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Hi Harold,

1. The interest expense* (1-tax rate) is used to add back the tax shield from debt, not the total taxes paid by the firm. Therefore, since MSFT has no debt, then only net income is used, and taxes are already taken into account in net income. Hopefully that clears that up a little bit.

2. This is the way the author does it, and I am not engineer, but it does indeed work. So, I am going to attach a MSFT Excel file with the CAP spreadsheet so you can see and play around with it.

3. I have seen CAPs done several times, and the analysts always hold them constant, so I do too. I think it is hard to forecast and most people are more comfortable modeling the changes after they occur.

If income rises faster than forecasted, CAP may not necessarily shorten because you forgot about the corresponding change in market capitalization. Maybe the CAP will lengthen, maybe it will shorten. It will depend on how the market assesses performance relative to competitors by awarding different market caps.

So, the spreadsheet is attached. Feel free to ask questions.


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