Microsoft (MSFT NYSE) Project 2-3 for Ron Sweet Oct 15 William Raymond

Oracle have jumped on the bandwagon and are in control of SAAS. Technically SAAS can include even an email server such as Outlook, SharePoint, or hotmail. Software industries for the last 20 years have been fairly growing and havent been entirely impacted by Wall Street dismal recession. The Software index based on 196 companies the median debt to equity ratio is around 62%. Software in general has advantages over other industries. They usually have large cash reserves and also dont usually have to deal with the inventory problem that many other industries have to. Another key aspect to the software companies is that they dont have much property, plant, and equipment. Not to mention raw materials like a car manufacture needs. Most of the expense themselves are from the maintenance of the software itself and the programmers salaries. On top of that, monthly SAAS software subscription fees can generate good revenue.

Microsoft by William Raymond Project 1 The software industry writes code that is pertinent to applications and for business and consumers that help them arrange, organize, maintain, their daily activities. The industry started in the 1960s and intensified in the mid 70s. As the demand for raw data, and how to organize it became evident to the market, so did the business as software industry. One of the first advocates that software could make huge margins was none other than Bill gates. Chairman of Microsoft, Bill gates revolutionized the computer software industry in my opinion. I remember hearing stories about my friend Tom who was a law student back in the 70s stated that he had to carry punch cards to a keyboard looking terminal and align them very nice to get the machine to work. The software industry is facing new mergers and alliances every day. Some of the new major advancements in the software industry are SAAS. It stands for Software as a Service. It basically provides CRM software on the internet with a subscription fee. Amazon cloud and

Some issues facing the software industry are the patent laws. Some of the top software companies are trying to get congress to fund a 3.26 billion proposal to help them fight against pricey and intellectually rights. Technology patents have not revised since the 50s. Will they get the money they need? That is hard to answer. Some swat analysis of software companies. There outlook haves some issues. The first

Microsoft (MSFT NYSE) Project 2-3 for Ron Sweet Oct 15 William Raymond

one is the banks are in fear of lending money to one another and to their customers too. Software companies will be affected by this a little. Consumers might be able to get cheap PCs and electronics; however on the corporate side the spending will be cut. The opportunities for the software sector are not a positive, but are not dismal either. According to Gartner Inc they predict technology spending will not forecast to a 5.8. However it still will be a positive increase of 2. 3%. The US is expected to be flat while the EU will be negative numbers. The weakness is the dollar is losing value. Last time I checked the index was at around 76. This will hurt many companies that have revenues in Europe and Asia. VeriSign and Digital River are just a few of many companies that rely on the international market. What does Porter have to say about all of this? Yes, now we are going to swing on over and check out the Porters framework. According to Data Monitor on the buying power of the global applications software they rank it as relatively weak. There explanations to this because the switching cost for a number of buyers are high and because of the retraining of new applications. I do agree with the case. In 2006 of November when Microsoft vista was released, I was ready to conquer the world. So I thought, after putting in the disk and observing what Microsoft has done to this thing! I quickly played around with the

new software and noticed my computer was running slow. Due to the Vista needing more horsepower, such as more ram, cpu speed, and the like I was disappointed. Next we move on to the supplying power. This is strong overall power for the global security software. Its hard to find substitutes. Especially, when Microsoft produces its own programming code C ++. Running a smooth continuing IT setup is not an easy task. You have to have skilled workers that know how to use the hardware and fix it when it goes array. Can new entrants join the arena? The answer is yes. Software is being learned all over the world. C++, java, html, and open source codes are readily available to people that want to learn. Ownership of intellectual property is vital for companies to stay alive and maintain good margins. However in China that is being tested every day. License key are being randomly generated with high sophisticated program keygens. You also have piracy software on the loose. This can kill a company if it gets leaked out. R&D is an expensive key that creates differentiated products that can later be sold for great returns. The broadband capabilities are reaching dramatic speeds. A lot of software now can be purchased online and then directly downloaded to a computer. The advantage to this is, one doesnt need to go to the physical store. This type of software is helping business manage their companies and employees too. This is how I got my Office 2007.

Microsoft (MSFT NYSE) Project 2-3 for Ron Sweet Oct 15 William Raymond

Substitutes are in the air. Every heard of Fedora Core or Ubuntu? These are open source codes. Both operating systems are completely free to download on the web. I have Fedora which is a Linux operating system. Its great. Its faster than Vista, more stable and less buggy. Though they are some negatives to this. Open source codes are hard to get started with. You simply cant just double click something all the time and make it install. Sometimes you have to know manually install it by command prompts or need to do some steps before installing. Microsoft doesnt like open source, because they claim that it can hurt their revenues. But I somewhat disagree with them there. Open source code systems are still for geeks that like to be different and have more level of control that most average users could care less about. Most of the general public doesnt know how to use open source that well. Rivalry is the last objective on Porters framework. Apple, Oracle, and Adobe, and Microsoft are fighting to exist in this trench warfare game. Apple and Microsoft have been at war for a while. Apple has just let themselves get beat while pouring their guts and souls to the IPod and I phone. Microsoft has been starting other things of their own, such as a game system and digital music players. Microsoft is still king for software but I predict that dominating 80 % in the future could dwindle down to 50% in the future. More and more people are getting interested in open source and Apples Tiger operating system is gaining.

In the semiconductors research we have slight increase in the world wide average sales. From Feb of 09 to July of 09 we have an steady increase to about 18 billion in sales. This is shown in. Exhibit 1
Global semiconductor sales Semiconductor Billings, 3 mo. MA, $ bil , increase fom Feb 09-to Jul 09 . 20 18 16 14 12 10 8 6 4 2 0 Americas Asia Pacific Worldwide Market Europe Japan

China was giving a stimulus package of over 585 billion dollars, which was put in good use to boost the communications infrastructure. Credit is still an issue these days and the PC manufactures and mobile headsets make up around 60 % of global semiconductor consumption according to Moodys. I think by looking at this graph one could see that consumer confidence is edging toward a slight improvement; however I would say its still too early to predict more sustained trends of massive increase for the semiconductor sector.

Microsoft (MSFT NYSE) Project 2-3 for Ron Sweet Oct 15 William Raymond

Gartner expects different outcomes for 2009 than Moodys. In world wide area Gartner expects the whole revenues of the semiconductors to fall as much as 22.4 %. Though 1st quarter PC sales came better than expected which has led to the vast array of new microprocessor. They however take this as the fact that the inventories had been run down to far according to Gartner.
On the Internet sale from Moodys shown is slight increase from last year 4th quarter to 2nd quarter of 2009 shown in Exhibit 2.

me. Looking at this chart I see internet sales slowly trying to climb an uphill mountain from last year. What does this mean to the industry itself? My conclusion is to think we are going to see more competitive prices at the Local Wal-Marts and Best Buy. First goal is to somehow get the consumer to spend though. These are scary dark times for spending. I personally have been shopping online for about 10 years now! I have to admit I it fantastic. I can always find the deals that I want and most local stores really cant compete. I have to admit that lately my budget for electronics on the internet has been skewed by the bad economy and I have learned to live without the greatest electronics. Craigslist has also caught my keen interest of buying used stuff. On the PC side of the things Gartner has some positive things to say in 2008 compared to much of the industry in the IT sector. PCs are slightly down from 2007 numbers. However looking at this chart on Exhibit 3 we still see HP dominating the word wide marketplace with almost 20%. We are in a recession again like in 2000. PC in the first half were great but when Christmas time came in Santa didnt bring many PC home. Fewer sales mean bigger inventories for the major PC makers. This was a means of a 27.9 decline of PCs over the year of 2000. Microsoft did issue a warning sign for the last half of the year of 2000. In Exhibit 3 I was surprised to see the Taiwan company Acer being in 3rd place in the worldwide market. I have to say, Gartner numbers are a little off from my research and would bet that Acer is the second most dominant player in the world.

Exhibit 2
E-Commerce Sales ($ Bil) rise slightly from last year 4th quarter to this year 2nd quarter

34.5 34 33.5 33 32.5 32 31.5 31 30.5 30

With retails sales show a small margin of increase from 1st quarter of 09. According to Computer World numbers of 2008 by Linda Rosencrance they claim that the internet sales are suppose to grow by 20-30 billion annually. So by 2012 we are supposed to see a peak of around 335 billion dollars. That is a far fetch for

Microsoft (MSFT NYSE) Project 2-3 for Ron Sweet Oct 15 William Raymond Exhibit 3

display that can be fit inside a womens purse. In Exhibit 4 we see that Dell is the number one seller in the states. Dell just bought Perot System for 3.9 billion dollars. I have no idea how this will play out in the PC market. My guess is that Dell is looking for other ways of revenue which leads me to believe that Dell could be heading for slight decline. Exhibit 4 PC sales

PC sales in the US are maybe not as big as expected but are going to rise according to Gartner. Gartner believes that Vista is going to be a necessary upgrade for the market. Vista is a beast that needs new and the latest hardware changes. Many people are going to have to upgrade to get that. Windows 7 is also due out this Oct 22. My conclusion is after testing with the beta version and after 3 years of disappointment with Vista, we finally have a polished Microsoft product that has once again. I like it and its ready for the masses. I expect when the rest of society gets to play with It, PC sales will jump up. Last are the ultra mini netbooks that are tiny and defying gravity in all ways. Sure they have atom Intel processor with small amount of ram, but they sure do look cool with the 6 inch

My thoughts for the PCs future of 2009 are really hard to actually pinpoint how the consumer is going to spend their dollar. I think there are some major innovation on software side such as SAAS, new operating systems, and potential legal issues if can be solved. If Windows 7 can be like what Windows XP did then of course the sales will fly off the shelves. However, one has to look at the fact that in America out of 1000 people around 850 already have a PC. I think the Global market is more suitable in

Microsoft (MSFT NYSE) Project 2-3 for Ron Sweet Oct 15 William Raymond

China and India where PCs number is not nearly the same ratio. I got some sector numbers from OSU university by David Fergurson that shown in Exhibit 5. Exhibit 5 of how well the IT industry does compared to others.
Sector Financials Health Care Information Technology Consumer Discretion Industrials Consumer Staple Energy Telecom Utilities Materials * As of 12/31/02 (in billions) Mkt Cap * $1,658 $1,211 $1,159 $1,090 $935 $768 $486 $339 $231 $230 8,107.40

room for transistors to spread. In 2011 it is also estimated that information and communications technologies will grow by 4 trillion dollars.

Mkt % 20.5% 14.9% 14.3% 13.4% 11.5% 9.5% 6.0% 4.2% 2.9% 2.8%

SIM % 23.4% 13.2% 9.5% 17.9% 11.1% 9.0% 6.5% 4.9% 2.9% 1.6%

Bet 2.9% -1.8% -4.8% 4.5% -0.5% -0.5% 0.5% 0.8% 0.1% -1.2%

Information technology is blooming all over the world. Some of the Tiger countries like Korea and Taiwan have fueled manufacturing components. China has also been in the game for semiconductors and PC manufacturing. Fiber to the premises has spurred a whole new level of computing. The information technology age is going to be fun for the 21st century and beyond. Some major things that are happening are the Internet, Software as a Service, and server upgrade technology. In 2008 it is estimated that a 6 million quintillion transistor were manufactured. To give an idea of what that means is this. A Zeon quad core has 820 million transistors. Divide that by 6 million quintillion and you still have much more

Microsoft (MSFT NYSE) Project 2-3 for Ron Sweet Oct 15 William Raymond

Microsoft (MSFT) Report Project 2-3

Overview of the firm: Microsoft develops, manufacture, and licenses its own software for PC market. Microsoft operating system is the dominant operating system in the world for PC end user. It has software that can help with business such as office 2007 a suite that includes Word, PowerPoint, and Excel, SharePoint with is an interactive global calendar for business to sync data with, and has security operation system for maintaining admin control of rights and privileges found by Server 2003 and 2007. It has contracts with the military, hospitals, University, and just about anything else. Being in the Air Force for about 5 years, I have seen many Microsoft products in our shop with loads of inventory. One of the most used Microsoft products out there for the military is Office 2003. This has now has been upgraded to Office 2007. Microsoft has MSN networks for it internet users. This is a strong search engine that finds topics when people that are in need of them. And the newest search engine is the Bing. Microsoft has the rights

to the Xbox 360 game console. The Zune is a direct level threat to the IPod. Microsoft also makes its PC games and has many PC peripherals too. Major products by Microsoft include Vista, Xbox 360 game console, Office 2007, and the latest Windows 7 edition. How is the software industry doing? From about 2003 to now we have bumpy road of strength. However in late 2008 to the present the industry has been slowly regaining its foothold. If I were to rub a global ball and predict the 2010 outcomes, I would have to say it really depends if the US gets out of the recession. Japan, France, Germany and Hong Kong have gained a small GDP % increase. How long will that last? I do expect to see some moderate increase in sales. If Microsoft Windows 7 can really make some waves that Vista could not do then were all in for a treat or two. Swot Analysis of Microsoft consists of this. Its Strengths are they have a flexible diverse workforce through contingent workers. They have Multinational Corporation in over 60 different countries. Their software products have extremely high quality name recognition such as Word, Excel, PowerPoint, and Outlook. Those names are fairly common to even young toddlers and that are learning to put their little fingers on the keyboard and use the applications. Its weakness they have lost the search engine battle to Google. They are now trying to bounce back with the MSN network and Bing. Windows CE was a disaster to recover from. The whole wireless technology got blown from under.

Microsoft (MSFT NYSE) Project 2-3 for Ron Sweet Oct 15 William Raymond

They have had many delays in its new operating software launches. Microsoft Vista at first was not well like by the public. Many bought the new operating system, only later to reinstall the old operating system. The drivers were weak. Many of the drivers with vista didnt work properly with the device. Its opportunities are PCs are vastly coming down in price. What this means to Microsoft is cheaper PCs, the more people to use their operating system. If one were to go to Best Buy and get a new PC, they will most likely see the operating system of Microsoft Vista. Unless they were to buy a Mac computer. The global demand for PC is increasingly popular around the world. Its threats on the software side are Mac and Linux. My experience with Mac is its a nice OS with easy features, however the software usually cost twice as much as Microsoft based OS systems. In the mid 1990s companies such as Sun Microsystems, Netscape, Oracle, IBM, and AOL took control of the internet potential, while Microsoft failed to do so.

Ipod have revolutionary made the perfect all in one electronic device. Microsoft spitefully answer to this was the Zune. However the Zune is barely staying afloat. Just to show you a chart from 2007. Exhibit 1

Products and Competition.

Microsoft has an assortment of PC products to electronic gadgets. Their most lucrative product is the Windows operating system. Starting in the 80s and now with Windows 7 they have maintain a stronghold against Apples OSX operating system. They have clearly won the operating system battle. On the gadget side of the consumer world they have been killed. Apples Iphone and

Microsoft (MSFT NYSE) Project 2-3 for Ron Sweet Oct 15 William Raymond

Other recent activity on the firm. Data from 1-3 found on www.microsoft.com 1. Microsoft Entertainment and Devices Division has generated for Microsoft 40% of its yearly segment revenues. This fact was due to the Express upgrade to Windows Vista and Microsoft Office. Microsoft highlights some key aspects for the future revelations. These include

security, messaging, systems management, and collaboration, and new technology for high-performance computing, unified communications, and business intelligence, we believe we are well-positioned to build on our strength with businesses of all sizes and with developers. Fiscal year 2008 saw widespread adoption of Windows Vista and the 2007 Microsoft Office system and the launch of Windows Server 2008, SQL Server 2008, and Visual Studio 2008.

Consumer Technology- They emphasis the ability to compete in the software industry and make sure properly maintains and support of the software for the current and future. They are also interested in the mobile aspect of devices that people want these days. Examples include the Zune MP3 player which is competed for the top spot for MP3 players such as IPOD by Apple.

2. Revenue growth was driven primarily by increased licensing of the 2007 Microsoft Office system, increased Xbox 360 platform sales, increased revenue associated with Windows Server and SQL Server, and increased licensing of Windows Vista . See below

Exhibit 2 Software Plus services- They want to combine the power of the desktop and server software with the reach of the Internet and connect business together. They have done this magically well with the Microsoft Office and SharePoint.
msft Revenues increase from 50-60 billion in 2007-2008
65000 60000 55000 50000 45000 2008 2007 msft

Expanding the presence on the desktop, the server, and with developers. Through the ability to deliver additional value in

Microsoft (MSFT NYSE) Project 2-3 for Ron Sweet Oct 15 William Raymond

3 . Global macroeconomic factors have a strong correlation to demand for our software, services, hardware, and online offerings. In fiscal year 2009, MSFT expects a broad continuation of the economic conditions and demand experienced during the latter part of fiscal year 2008. In fiscal year 2009,they expect double digit revenue growth and estimate PC shipments will grow between 12% and 14%. Within the overall PC market, expect current trends to continue with consumer segment growth exceeding that of the business segment and emerging market growth exceeding that of mature markets.

Exhibit 3

MSFT and AAPL debt-MSFT has borrowed in 2009 due to a maybe a buyout of SAP.
7000 6000 5000 4000 3000 2000 1000 0 2009 2008 MSFT 0 2007 AAPL 2006

Liquidity issues Microsoft has about 6

billion in borrowing. Rumor has it according to itmanagement.earthweb.com they may acquire the firm SAP. Another wild guess was the money could even be for operating expenses. For instance, some of the cash might be used to fund marketing and advertising for Windows 7, which is due out this October of 09. according to InternetNews.com. SAP is a multinational software development and consulting corporation headquartered in Germany and is worth roughly around 10 Billion in revenue. Steve Ballmer CEO of Microsoft did not want to spills out any news about a merger or such talks.

Conclusion to liquidity it is estimated Microsoft has around 25 billion in the bank to play with. With the recent 6 billion in debt they dont have anything to worry about. They might be buying shares back or general corporate purposes, which may include funding for working capital, capital expenditures, repurchases of stock and acquisitions. I think the merger for SAP will be even bigger than the Hotmail, Facebook, and AQuantive. SAP is the world's largest business software company. With that being said I hope Steve can get the deal done and make sure they fly straight with the EU and not cause any more ruckus in Europe that they have already been billed around 1.8 billion Euros in fines.

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Microsoft (MSFT NYSE) Project 2-3 for Ron Sweet Oct 15 William Raymond

Asset Turnover issues- Microsoft in

2007 has bought AQuantive at 66.50 per share at a valued rate of 6 billion. On a side note in that same year they bought about 1.6 percent of the social networking site Facebook for $240 million which values the company at $15 billion On the Merger side, Microsoft has acquired in April 2008 and completed the acquisition of Fast Search & Transfer ASA (FAST), an enterprise search company. MSFT believe the acquisition will broaden our enterprise search technology product offerings to businesses and will enable innovations in related areas such as our portal and content management. Latest news about Microsoft is to pay the Yahoo up to $1 billion in cash up front for the deal that should be fully decided by 2010. What the deal involves is yahoo search engine will be powered by bing in a 10 year deal. A diversified business model leads Microsoft into record breaking revenues of 60 billion in 2008. Chris Liddell, chief financial officer of Microsoft. Our broad span across geographies, product categories and customer segments is a tremendous asset and supports our outlook for double-digit revenue, operating income and earnings per share growth for this fiscal year and also for fiscal year 2009. This was due to the fact that electronic devices grew about 68% by last year. What helped spur this great increase was the demand for new Xbox 360 console units?

Conclusion ATO- The billion dollar deals that Microsoft has made with AQuantive, Facebook, and Yahoo is just what a big company can do. What is all of this to Microsoft? When a company has revenues of almost 60 billion in 2009 the rules they play and mergers they take come fast and easy. They now have yahoo in a major deal that I think Google could now have competition. Google for the longest time has been dominate search engine on the internet for quite some time and still is the number 1 search engine. As shown here by CNN in June of this year poll. Can Bing give Google a war? Exhibit 4

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Microsoft (MSFT NYSE) Project 2-3 for Ron Sweet Oct 15 William Raymond

Conclusion continued ATO What I like about the deal is I have personally gone to bing site and tested the results out. It has a nice fresco painting and is easy to navigate the search queries. They mostly do Vertical mergers, and now with the horizontal merger with Yahoo. I think Microsoft deal just wanted to show they can compete with Google who some say is the king of the world in terms of internet dominance. I would like to say that this deal with Yahoo is going to put Google in a hard bind, but I dont know how Google will react to this in the later years. What really gained a market opportunity for revenues was the mere fact that Microsoft Xbox 360 marked it biggest year in history. They sold over 28 million units worldwide in 2008. While they competitor Sony had only sold around 20 million units. They also in the past years spent about a billion in fine tuning the Xbox 360 live. This enables game members to play against each other online from around the world. The 60 price tag for the 1 year membership in 2008 gave the number of subscribers to dramatically increase since its release three years ago. They were also able to grab a stranglehold in the European market for Xbox 360 sales. At $199 per unit system that was increasing its eye toward victory. While the Sony Playstation 3 was still selling at around 400500 dollars. Another big Santa helper was when NetFlix jumped on board with the Xbox live. NetFlix member provides users with access to unlimited viewing of more than 12,000 movies and TV shows in DVD

quality as well as many in high definition. I found this data on Microsoft Pass press.

Exhibit 5 Asset Turnover -MSFT is catching Apple due to large sales in Electronic device system.
MSFT AAPL 1.4 1.2 1.1 0.82 0.75 0.95 0.83 1 0.81 0.64 0.56 1 0.8 0.6 0.4 0.2 0 2009 2008 2007 2006 2005 1.2

Anti trust (Solvency issues)

MSFT incurred $1.8 billion of legal charges during the year primarily related to the European Commission fine of $1.4 billion (899 million) as compared with $511 million of legal charges during the prior year from Microsoft annual Report of 2008.

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Microsoft (MSFT NYSE) Project 2-3 for Ron Sweet Oct 15 William Raymond

Microsoft has been attempting a full-speedahead resolution of the two antitrust cases against it by the European Union, one dealing with the ability of Microsoft Word and Excel to interact with other applications, the other with the installation of Internet Explorer in the upcoming Window over the summer, Bloomberg reported that Redmond was in talks to wrap up both investigations by the time European Competition Commissioner Neelie Kroes stepped down from office at the end of 2009. http://www.microsoftwatch.com

I dont see an issue on why the EU commissioner is setting these ridicules fines. The fines have now added up to 1.7bn in the past four years. I have read on the subject matter on the issue and have not found out why the EU commission is doing this. Kroes the EU competition commissioner has accused Microsoft of continuing to abuse its powerful market position, stifling innovation and damaging consumers. "Directly and indirectly, this had negative effects on millions of offices in companies and governments around the world. I found that quote at http://www.guardian.co.uk/business/2008/ feb/27/microsoft.europe.

Conclusion- The EU commission is making the monopoly issue over Microsofts Internet Explorer (IE) web browsers and Windows Music player far too harsh then the reality is. The new version of Windows 7 will allow members to disable Internet Explorer, so it wont be the default Web Browser. A lot of people I know in fact dont use (IE). They would rather use Mozilla Firefox. I only use Internet Explorer when I have to. It has many bugs and people have hacked the hell out of it. The Windows Media player is another issue. Its basically a novice version of a media player itself. Jet Audio, VLC, Winamp, and Real player are better in terms of features and services they provide.

If you look at the next page below in Exhibit 6 we see that Microsoft is clearly winning in net margins over Apple. Apple is more focused on core products such as hardware and Microsoft cant keep their hands to themselves while trying to get into many different markets. They also compete with Sony with the video game consoles wars.

Conclusion to Net Margins If one was

to look at numbers alone on the income

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Microsoft (MSFT NYSE) Project 2-3 for Ron Sweet Oct 15 William Raymond

statements of both Apple and Microsoft we see that in 2009 the MSFT net income is roughly around 10 billion more than Apple. In the revenues we see again that MSFT is twice as much in sales. What accounts for this? Microsoft maintains some of the best gross margins in the industry with the average in the 80 %. Meaning they grossed 80 cents of every dollar earned from revenue. Not bad for a company. While Apple maintained a strong 30% gross margins which is still good. Microsoft has great operating margins, great management team, and a revolutionary business model. future for Apples sales to Exhibit 6 Exhibit 6 Net Margin MSFT-vs AAPL from 2005-2009. Microsft 2x better than Apple at margins on the average.
45 40 35 30 25 20 15 10 5 0 2009 2008 2007 2006 AAPL 2005 MSFT

. Here is a picture of Apples iphone Exhibit 7 Apple is betting a lot on this device.

Final Conclusion

With 80 % of Microsoft revenues coming from software sales primarily from MS

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Microsoft (MSFT NYSE) Project 2-3 for Ron Sweet Oct 15 William Raymond

office and MS Windows, the future for Microsoft could need some repackaging. In 2008 due to the global recession itself PC sales were down around 6%. However I am with Gartner and they predict worldwide PC sales to increase to about 10.3 % in 2010 due to the recovering markets. What does this mean for Microsoft? It means everything for them. Windows 7 is due out later this year also. It has been beta tested for quite some time. I personally like it and think that Windows 7 is going to be one of those crucial buys for the holidays of 2009 and if it sells well it could very well lead Microsoft back to its glory days when Windows XP came out. On the competition side of things Microsoft has proved it way to dominate the operating system wars. OSX has a glossy eye candy gui, but I still would prefer Windows over OSX. Although Microsoft is having antitrust violations in Europe, this incident shouldnt affect its future. Thanks in Part of China and India which Microsoft is waiting to cash in on new potential customers. Apple on the other hand has not had any litigation problems with its operating system called Safari, but its not nearly the beast on the market that Windows is. In 2005 the cash flow from operations increased 14 % to 16.61 billion due to increase in cash receipts from customer driven by 8 % revenue growth combined with a 12% increase in unearned revenue. In 2005 they paid out 36.11 cash dividends compared to 2004 of 1.73 billion due to an 8 billion in cash used for share repurchases.

Microsoft debt issues still remain a mystery. It has never had to borrow in the billions. Microsofts CFO Liddell in 2008 said they might have to borrow for the first time to acquire Yahoo and fund a portion of the 44.6 billion dollar deal. That didnt happened as most people speculated. In May of this year they filed with the SEC that issued up to 6 billion in debt. The company didnt say what was going on with the money only rumors as I have mentioned above are all in the air. To reiterate once again if they could have a merger with SAP which makes propriety software in Europe could be a strategic point that Microsoft could not afford to lose. However CEO Leo Apothekar still remained quite on the subject and did advise a statement that SAP should be independent for now. Microsoft is a major player in the IT software industry. As you can see clearly by the margins over Apple they are in clear defiance of gaining its strong foot hold in the market for computer software. They have also been able to compete in the Asset turnover wars with apple as you can see in the year 2009 at 83 %. I like the position Microsoft is in with its Business revenue of Microsoft Office. I use the suite everyday and have many pals that do the same. Microsoft long term growth bets. Steve Baller CEO of MSFT made apparently 8 long term bets. Online advertising: Microsoft wants to buy Yahoo to grow its online ad business. But in response to an analyst question, Ballmer told Wall Street that even if the company is thwarted in its takeover

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Microsoft (MSFT NYSE) Project 2-3 for Ron Sweet Oct 15 William Raymond

bid, it will continue to invest heavily in its own online-advertising assets, as the online services business is typically advertising funded. I found this and 2 others that could tell the fortune of Microsoft future. I think also to add in there was the Xbox popularity over Sony and if Windows 7 can redefined the glory days that windows XP managed to do so. If all three of those mentioned above can gel in a way for the good of humanity then Microsoft will still be king of the hill.

Video game consoles Microsoft Windows Microsoft Office Microsoft Servers Windows Developer Tools Microsoft Expression Business Software Games[2] & Xbox 360[3] Windows Live[4] Windows Mobile Zune[5]

Products

Type Founded Founder(s) Headquarters Area served

Public (NASDAQ: MSFT) Albuquerque, New Mexico (April 4, 1975)[1] Bill Gates Paul Allen Redmond, Washington, United States Worldwide Bill Gates (Chairman) Steve Ballmer (CEO) Ray Ozzie (CSA) Craig Mundie (CRSO) Don Mattrick (Senior VP of Entertainment and Devices) Computer software Consumer electronics

Key people

Discount Rate and DCF Valuation

Project 4

Industry

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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09

Capital Asset Pricing Model (CAPM) In 1964 William Sharpe published the Capital Asset Pricing Model. CAPM breaks the portfolio risk into systematic and specific risk. Systematic risk also knows as non diversifiable risk is the risk of holding the market portfolio. They also affect a large number of assets. Specific risk involves is when a unique to an single asset. specific risk can be diversified while systematic cannot. However systematic risk can be measure using beta. CAPM formula that we will be using is Ke= Risk + Beta (Market Risk Premium)

The RF inside of the market risk premium is again tied the US government treasure bond of ten year. According to our teacher in finance Ron Sweet, has his own theory about the risk free rate and the market risk premium. I have looked historical at the date for the 10 year treasury. I went to yahoo finance and downloaded the data from 1962 and calculated the median. The open yield average out to be 6.5. Again according to Sweet theory the treasury doesnt usually fall below 3.5. So we will use an adjusted to 4.5%.

Sweet theory suggest this 10 yr treasury = 4.-4.5 % Inflation = 2-2.5%

The risk free (RF) is pegged to the 10 year treasury.

Real rate = 2-2.5 %

The beta is a company specific risk. If the number is positive it general follows with the market. While a negative beta shows that it inversely follows this trend. A zero would indicate that the price is not correlated with the market. The beta in effect equals one. If a company has a beta of lets say 2 than it is two times more risky than the overall market.

The KE is the required rate of return. The RM inside of the market risk premium is the expected return of the overall stock market.

Our teaching has also noted in class that the market risk premium is in the air for speculation. In addition he has given us a investment insights from Barclays global investors. They have listed on the conclusion that the equity risk premium is around 3.25% and in condition of 2002 they have it pegged around 2.5%. They do forecast of market return of 7.5% over the next ten years. We will be using a steady 3.5%. for our equity risk premium.

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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09

The beta number is also highly controversial and our teacher doesnt like the beta numbers that Yahoo and other sources give. You can also find many articles if you were to type in Beta is Dead on Google.

industry can be different. Usually Tech firms such as MSFT, AAPL, and GOOG have more higher on the beta side due to nature of the environment. GOOG right now range is selling anywhere between 551 and 557 dollars.

Beta in effect will be figured out like this. For beta I will be using the following.
The next page shows a graph showing the 3

year rolling beta median for Microsoft.

Beta is defined in finance, the beta () of a stock or portfolio is a number describing the relation of its returns with that of the financial market as a whole. This is from Wikipedia.

Risk Free rate (adjusted) = 4.5% equity risk premium = 3.5 (Historical Barclays conclusion to above) My beta median for Microsoft (MSFT) =1.1 IF we do the math we get Ke =8.35% required rate of return.

Stock analyst use beta to measure the risk of a stock. Higher the number the higher the risk. It has a substantial risk rate that is accordance to the market. How do we measure systematic risk? We use the beta coefficient to measure systematic risk What does beta tell us?

Ke (Base) = Rf + * (Rm Rf)

= .045 + 1.1 (.035) = .0835 = 8.35 %

A beta of 1 implies the asset has the same systematic risk as the overall market A beta < 1 implies the asset has less systematic risk than the overall market A beta > 1 implies the asset has more systematic risk than the overall market

Historically the trend with the stocks beta has been around the .7 to 1.1 range. Every

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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09

To further extend the CAPM analysis I will also include the high and low Ke. This will bring forth the other Ke possibilities. Ke (High) = Rf + * (Rm Rf)

Exhibit 1
MSFT Beta from 1994 to 2009 and 3 year rolling median at 1.10 1.40 1.20 1.00 0.80 0.60 0.40

= .045 + 1.3 *.035=.0905 = 9.05% Ke (Low) = Rf + * (Rm Rf) = .045 + 1 *.035=.08 =8%

3 year median, 1.10

3 year beta, 0.74

I will be using three models to my valuations

0.20

Capitalized Earnings Constant Growth Dividend Model H- Model

Growth Rates. We will have to figure out Long term and the US economy growth. Here is a chart From Barclays showing the Labor for growth and the average production growth. They have assembled the numbers of average labor force as 1.7 % from the year 1960-2001. On the productivity side they have it at 1.9%,

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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09 Exhibit 2

forward to understand however but difficult to find the actual capitalization rate. However, our teacher Ron Sweet has injected some percentages for us.

required rate of (Ke) Of 7-9.5% growth (G) of 2-2.5%. We going to assumed that to find the value of the firm they are paying out all earnings out.

In each of our case according to our teacher

Ron Sweet we will assume long term

growth to be as followed. CPI = 2-2.5 % Productivity = 1.5-2.5% Labor growth = 1.5-2.5 %

The formula for capitalized earnings we will be using is EPS0 (1+g) / Ke-g Ke is always greater than g. If not the stock is considered perpetual. Here is what we need for Capitalized earnings. Of Microsoft (MSFT)

Capitalized earnings
Capitalized earnings refer to the return of investments that is expected by the investor. It more or less the starting point for the valuation. This method involves potential future earnings divided by a capitalization rate. This method is straight

Beta range of 1%-1.2% EPS0 = 1.62 as of 10/23/09 on yahoo finance Ke= range of 8% - 9% Formula to get Ke

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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09

.045 +1 *.035= 8% Growth = 2-2.5% Exhibit 3

$35.00
MSFT- Capitalized Earnings Model vs the acutual price of $26

The results are as follows

$30.00

BETA growth EPS1 Ke market current

1 0.025 1.6605 0.08 $ 30.19 $ -

1.1 0.0225 1.65645 0.0835 $ 27.15 $ 26.00

1.2 0.02 1.6524 0.087 $ 24.66 $ -

$25.00
CAPM RESULTS

$20.00

$15.00
CURRENT STOCK PRICE OF $26

$10.00

$5.00

After running the numbers using the different beta, growth and discount rates we come up a little high than the actual price. However if we have a higher Ke and a higher beta our market value comes out smaller than the actual price. According to yahoo price of Microsoft (MSFT) was $26 as of 10/21/09. The 52 week low and high is as follows.

$HIGH BASE LOW

The capitalized earnings have three different Ke values, growths rates, and beta. Ke base = 27.15 Ke low = 24.66 Ke high = 30.19

52 week low and High

Low= 14 High = 29

The range of the stock is therefore concluded that in the capitalized earnings we can have numbers that are as low as 24.66 to 30.19. That is intolerance of the low and high of 14-29 dollars.

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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09

Constant Growth Model Gordon DDM

The constant-growth DDM aka Gordon Growth model, because it was made by Myron J. Gordon assumes that dividends grow by a specific percentage each year, and is usually denoted as g, and the capitalization rate is denoted by k. While the Gordon growth model is a simple and powerful approach to valuing equity, its use is limited to firms that are growing at a stable rate.

Here we are going to use Div 0 =.52 according to yahoo on 10/23/09 Beta = 1- 1.2% range Low 8% 6% $ 18.20 $ 14.87 Base 8% 5.5% $ 19.25 $ High 9% 5% $ 20.41 $ 26.75

Ke growth price actual

26.23

52 wk low Actual price = 26.23 Exhibit 4

52 wk high

The formula for The Gordon Growth Model is

Gordon Growth Model (DDM) of MSFT price & actual price of $26 $30.00

Value of Stock = DPS1 / ke-g

$25.00

actual , $26.2 3

DPS1 = Expected Dividends next year ke= Required rate of return for equity investors g = Growth rate in dividends forever

$20.00

$15.00 DDM PRICE RANGE OF $14.76$27.56

$10.00

$5.00

$Low Base High

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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09

Again here like the capitalized earnings we also have three different growth rates of 5, 5.5, and 6% However keep that in mind that will assume that our price will be below the acutal price $26. The prices we are left with are this. Ke base= 19.25 Ke low = 18.20 Ke high = 20.41

Microsoft vs. the Industry Application Software. As you can see here Microsoft does exceptionally well in its industry.

Exhibit 5

Conclusion to DDM model The dividend discount model, however, depends on projections about company growth rate and future capitalization rates of the remaining cash flows. I would also like to include that annual revenues have also shot up from 2005 to 2008 to 8% increase. I have some information from http://www.thedivnet.com/2009/01/microsoft-msft-dividendstock-analysis.html on Microsoft stock analysis. They have data from 1999 to 2008. Microsoft has managed to increase an 11.30% average annual increase in its EPS since 1999. They have had a low payout that has been under 30 % since 1999. That leaves more room for dividend growth.

Source Smith and Barney

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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09

Exhibit 6

Exhibit 7

Average Annual Total Returnsdaily through Oct 23,2009 MSFT vs Industy vs S&P
3 month YTD 5yr 3 yr 1 yr -20 0 20 40 MSFT 60

Source Smith and Barney

S&P 500 index industry

Source Smith and Barney( graph made by me though) Source Smith and Barney

H model
The H model can be broken down into three separate stages.

The first stage has to do with a companys initial stages. The time frame can be between two and five years. This stage with go into the initial growth period. Due to high cost of starting a IT firm up, the company may have no cash flows and will therefore be considered a high risk company that can more than likely fail or if

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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09

they do pull it off they can sky rocket. Microsoft was one of the few that blasted past most peoples perception. The first stage may have substantial high growth but then the second stage kicks in gear and brings the figures growth rate linearly to its initial stage, until long term growth is reached. The last stage with begin to balance it out according to the market so investors can get a real sense of more or less of what the company could be worth.

Exhibit 8

H model of Microsoft
90 80 70 60 50 40 30 20 10 0 low base

H model forcas t prices , 80.05 725 actual stock price, $26.2 3

high

For our H model we will use the formula

= Div 0 (1+g) +div1 +(gs-gl)/ Ke-g

Ke Earnings st Half life earnings LT prices actual low 8% 15 8% 6% 19.9732 $ 14.87 base 8.5% high 9%

Standard and Poor decision on hold. They give it 3 stars out of 5

52 wk low

Sep-Q EPS of $0.40 vs. $0.48 is $0.08 above our estimate. Revenues fell 14% to $12.9B, but were $388M above our forecast, as the 25 35 company saw stronger PC demand and 12% 18% Xbox sales. We believe MSFT benefited from an inventory build in anticipation of 6% 5% 53.51515 106.561 the launch of Windows 7.We expect the $ 26.23 $ 26.75 premium mix to rise as enterprises gradually adopt Windows 7 over the next couple of years. Despite an improvement in the economy, MSFT plans to maintain cost 52 wk high discipline. We raise our FY 10 (Jun) EPS estimate $0.14 to $1.67 on higher revenues and lower expenses, and our target price by $3 to $30.

J.Yin from S&P

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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09

Final Conclusion
Looking back at the historical price of Microsoft makes me wander. Before the IT crash hit Microsoft stocks were hot. In 1999 they had a value of in the 40 dollar range. Will they achieve that again? I think it is safe to say yes. If Google can have a 500 and up price range than Microsoft can surely see an increase of a few more dollars in its tank. I look at revenues streams that have also gone up consistently in the past 5 years and from doing the three different models it was interesting to see the different prices that Microsoft could attain. I do like the H model predictions of someday seeing Microsoft sell in the 100 dollar range. I also think to answer this question properly you have to look at long term and short term. In the long term I see Microsoft gaining more market share in the internet market. Thanks in part to the yahoo and Bing merger. The short term band aid fix on the horrible Vista to Windows 7 is an improvement that we can see a rise in short. I have looked at the price of the stock in a couple of different angles and I do see this stock as having potential. However they are up and comers like Google with its SAS software that is tackling Microsoft Office Suit. Therefore Im concluding and in agreement with S&P J Yin that it is a hold at the current price of $26. I do see potential earnings for this stock to shoot past the 30 dollars range and beyond.

Microsoft Project 5

Relative valuation (Part A) Exhibit 1 MSFT vs S&P P/E of Oct of 2009

25 20 15 10 5 0

MSFT

S&P

Based on the graph above as of October of this year, Microsoft is about around 15 % cheap compared to the market.

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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09

Relative valuation formula P/E = share price / Earnings per share The historical P/E of Microsoft has been higher than the S&P 500. However as of 2008 February the P/E of Microsoft started to see a 1 to 1 ratio.

the S&P on P/E. I was able to get data from around from around 1987 from Microsoft and S&P of the PE ratios thanks in due part to my teacher Ron. This graph on exhibit 2 shows the normal P/E range from the years of 1987 to 2008 of MSFT median compared to the historical PE price. As of October of this year Microsoft P/E ttm is currently at the price of 19.25. Exhibit 2

The Price earnings ratio (often simply referred to as the "P/E") shows the relationship between a stock price and its company's earnings (or profits) per share of stock. P/E ratios is sometimes used as a proxy for investors assessments of the company ability to generate cash flow into the future.

MSFT historical PE against its historical median of 1.5 above the market.
3 2.5 2 1.5 1 0.5 12/31/1987 12/31/1990 12/31/1993 12/31/1996 12/31/1999 12/31/2002 12/31/2005

Microsoft historical P/E levels from 1987 to 2008 are in the range of 8 98.

relative

msft median

Currently the situation at Microsoft as of Oct of this year is trailing a bit lower than

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12/31/2008

William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09

Microsoft median relative over its median in the early years of 1987 has been higher than currently but it has jumped up and down and when the IT 2001 crash begun to sink. Microsoft info Exhibit 3

MSFT Peg ratio is as of Nov 13,09 is =1.49 Apple (AAPL Peg is set at 1.47 ) Here is a comparison that shows the competitors of MSFT faces in terms of P/E, P/S, and Peg ratio. Exhibit 4

Source yahoo finance

Source yahoo finance Exhibit 5

Peg Ratios formula is

Peg ratios Msft vs competitors and industry

industry 1.33 1.13 1.18 1.47 1.49 Oracle Google APPLE Microsoft

Peg Ratios show us that a couples things. First it can show companies expected growth and second it shows the relationship between the price of the stock and growth.

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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09

I was able to get some information on the P/S from Microsoft for the last 4 years. Its 60% of lower now, against the year 2006. Exhibit 6

lower the ratio the more favorable the investment is going to be.

If we look at Exhibit 4 at see MSFT market cap is around 263.40 Billion And the revenues are around 56.30 Billion IF you divides those you P/S of 4.67 AAPL= P/S 4.98 Industry P/S = 2.74

Conclusion to P/S They are both overvalued here by the industry. A better buy would be Microsoft compared to Apple because of the lower price compared to the industry. If youre doing a comparison on which is a better buy you have to compare the same industry competitors with each other like the diagram above

Source Standards and Poors

Price to book
The current Peg ratio shown to the left on Exhibit 5 for Microsoft is at 1.49. Typically we want a Peg ratio that is less than 1.0. Microsoft like the rest of the gang exceeds that. Therefore MSFT is overpriced. Book Value Per Share = (Total Shareholders Equity) / (Shares Outstanding)
Another common financial ratio valuation to measure is the price/book ratio (P/B), which is a stock's market value with its book value (also known as shareholder equity) from the latest balance sheet. The P/B is not the best indicator of an IT corporations richness or cheapness for example, if a company has significant intangible assets such as brand names, market share, and other competitive advantages. However for

Price to sales
The P/S shows the investor how much of the market is willing to pay for every dollar of the company sales. Bottom line said is

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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09 Finance companies its a must have and our teacher Ron wanted us to still include the P/B number. Forward P/E and Peg ratios are better at valuation of a company

Conclusion to P/B
Therefore based on my relative valuation of MSFT price of 29.94 as of 11/23/09 I recommend a hold for right now. I have based this on a couple of reason. The first is the MSFT Peg ratio is higher than its competitors shown in Exhibit 5 and its industry. Sales are less subject to accounting manipulation than earnings, so the price to sales ratio has this benefit over the better known price to earnings ratio. MSFT ttm P/S is lower than the competitors but is higher than the industry. The low P/s price of 4.63 could mean for MSFT small increase in margins will significantly raise earnings per share.

Exhibit 7

MSFT P/B of 6.40 vs other competitors of 2009

7 6 5 4 3 2 1 0 P/B ratio

Technical Analysis (part B)

We were given some information by our teacher Ron Sweet about Technical Analysis. I have heard from past from my friend that mentioned different patterns and cycles in the world, but clearly had no idea it was true. The term he told me was called chart analysis and also watched a video on it but got frustrated with the exact details. All I could remember was they were using past information to predict the future decision of some sort. Technical analysis is using information in or related to stock prices to make buy and sell decisions.

America was once a time when sprawling factories and manufacturing were in plain site. Now that tide is turning away. Both MSFT and AAPL are greater than the market average of P/B ratio of around 3. Importantly, each of these companies has highly successful products and services. AAPL has its consumer electronics while MSFT has its dominating operating system

The efficient-market hypothesis was developed by Professor Eugene Fama at the University of Chicago Booth School of Business as an academic concept of study through his published Ph.D

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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09

There are three fama test. weak-form efficiency, future prices cannot be predicted by analyzing price from the past. Eugene didnt agree with this one either. Semi strong- test of fundamental analysis and technical analysis combined. Can the open use of public information lead to buying and selling decisions that beat the market? Eugene once again said no way.
Strong-form efficiency all relevant information, including that which is privately held, is reflected in the share price. Answer to this is we dont know. Technical analysis is interested in patterns driven by the market over and under reactions to emotions according to our teacher

Ron.

MSFT historical closes prices Exhibit 8

MSFT historical Close from 2008-2009 prices and the 50, 100, and 200 moving day averages
29 27 25 23 21 19 17 15 12/31/2008

Resistance

Support level
2/28/2009 Close 4/30/2009 200 MA 6/30/2009 100 MA 8/31/2009 50MA 10/31/2009

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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09

This graph is big to show you the detail of moving averages and prices close. In addition I have labeled the resistance and support levels. There is a breakout price of 24 and 25 at the support level at the date around 8/31/09. Moving averages are one of the most popular and easy to use tools available to the technical analyst. The most commonly used time frames for moving averages are 10, 20, 50, and 200 periods on a daily chart. However we will omit the 10 and 20 and add the 100 day moving average. 200 MA is not as responsive in as the 50 MA. If you look at the graph above and notice that it would take you around 10/31/09 to get into the market. Where is if you use n=50MA you begin to get into the game at 4/30/09. The MSFT at 2/28/09 price indicates it as 15 at a low support. When it finally reaches past 29 the 200 MA now decides to makes it mind up and shift in a new direction being up. According to wiki invest they say, Technical traders will look to the convergence or divergence of moving averages, known as MACD, with different periods (or values of "N") to indicate patterns of resistance or support which technical traders believe indicate where a stock price is likely to move in the future.

Conclusion Technical Analysis price of MSFT.

We begin to move our eyes to the right of the date of 4/30/09. We begin to see the 50 day and 100 day moving average beginning to make forward momentum process. This indicates to use that we should start to buy on that date alone. MSFT 50 and 100 day moving average begin to soar from its support level of around 18 and climb up the ladder to 26. Its a fascinating tale of buying and staying in. There might be a question as weather to sell on 8/31/09 and again in the later date; however because of the 50 and 100 day is climbing one might not be inclined to do so.

Project 6

Philosophy in stock portfolio management

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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09

Overview- I dont have much experience in buying stock. Much of the information comes from my stock broker that I meet about once a year. I do have around $1000 in stocks and another $4000 in bonds. Someday I want the numbers inversely change to $4000 in stocks. I have done research and with my account at Smith and Barney via Capital One. I have a Legg Mason aggressive fund. My philosophy will be based off of funds objectives by, CFA instituted theory, BUZZLE.COM, GLOBAL VALUE INVESTING, money talk, USAA, and Merril Lynch that are doing the best job at portfolio management in my opinion.

Philosophy- I believe in accordance with the Legg Mason that common stock that are experiencing or will experience long term growth exceeding the average rate of earnings growth of the companies which consist of the S&P 500 index. I have found alternate sources of wisdom on USAA website about how diversify their portfolio.

Long-term earnings growth Solid, sustainable business models Strong financial statements and a combination of attractive growth prospects and reasonable valuations Source USAA

I have the belief that value investing refers to a philosophy or practice of buying stocks that are fundamentally sound. Fundamentals by meaning of ,dividends, earnings growth, cash flow, and book value are more critical than market forces on the stocks price. On Buzzle.com they list some valuation techniques such as the following.
How do Value Investors find a potential investment? - price to earnings ratio is in the bottom 10 percentile for its sector - debt to equity ratio is less than 1 - price to book value ratio is less than 1 - PEG value of less than 1 - Stock value is trading at 60-70% of its intrinsic value

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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09

Risk- The CFA institutes assess risk tolerance Risk is often defined as portfolio volatility,
or the fluctuation in the value of your assets over time. They also go to mention that your tolerance for risk is a very personal characteristic that may be difficult to determine and may change over time. They specifically state age and risk have a strong correlation. One being that when one is older he/she that makes aggressive funds that fail have less time to make up with the poor investments, whereas a younger person can make more aggressive deals. However, if one has enough to fault on such bad deals and has more than one egg in the basket, maybe which might not be such a bad deal at all. The older one gets also the circumstances and wealth will probably change.

Selection process- I have insight on useful information found on Global Value Investing.
Their criterion that seems somewhat similar to our teacher Ron was perching about. Four-Step Common Stock Selection Process 1 Search for investment ideas within circle of competence. 2 Evaluate the company using discounted cash flow model. 3 Study the company and its competitors exhaustively. 4 Decide whether to buy with margin of safety, sell or hold. Source http://www.numeraire.com/fourstep.htm With these four objectives in mind lets dig the rabbit hole a bit deeper. 1 The search methods are a mechanical filtering and rank ordering of databases. As our teacher Ron has showed us a good process of elimination of stocks by sector and then by if the stocks were high quality or not. The valuation model is used most often for minority interests in individual common stocks. The circle of competence is a specific application of the general principle of differential knowledge.

2 Determine margin of safety. Using margin of safety, one should buy a stock when it is worth more than its price on the market. Warren Buffet I have heard buys stocks at 50% off the discount actual price. Pricing models include the use of technical analysis charts for trend and momentum. We have done this in our last project and it helped me a lot determine on my company the 50 day moving average a bit. As our teacher is in agreement to this we were not allowed to use yahoos beta coefficient for our companies. We had to figure that out for ourselves. Also

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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09

beware of hybrid models that incorporate both valuation and pricing such as the use of beta coefficients or so-called volatilities.

3 Study the company, its competitors, and its industry exhaustively if the margin of safety is sufficiently compelling to justify further interest. This was apparent throughout our project. I was constantly comparing MSFT with AAPL. I found this very helpful in determining how well MSFT was doing compared to its competitors and industry.

4 Time to choose whether or not there is sufficient safety margin to execute a market order to open a long position to buy the stock. Catalysts to consider I have found some themes off of Merril Lynch web site.

These were included in 08 top internet themes that could create trading opportunities in the group. Some of the themes included are Increasing focus on mobile market initiatives and A bump Online media spending.

These are some macro factors to consider.

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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09

1. Demographic problems are currently concentrated in the developed nations. . 2. Public policy refers to global imbalances, managed exchange rates and inflation. It is widely believed that managed exchange rate policies cannot be maintained indefinitely and therefore wonder whether, on a 10-year view, there is a case for favoring Asian equities over US equities. 3. The key Geopolitical question is the impact of a shift from East versus West ideological differences to differences in religious ideologies and the related impact on the peace dividend. 4. By Chindia we refer to the rise of populous economies that (a) are highly competitive producers of goods and services and (b) have a large and growing middle class that could be a meaningful source of global demand. There could be the rise of a significant middle class should reduce reliance on the US consumer and is positive for world growth, and hence global equity returns. 5. The Energy factor addresses the confirmed growth in demand for energy. The supply of and demand for oil is inelastic in the short run, and any imbalances between the two will generate Considerable price volatility. The view that energy prices could be considerably higher than expected over the next 10 years with potential negative consequences for equity returns. 6. It is possible that the Environment factor will become meaningful over the next 10 years. There might be a significant increase in costs to business which cannot be passed on to consumers, hence dampening corporate profits and equity returns.

7. In a world where it is possible for investors to make misjudgments, the main cause of market volatility is the dynamic beliefs of investors as they struggle to interpret news. The shift in the average state of beliefs between optimism (bullish) and pessimism (bearish) and back generates investment regimes. (source from http://www.watsonwyatt.com/asiapacific/pubs/perspective/docs/WW_MoneyTalk_06May.pdf)

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William Raymond Project 5A and 5B FINC 4331 Ronald Sweet Dec 1, 09

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Microsoft (MSFT NYSE) Project 1 for Ron Sweet Sep 22 William Raymond