Estimating Share Value Using the ROPI Model.

Assume the following are the income statement and balance sheet for Intel Corporation.

4/30/2017 Module 14 Quiz QUESTION 1 Not complete Points out of 1.00 Estimating Share Value Using the ROPI Model Assume the following are the income statement and balance sheet for Intel Corporation. INTEL CORPORATION Consolidated Statements of Income Year Ended (In millions) Dec. 25, 2010 Dec. 26, 2009 Dec. 27, 2008 Net revenue $ 44,123 $ 35,127 $ 37,586 Cost of sales 15,132 15,566 16,742 Gross margin 28,991 19,561 20,844 Research and development 6,576 5,653 5,722 Marketing, general and adminstrative 6,309 7,931 5,452 -- 231 710 18 35 6 Operating expenses 12,903 13,850 11,890 Operating income 16,088 5,711 8,954 Gains (losses) on equity method investments, net* 117 (147) (1,380) Gains (losses) on other equity investments, net 231 (23) (376) Interest and other, net 109 163 488 Income before taxes 16,545 5,704 7,686 Provisions for taxes 4,581 1,335 2,394 $ 11,964 $ 4,369 $ 5,292 Restructuring and asset impairment charges Amortization of acquisition-related intangibles Net income *These should be considered as operating income. INTEL CORPORATION Consolidated Balance Sheets Dec. 25, 2010 Dec. 26, 2009 Assets Current assets Cash and cash equivalents $ 5,498 $ 3,987 Short-term investments 11,294 5,285 Trading assets 5,093 4,648 Accounts receivables, net 2,867 2,273 As of Year-Ended (In millions, except par value) https://mybusinesscourse.com/platform/mod/quiz/attempt.php?attempt=1169732 2/7 4/30/2017 Module 14 Quiz INTEL CORPORATION Consolidated Balance Sheets As of Year-Ended (In millions, except par value) Dec. 25, Dec. 26, 2010 2009 Inventories 3,757 2,935 Deferred tax assets 1,488 1,216 Other current assets 1,614 813 Total current assets 31,611 21,157 Property, plant and equipment, net 17,899 17,225 Marketable equity securities 1,008 773 Other long-term investments** 3,026 4,179 Goodwill 4,531 4,421 Other long-term assets 5,111 5,340 $63,186 $53,095 Liabilities Currnet liabilities $38 $172 Accounts payable 2,190 1,883 Accrued compensation and benets 2,888 2,448 Accrued advertising 1,007 773 622 593 Other accrued liabilities 2,482 1,722 Total current liabilities 9,227 7,591 190 193 1,677 2,049 926 555 1,236 1,003 13,256 11,391 -- -- 16,178 14,993 333 393 33,419 26,318 Total assets Short-term debt Deferred income on shipments to distributors Long-term income taxes payable Long-term debt Long-term deferred tax liabilities Other long-term liabilities Total liabilities Stockholders' equity: Preferred stock, $0.001 par value Common stock, $0.001 par value, 10,000 shares authorized; 5,581 issued and 5,511 outstanding and capital in excess of par value Accumulated other comprehensive income (loss) Retained earnings https://mybusinesscourse.com/platform/mod/quiz/attempt.php?attempt=1169732 3/7 4/30/2017 Module 14 Quiz INTEL CORPORATION Consolidated Balance Sheets As of Year-Ended (In millions, except par value) Total stockholders' equity Total liabilities and stockholders' equity Dec. 25, Dec. 26, 2010 2009 49,930 41,704 $ 63,186 $ 53,095 ** These investments are operating assets as they relate to associated companies. (a) Compute Intel's net operating assets (NOA) for year-end 2010. 2010 NOA = $ (b) Compute net operating prot after tax (NOPAT) for 2010, assuming a federal and state statutory tax rate of 37%. HINT: Gains/losses on equity method investments are considered operating income. Round your answer to the nearest whole number. 2010 NOPAT = $ (c) Forecast Intel's sales, NOPAT, and NOA for years 2011 through 2014 using the following assumptions: Sales growth 10% Net operating prot margin (NOPM) 26% Net operating asset turnover (NOAT) at scal year-end 1.50 Forecast the terminal period value using the assumptions above and assuming a terminal period growth of: 1%. INTC Reported ($ millions) 2010 Sales (rounded two decimal places) $ Forecast Horizon 2011 Est. $ 2012 Est. $ Terminal 2013 Est. $ 2014 Est. $ Period $ Sales (rounded nearest whole number) https://mybusinesscourse.com/platform/mod/quiz/attempt.php?attempt=1169732 4/7 4/30/2017 Module 14 Quiz INTC ($ millions) Forecast Horizon Reported 2010 2011 Est. 2012 Est. Terminal 2013 Est. 2014 Est. Period NOPAT (rounded nearest whole number)* NOA (rounded nearest whole number)* * Use sales rounded to nearest whole number for this calculation. (d) Estimate the value of a share of Intel common stock using the residual operating income (ROPI) model as of December 25, 2010; assume a discount rate (WACC) of 11%, common shares outstanding of 5,511 million, and net nonoperating obligations (NNO) of $(21,178) million (NNO is negative which means that Intel has net nonoperating investments). Use your rounded answers for subsequent calculations. INTC Reported ($ millions) 2010 ROPI Model Forecast Horizon 2011 Est. 2012 Est. Terminal 2013 Est. 2014 Est. Period ROPI [NOPAT (NOA beg x WACC)] (rounded to nearest whole number) Discount factor (rounded to 5 decimal places) Present value of horizon ROPI (rounded to nearest whole number) https://mybusinesscourse.com/platform/mod/quiz/attempt.php?attempt=1169732 5/7 4/30/2017 Module 14 Quiz INTC Reported ($ millions) 2010 Forecast Horizon 2011 Est. 2012 Est. Terminal 2013 Est. 2014 Est. Period Cum present value of $ horizon (rounded to nearest whole number) ROPI Present (rounded to value of $ terminal nearest whole number) ROPI (rounded to NOA nearest whole number) (rounded to Total rm nearest whole value number) Plus (enter as a negative negative NNO number) Firm equity value $ nearest whole number) Shares (rounded to outstanding nearest whole (millions) number) Stock price per share (rounded to $ (rounded to two decimal places) (e) Intel (INTC) stock closed at $22.14 on February 18, 2011. How does your valuation estimate compare with this closing price? What do you believe are some reasons for the dierence? What investment decision is suggested from your results? (Select all that apply) Our lower stock price estimate may be due to more pessimistic forecasts or a higher discount rate compared to other investors' and analysts model assumptions. Our stock price estimate is higher than the INTC market price as of February 18, 2011, indicating that we believe the stock is undervalued. Stock prices are a function of expected NOPAT and NOA, as well as the WACC discount rate. Our higher stock price estimate may be due to more optimistic forecasts or a lower https://mybusinesscourse.com/platform/mod/quiz/attempt.php?attempt=1169732 6/7 4/30/2017 Module 14 Quiz discount rate compared to other investors' and analysts model assumptions. Check Save Answers https://mybusinesscourse.com/platform/mod/quiz/attempt.php?attempt=1169732 7/7