Forecasting and Estimating Share Value Using the DCF Model 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 $ 45,223 $ 35,127 $ 37,586 Cost of sales 15,132 15,566 16,742 Gross margin 30,091 19,561 20,844 Research and development 6,576 5,653 5,722 Marketing, general and administrative 6,309 7,931 5,452 Restructuring and asset impairment charges -- 231 710 Amortization of acquisition-related intangibles 18 35 6 Operating expenses 12,903 13,850 11,890 Operating income 17,188 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 17,645 5,704 7,686 Provisions for taxes 4,581 1,335 2,394 Net income $ 13,064 $ 4,369 $ 5,292 *This should be considered as operating income. INTEL CORPORATION Consolidated Balance Sheets As of Year-Ended (In millions, except par value) Dec. 25, 2010 Dec. 26, 2009 Assets Current assets Cash and cash equivalents $ 5,998 $ 3,987 Short-term investments 11,294 5,285 Trading assets 5,093 4,648 Accounts receivables, net 3,167 2,273 Inventories 3,757 2,935 Deferred tax assets 1,888 1,216 Other current assets 1,614 813 Total current assets 32,811 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 Total assets $64,386 $53,095 Liabilities Current liabilities Short-term debt $38 $172 Accounts payable 2,190 1,883 Accrued compensation and benefits 2,888 2,448 Accrued advertising 1,007 773 Deferred income on shipments to distributors 622 593 Other accrued liabilities 2,482 1,722 Total current liabilities 9,227 7,591 Long-term income taxes payable 190 193 Long-term debt 1,677 2,049 Long-term deferred tax liabilities 926 555 Other long-term liabilities 1,236 1,003 Total liabilities 13,256 11,391 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 16,178 14,993 Accumulated other comprehensive income (loss) 333 393 Retained earnings 34,619 26,318 Total stockholders' equity 51,130 41,704 Total liabilities and stockholders' equity $ 64,386 $ 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 = $Answer (b) Compute net operating profit 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 = $Answer (c) Use the parsimonious forecast method, as shown in Analysis Insight box on page 13-4, to forecast Cisco's sales, NOPAT, and NOA for 2011 through 2014 and the terminal period using the following assumptions. Sales growth 10% Net operating profit margin (NOPM) 26% Net operating asset turnover (NOAT) at fiscal year-end 1.50 Forecast the terminal period value using the assumptions above and assuming a terminal period growth of: 1%. INTC Reported Forecast Horizon Terminal ($ millions) 2010 2011 Est. 2012 Est. 2013 Est. 2014 Est. Period Sales (rounded two decimal places) Sales (rounded nearest whole number) 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 discounted cash flow (DCF) 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 $(21,678) million (NNO is negative which means that Intel has net nonoperating investments). Instructions: Use your rounded answers for subsequent calculations. Round all answers to the nearest whole number, except for discount factors and stock price per share. Round discount factors to 5 decimal places. Round stock price per share to two decimal places. Use a negative sign with your NNO answer. INTC Reported Forecast Horizon Terminal ($ millions) 2010 2011 Est. 2012 Est. 2013 Est. 2014 Est. Period DCF Model Increase in NOA FCFF (NOPAT - Increase in NOA) Discount factor Present value of horizon FCFF Cum present value of horizon FCFF Present value of terminal FCFF Total firm value NNO Firm equity value Shares outstanding (millions) Stock price per share (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 difference? What investment decision is suggested from your results? (Select all that apply) Answer Our stock price estimate is higher than the INTC market price as of February 18, 2011, indicating that we believe the stock is undervalued. Answer Stock prices are a function of expected NOPAT and NOA, as well as the WACC discount rate. Answer 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. Answer 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