where im coming from is using a simple dcf model of msft earnings. used following params for dcf:


bottom line growth compounded 14% for next 10 yrs.


bottom line growth compunded 7% after 10 yrs.


discount rate of 13%


consensus bottom line for fiscal 2002 $1.83 per share.


used a discount rate of 13% using 10 year govt bond rate with approx historical stock mrkt risk premium.


of course modeling msft earnings isnt that simple however it might give some clue. with those params i came up with a stock value per share of $54.86. for fiscal 2003 consensus earnings growth for msft is $1.92 a share so a year over year growth rate of about 5% is anticipated for 2003. this is a far cry from 14% as well as a far cry from 7%. is 14% earnings growth compounded for msft too optimistic? yeah i think so. does msft deserve historical stock market risk premium? yeah i think so. basically msft is trying to change their business model and thats always a risky proposition. interestingly i did a dcf for a constant 5% growth rate and came up with something like $20 a share. now we are looking at a very high discount rate. what im sayin is that investors will demand the historical risk premium for stocks because they are going to be very conservative in their valuations. if im wrong then stocks, in particular msft, will have higher valuations based on parameters ive given. for instance


say msft has the following growth prospects:


bottom line growth compounded 10% for next 10 yrs.


bottom line growth compunded 5% after 10 yrs.


if I use a discount rate of 10.5% which implies a risk premium of 5.5% then a fair value for msft on a per share basis is $51.24.


if I use a discount rate of 13.5% which implies a risk premium of 8.5% then a fair value for msft on a per share basis is $31.99 a share.


the premise im making my market calls on is that the risk premium is closer to 8.5% than 5.5%. if im wrong im wrong about the market.