High-Growth or Stable-Growth Firm? Intel Corporation is a leading manufacturer of semiconductor chips. The firm was incorporated in 1968 in Santa Clara, California, and represents one of the greatest success stories of the computer age. Although Intel continues to grow, the industry in which it operates has matured, so there is some questions whether the firm sho9uuld be evaluated as a high-growth company or stable-growth company from now on. For example, in December 2007, the firm?s shares were trading for $20.88, which represented a price-earnings ratio of only 17.61. compared to Google Inc?s price-earnings ratio of 53.71 on the same date, it would appear that the decision has already been made by the market. Intel?s expected earnings for 2007 were $1.13 per share, and its payout ratio was 48%. Furthermore, selected financial data for the sector, industry, and seven of the largest firms (including Intel) are found in Exhibit 8.7.1 (attached)

• Is Intel?s current stock price of $20.88 reasonable in light of its sector, industry, and comparison firms?
• Intel has a beta coefficient equal to 1.66. If we assume a risk-free rate of 5.02% and a market risk premium of 5%, what is your estimate of the required rate of return for Intel?s stock using the CAPM? What rate of growth in earning is consistent with Intel?s policy of paying out 40% of earnings in dividends and the firm?s historical return on equity? Using your estimated growth rate, what is the volume of Intel?s shares using the Gordon (single-stage) growth model? Analyze the reasonableness of your estimated value per share using the Gordon model.
• Using your analysis in part b above, what growth rate is consistent with Intel?s current share price of $20.88?
• Analysts expect Intel?s earnings to grow at a rate of 12% per year over the next five years. What rate of growth from Year 6 forward (forever) is needed to warrant Intel?s current stock price (use your CAPM estimate of the required rate of return on equity)? (Hint: Use a two-stage growth model where Intel?s earnings grow for five years at 12% and from Year 6 forward at a constant rate)

PROBLEM 8-9 Given Beta Dividend payout ratio EPS for 2007 Stock Price (12/07/06) Anticipated growth rate in EPS (5 years) Description Sector: Technology Industry: Semiconductor - Broad Line Intel Corp. Texas Instruments Inc. STMicroelectronics NV Advanced Micro Devices Inc. Analog Devices Inc. Maxim Integrated Products Inc. National Semiconductor Corp. = Value given in problem = Formula/Calculation/Analysis required 48% 1.13 20.88 12% $ $ = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Market Cap 5344.81B 252.89B 120.51B 44.62B 16.35B 11.79B 11.48B 10.28B 8.04B P/E 27.716 19.9 17.622 11.08 24.959 21.152 22.667 23.025 18.049 Return on Equity Long-term Debt to % Dividend Yield % Equity 14.77% 1.90% 0.691 16.20% 1.30% 0.096 19.63% 1.90% 0.064 22.94% 0.50% 0.004 7.81% 0.70% 0.209 12.61% 0.00% 0.138 15.42% 1.90% NA 16.93% 1.90% NA 25.67% 0.60% 0.012 Solution Intel Comparison to Industry a. P/E ROE Dividend Yield LTD to Equity Price to Book Net Profit Margin Price to Cash Flow b. Estimated cost of equity Estimated growth rate DCF Estimate of Share Price c. Imputed growth rate d. Estimated future dividends Year Earnings 2007 $ 2008 2009 2010 2011 Future growth rate Value of Intel Shares (2-stage) 2007-2011 2011 and beyond Estimated equity value Solution Legend 1.66 Dividends 1.13 The growth rate in earnings that makes the value of Intel's shares $20.88 is found using Goal Seek. Price to Book Value Net Profit Margin 5.588 10.39% 3.42 15.50% 3.437 18.72% 3.71 18.67% 1.764 8.24% 2.088 10.13% 3.342 21.48% 3.681 21.39% 4.481 22.18% Price To Free Cash Flow 55.435 193.3 121.039 -5577.55 -11.219 -58.916 311.392 NA 154.483