.00

0%

0%

Financial Analysis & Valuation, Page 2 of 5

Analysts: Alex Burke, Emily Emery, Raul Guevara, Boone Plager

Capital, NOPAT & FCF NOWC Net Fixed Assets Total Invested Capital Effective Tax Rate NOPAT Free Cash Flow NOPAT Per Share FCF/Share Return on Capital

2006

2007

2008

2009

2010

2011

12,661 3,044 15,705 31.0% 12,261 N/A 1.17 N/A 78.1%

13,004 4,350 17,354 30.0% 13,259 11,610 1.36 1.19 76.4%

17,945 6,242 24,187 25.8% 17,872 11,039 1.92 1.18 73.9%

11,505 7,535 19,040 25.8% 15,574 20,721 1.74 2.32 81.8%

11,951 7,630 19,581 25.0% 18,518 17,977 2.10 2.04 94.6%

18,197 8,162 26,359 17.5% 22,673 15,895 2.67 1.87 86.0%

Total Invested Capital

Net Fixed Assets

2012E

2013E

2014E

2015E

2016E

17,789 18,856 19,988 20,787 8,247 8,741 9,266 9,636 26,035 27,598 29,253 30,424 (Tax rate from last historical year used in forecasts) 23,433 24,839 26,329 27,382 23,756 23,276 24,673 26,212 2.88 3.18 3.40 3.57 2.92 2.98 3.19 3.42 90.0% 90.0% 90.0% 90.0%

NOPAT

Economic Value-Added $30,000

$25,000

$25,000

$20,000

$20,000

$15,000

$15,000

$10,000

$10,000

$10,000

$5,000

$5,000

$5,000

$0

$0

$0

$30,000 $25,000 $20,000 $15,000

Intrinsic Value of FCFs Valuation Model Value Creation 2006

2007

2008

2009

2010

2011

15,775 147,196 337,711 10,339 348,050 348,050 $37.31 $19.67 ($17.64) -89.7%

13,924 231,833 346,261 6,076 352,337 344,907 $38.56 $30.34 ($8.22) -27.1%

16,821 182,787 358,297 5,505 363,802 357,681 $40.59 $25.98 ($14.61) -56.2%

20,389 200,546 373,457 9,610 383,067 369,938 $43.57 $30.35 ($13.23) -43.6%

Economic Value-Added Market Valued-Added PV of Future FCFs Value of Non-Oper. Assets Total Intrinsic Firm Value Intrinsic Value of Equity Per Share Intrinsic Value Year-End Stock Price Over (Under) Valuation/Sh % Over (Under) Valued

10,900 253,308 306,019 6,714 312,733 312,733 $29.96 $28.11 ($1.85) -6.6%

11,755 244,407 320,933 6,111 327,044 327,044 $33.57 $28.28 ($5.29) -18.7%

Cost of Capital Equity Capitalization

2011 255,667

Weight 95.1%

Total Debt Preferred Stock Value of All Securities Effective Tax Rate Risk-Free Rate 5-Yr Beta Market Risk Premium CAPM Cost of Equity

% Cost Wgt Cost 8.9% 8.5%

13,129 4.9% 4.5% 0 0.0% 0.0% 268,796 100.0% 17.5% Long-Term Growth Rate: 2.27% 2.0% 1.00 Alternative Beta: 7.0% 0.95 8.9% Weighted Average Cost of Capital:

MSFT Performance Analysis. Datasource: CapitalIQ

0.2% 0.0%

27,930 27,321 3.65 3.57 90.0%

Free Cash Flow

$30,000

$35,000

21,203 9,829 31,032

$400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0

2012E

2013E

2014E

2015E

2016E

21,176 327,315 382,070 9,195 391,265 385,144 $47.28

22,447 333,476 391,909 9,747 401,656 395,168 $50.55

23,793 338,850 401,205 10,332 411,537 404,659 $52.29

24,745 344,485 409,768 10,745 420,513 413,360 $53.96

25,240 350,932 417,963 10,960 428,923 421,627 $55.03

Year-End Stock Price

Per Share Intrinsic Value

$60

Market Valued-Added

Over (Under) Valuation/Sh

% Over (Under) Valued

$0

$50

0%

-20%

($5)

$40

-40%

$30

($10) -60%

$20

($15)

$10 $0

-80%

($20)

-100% 2006

8.7%

Financial Analysis & Valuation, Page 3 of 5

2007

2008

2009

2010

2011

Analysts: Alex Burke, Emily Emery, Raul Guevara, Boone Plager

Relative Valuation Stock Price/Intr. Value Price to Earnings Price to Free Cash Flow Price to Sales Price to Book Earnings Yield Dividend Yield Free Cash Flow Yield

2006

2007

2008

2009

2010

2011

$28.11 23.3 N/A 6.6 4.2 4.3% 1.2% N/A

$28.28 19.6 23.7 5.4 4.4 5.1% 1.4% 4.2%

$19.67 10.4 16.6 3.0 2.5 9.6% 2.2% 6.0%

$30.34 18.6 13.1 4.6 3.5 5.4% 1.7% 7.6%

$25.98 12.2 12.7 3.7 2.7 8.2% 2.0% 7.9%

$30.35 11.1 16.2 3.7 2.4 9.0% 2.1% 6.2%

Price to Earnings

Price to Free Cash Flow

2012E $47.28 17.3 16.2 5.2 3.9 5.8% 1.5% 6.2%

Price to Sales

2013E

2014E

$50.55 16.8 17.0 5.0 3.7 6.0% 1.6% 5.9%

2015E

$52.29 16.2 16.4 4.9 3.6 6.2% 1.7% 6.1%

2016E

$53.96 15.9 15.8 4.8 3.6 6.3% 1.8% 6.3%

$55.03 15.9 15.4 4.8 3.6 6.3% 1.8% 6.5% Earnings Yield

Price to Book

25

6.0

12%

20

5.0

10%

4.0

8%

3.0

6%

15 10

2.0

4%

5

1.0

2%

0

0.0

0%

Relative Valuation Pricing Model 2012E Ratio Ratio Price to Earnings 17.3 Price to Free Cash Flow 16.2 Price to Sales 5.2 Price to Book 3.9

Adjust Ratio 16.0 16.0 4.0 3.0

2012 Metric $2.73 $2.92 $9.10 $12.21

Intrinsic Value $43.68 $46.66 $36.40 $36.62

Dividend Discount Valuation Model MSFT Microsoft Corporation Annual Dividend 2006 2007 2008 2009 $0.35 $0.40 $0.44 $0.52

Intrinsic Value Estimates vs. Current 2012EPrice Current Price $30.35 PV of Free Cash Flows $47.28 Dividend Discount Model $17.32 Price to Earnings $43.68 Price to Free Cash Flow $46.66 Price to Sales $36.40 Price to Book $36.62

1-Yr Div Growth 3-Yr Div Growth 5-Yr Div Growth Risk-Free Rate 5-Yr Beta Market Premium Required Return Alternative Beta

Intrinsic Value Estimates vs. Current Price

23.1% 13.3% 12.8% 2.27% 1.00 7.0% 8.9% 0.95

May 7, 2012 2010 $0.52

PV Dividends 1-4 PV Perpetual Div. Intrinsic Value Current Price

14.0% 2012E $0.73

2011 $0.64 $2.74 $14.57 $17.32 $30.35 ($30.35)

Dividend Yield

Expected Dividend Growth Rates 12.0% 10.0% 8.0% 2013E 2014E 2015E $0.82 $0.90 $0.97

Dividend Yeld

2.1%

If Purchased For: Expected Return = $0.73 $0.82

$30.35 -6.0% $0.90

$21.48 Analyst Notes: Based on a current dividend of $0.64, expected growth as shown above and an equity required return of 8.9%, MSFT is worth $17.32 per share, vs. a current price of $30.35.

Compared With:

Compared With:

International Business Machines Corp.

S&P 500 Index

4.0% 2016E $1.01

$20.51

Accenture plc

$50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0

MSFT

Current Price

PV of Free Cash Flows

Dividend Discount Model

Price to Earnings

MSFT Performance Analysis. Datasource: CapitalIQ

Price to Free Cash Flow

Price to Sales

Price to Book

IBM

35% 30% 25% 20% 15% 10% 5% 0% -5% -10%

ACN

MSFT

^SPX

40% 30%

20% 10% 0% -10% -20%

Financial Analysis & Valuation, Page 4 of 5

Analysts: Alex Burke, Emily Emery, Raul Guevara, Boone Plager

Piotroski Financial Fitness Scorecard (10-point scale)

2007

Positive Net Income Positive Free Cash Flow Growing ROA (% change NI > % change TA) Earnings Quality (Operating Income > Net Income) Total Assets Growing Faster Than Total Liabilities Increasing Liquidity (Current Ratio) % Change Shares Outstanding (Diluted) < +2.0% Expanding Gross Margin Asset Turnover (% change sales > % change assets) Total Liabilities to Operating Cash Flow (EBIT) < 4.0 Piotroski Score

Altman Probability of Bankruptcy Z-Score (Current Assets-Current Liabilities)/Total Assets Retained Earnings/Total Assets Earnings Before Interest & Tax/Total Assets Market Value Equity/Total Liabilities Sales/Total Assets Altman Score

2008

1 1 1 1 0 1 1 0 1 1 8

Weight 1.200 1.400 3.300 0.600 0.999

1 1 1 1 0 1 1 1 1 1 9

2009

2010

1 1 0 1 0 0 1 0 0 1 5

1 1 1 1 1 1 1 1 0 1 9

2011 1 1 0 1 0 1 1 0 0 1 6

2012E 1 1 1 1 1 0 1 1 1 1 9

2007

2008

2009

2010

2011

2012E

0.3118 -0.4461 0.9899 5.1538 0.8085 6.82

0.2202 -0.5984 1.0912 3.0156 0.8292 4.56

0.3427 -0.4979 0.8887 4.2482 0.7495 5.73

0.4115 -0.3868 0.9462 3.4398 0.7249 5.14

0.5094 -0.2284 0.8346 2.9945 0.6428 4.75

0.3949 -0.1154 0.9430 5.5547 0.7449 7.52

2013E 1 1 0 1 1 1 1 0 0 1 7

2013E 0.4128 0.1076 0.9430 5.4250 0.7449 7.63

2014E 1 1 0 1 1 1 1 0 0 1 7

2014E 0.4218 0.3169 0.9430 5.2884 0.7449 7.71

2015E 1 1 0 1 1 1 1 0 0 1 7

2015E 0.4352 0.5221 0.9430 5.2419 0.7449 7.89

2016E 1 1 0 1 1 1 1 0 0 1 7

2016E 0.4397 0.7310 0.9430 5.2903 0.7449 8.15

The interpretation for the Altman Score is: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23

Piotroski Financial Fitness Scorecard (10-pt scale) 10 8 6 4 2 0

MSFT Performance Analysis. Datasource: CapitalIQ

Altman Probability of Bankruptcy Z-Score 9 8 7 6 5 4 3 2 1 0

Financial Analysis & Valuation, Page 5 of 5

Analysts: Alex Burke, Emily Emery, Raul Guevara, Boone Plager