Forecasting and Estimating Share Value Using the DCF Model Following are the income statement and balance sheet for Intel Corporation. 18 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 35 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 $5,998 11,294 5,093 3,167 3,757 1,888 1,614 32,811 17,899 1,008 3,026 4,531 5,111 $64,386 $ 3,987 5,285 4,648 2,273 2,935 1,216 813 21,157 17,225 773 4,179 4,421 5,340 $53,095 $38 Current assets Cash and cash equivalents Short-term investments Trading assets Accounts receivables, net Inventories Deferred tax assets Other current assets Total current assets Property, plant and equipment, net Marketable equity securities Other long-term investments** Goodwill Other long-term assets Total assets Liabilities Current liabilities Short-term debt Accounts payable Accrued compensation and benefits Accrued advertising Deferred income on shipments to distributors Other accrued liabilities Total current liabilities 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 Total stockholders' equity Total liabilities and stockholders' equity ** These investments are operating assets as they relate to associated companies. 2,190 2,888 1,007 622 2,482 9,227 190 1,677 926 1,236 13,256 $172 1,883 2,448 773 593 1,722 7,591 193 2,049 555 1,003 11,391 16,178 333 34,619 51,130 $ 64,386 14,993 393 26,318 41,704 $53,095 (a) Compute Intel's net operating assets (NOA) for year-end 2010. 2010 NOA = $ 32,702 (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 = $ 12,849 (c) Forecast Intel's sales, NOPAT, and NOA for years 2011 through 2014 using the following assumptions: Sales growth 1096 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) $ 45,233 $ 49,745.3 $ 54,719.83 $ 60,191.99 $ 66,210.99 $ 72,832.09 Sales (rounded nearest whole number) 45,233 49,745 54,720 60,192 66,211 72,832 NOPAT (rounded nearest whole number)* 32,702 8,503 2,211 575 149 151 NOA (rounded nearest whole number)* 12,849 8,566 5,711 3,807 2,538 2,563 * 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 $(21,678) million (NNO is negative which means that Intel has net nonoperating investments). Use your rounded answers for subsequent calculations. Do not use negative signs with any of your answers below. Terminal Period 2013 Est. 2014 Est. (1,904) 2,478 0.73119 (39) INTC Reported Forecast Horizon ($ millions) 2010 2011 Est. 2012 Est. DCF Model Increase in NOA (4.283) (2,855) FCFF (NOPAT - Increase in NOA) 12,786 5,066 Discount factor (rounded to 5 decimal places) 0.9009 0.81162 Present value of horizon FCFF (rounded to nearest whole number) 6,387 1,029 Cum present value of horizon FCFF $ 7,200 (rounded to nearest whole number) Present value of terminal FCFF (845) (rounded to nearest whole number) Total firm value 6,355 (rounded to nearest whole number) NNO 21,678 Firm equity value 28,033 (rounded to nearest whole number) Shares outstanding (millions) 5,511 (rounded to nearest whole number) Stock price per share (rounded to two decimal places) 5.09 (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) yes Our stock price estimate is higher than the INTC market price as of February 18, 2011, indicating that we believe the stock is undervalued. no Stock prices are a function of expected NOPAT and NOA, as well as the WACC discount rate. yes 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. Forecasting and Estimating Share Value Using the DCF Model Following are the income statement and balance sheet for Intel Corporation. 18 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 35 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 $5,998 11,294 5,093 3,167 3,757 1,888 1,614 32,811 17,899 1,008 3,026 4,531 5,111 $64,386 $ 3,987 5,285 4,648 2,273 2,935 1,216 813 21,157 17,225 773 4,179 4,421 5,340 $53,095 $38 Current assets Cash and cash equivalents Short-term investments Trading assets Accounts receivables, net Inventories Deferred tax assets Other current assets Total current assets Property, plant and equipment, net Marketable equity securities Other long-term investments** Goodwill Other long-term assets Total assets Liabilities Current liabilities Short-term debt Accounts payable Accrued compensation and benefits Accrued advertising Deferred income on shipments to distributors Other accrued liabilities Total current liabilities 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 Total stockholders' equity Total liabilities and stockholders' equity ** These investments are operating assets as they relate to associated companies. 2,190 2,888 1,007 622 2,482 9,227 190 1,677 926 1,236 13,256 $172 1,883 2,448 773 593 1,722 7,591 193 2,049 555 1,003 11,391 16,178 333 34,619 51,130 $ 64,386 14,993 393 26,318 41,704 $53,095 (a) Compute Intel's net operating assets (NOA) for year-end 2010. 2010 NOA = $ 32,702 (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 = $ 12,849 (c) Forecast Intel's sales, NOPAT, and NOA for years 2011 through 2014 using the following assumptions: Sales growth 1096 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) $ 45,233 $ 49,745.3 $ 54,719.83 $ 60,191.99 $ 66,210.99 $ 72,832.09 Sales (rounded nearest whole number) 45,233 49,745 54,720 60,192 66,211 72,832 NOPAT (rounded nearest whole number)* 32,702 8,503 2,211 575 149 151 NOA (rounded nearest whole number)* 12,849 8,566 5,711 3,807 2,538 2,563 * 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 $(21,678) million (NNO is negative which means that Intel has net nonoperating investments). Use your rounded answers for subsequent calculations. Do not use negative signs with any of your answers below. Terminal Period 2013 Est. 2014 Est. (1,904) 2,478 0.73119 (39) INTC Reported Forecast Horizon ($ millions) 2010 2011 Est. 2012 Est. DCF Model Increase in NOA (4.283) (2,855) FCFF (NOPAT - Increase in NOA) 12,786 5,066 Discount factor (rounded to 5 decimal places) 0.9009 0.81162 Present value of horizon FCFF (rounded to nearest whole number) 6,387 1,029 Cum present value of horizon FCFF $ 7,200 (rounded to nearest whole number) Present value of terminal FCFF (845) (rounded to nearest whole number) Total firm value 6,355 (rounded to nearest whole number) NNO 21,678 Firm equity value 28,033 (rounded to nearest whole number) Shares outstanding (millions) 5,511 (rounded to nearest whole number) Stock price per share (rounded to two decimal places) 5.09 (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) yes Our stock price estimate is higher than the INTC market price as of February 18, 2011, indicating that we believe the stock is undervalued. no Stock prices are a function of expected NOPAT and NOA, as well as the WACC discount rate. yes 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