Estimating Share Value Using the ROPI Model

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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 Years Ended December (In Millions, Except Per Share Amounts) Net revenue 2012 2011 2010 $ 53,341 $ 53,999 $ 46,623 Cost of sales 20,190 20,242 15,132 Gross margin 33,151 33,757 28,491 Research and development 10,148 8,350 6,576 8,057 7,670 6,309 308 260 18 Operating expenses 18,513 16,280 12,903 Operating income 14,638 17,477 15,588 141 112 348 94 192 109 Income before taxes 14,873 17,781 16,045 Provisions for taxes 3,868 4,839 4,581 Marketing, general and adminstrative Amortization of acquisition-related intangibles Gains (losses) on other equity investments, net Interest and other, net Net income $ 11,005 $ 12,942 $ 11,464 INTEL CORPORATION Consolidated Balance Sheets As of Year-Ended (In millions, except par value) Dec. 29, 2012 Dec. 31, 2011 Assets Current assets $ 8,478 $ 5,065 Short-term investments 3,999 5,181 Trading assets 5,685 4,591 Accounts receivables, net 3,833 3,650 Inventories 4,734 4,096 Deferred tax assets 2,117 1,700 Other current assets 2,512 1,589 Cash and cash equivalents INTEL CORPORATION Consolidated Balance Sheets Dec. 29, 2012 Dec. 31, 2011 Total current assets 31,358 25,872 Property, plant and equipment, net 27,983 23,627 4,424 562 493 889 Goodwill 9,710 9,254 Identied intangible assets 6,235 6,267 Other long-term assets 4,148 4,648 As of Year-Ended (In millions, except par value) Marketable equity securities Other long-term investments** Total assets $84,351 $71,119 Liabilities Currnet liabilities Short-term debt $312 $247 Accounts payable 3,023 2,956 Accrued compensation and benets 2,972 2,948 Accrued advertising 1,015 1,134 Deferred income 1,932 1,929 Other accrued liabilities 3,644 2,814 12,898 12,028 13,136 7,084 Long-term deferred tax liabilities 3,412 2,617 Other long-term liabilities 3,702 3,479 -- -- 19,464 17,036 (399) (781) Retained earnings 32,138 29,656 Total stockholders' equity 51,203 45,911 Total liabilities and stockholders' equity $ 84,351 $ 71,119 Total current liabilities Long-term debt Stockholders' equity Preferred stock, $0.001 par value, 50 shares authorized; none issued Common stock, $0.001 par value, 10,000 shares authorized; 4,944 issued and outstanding (5,000 issued and outstanding in 2011) and capital in excess of par value Accumulated other comprehensive income (loss) ** These investments are operating assets as they relate to associated companies. (a) Compute Intel's net operating assets (NOA) for year-end 2012. 2012 NOA = $ 0 (b) Compute net operating profit after tax (NOPAT) for 2012, assuming a federal and state statutory tax rate of 37%.(Round your answer to the nearest whole number.) 2012 NOPAT = $ 0 (c) Forecast Intel's sales, NOPAT, and NOA for years 2013 through 2016 using the following assumptions: Sales growth 10% Net operating prot margin (NOPM) 20.4% Net operating asset turnover (NOAT) at year-end 1.27 Forecast the terminal period value using a terminal period growth of: 1% and the NOPM and NOAT assumptions above. INTC Reported ($ millions) 2012 Sales (rounded two decimal places) Sales (rounded nearest whole number) NOPAT (rounded nearest whole number)* NOA (rounded nearest whole number)* $ Forecast Horizon 2013 Est. 53341 53341 0 0 $ 0 2014 Est. $ Terminal 2015 Est. 0 $ 2016 Est. 0 $ Period 0 $ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 * 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 29, 2012; assume a discount rate (WACC) of 11%, common shares outstanding of 4,944 million, and net nonoperating obligations (NNO) of $(9,138) million (NNO is negative which means that Intel has net nonoperating investments). Use your rounded answers for subsequent calculations. INTC Reported ($ millions) 2012 Forecast Horizon 2013 Est. ROPI Model 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) Cum present value of horizon ROPI Present value of terminal ROPI NOA Total rm value Plus negative NNO $ 0 $ 0 0 0 0 2014 Est. 0 2015 Est. 0 0 0 Terminal 2016 Est. 0 0 0 0 0 0 0 0 Period 0 (rounded to nearest whole number) (rounded to nearest whole number) (rounded to nearest whole number) (rounded to nearest whole number) (enter as a negative number) INTC Reported ($ millions) 2012 Firm equity value $ Shares outstanding (millions) Stock value per share 2013 Est. 0 0 $ Forecast Horizon 0 2014 Est. Terminal 2015 Est. 2016 Est. Period (rounded to nearest whole number) (rounded to nearest whole number) (rounded to two decimal places) (e) Intel (INTC) stock closed at $21.09 on February 19, 2013, the date the Form 10-K was led with the SEC. 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) yes Our stock price estimate is higher than the INTC market price as of February 19, 2013, indicating that we believe the stock is undervalued. yes Stock prices are a function of expected NOPAT and NOA, as well as the WACC discount rate. no 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. yes Our higher stock price estimate may be due to more optimistic forecasts or a lower discount rate compared to other investors' and analysts model assumptions