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 question whether the firm should be evaluated as a high-growth company or stable-growth company from now on. For example, in December 2007, the firms shares were trading for $20.88, and has a priceearnings ratio of 17.622. Compared to Google Inc.s priceearnings ratio of 53.71 on the same date, it would appear that the decision has already been made by the market.

Intels 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 below

Exhibit P8-9.1 Industry Comparables for Intel Corporation

a.Is Intels current stock price of $20.88 reasonable in light of its sector, industry, and comparison firms?

b.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 Intels stock using CAPM? What rate of growth in earnings is consistent with Intels policy of paying out 48% of earnings in dividends and the firms historical return on equity? Using your estimated growth rate, what is the value of Intels shares using the Gordon (single-stage) growth model? Analyze the reasonableness of your estimated value per share using the Gordon model.

c.Using your analysis in Problem 8-9(b), what growth rate is consistent with Intels current share price of $20.88?

d.Analysts expect Intels 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 Intels current stock price (use your CAPM estimate of the required rate of return on equity)? (Hint: Use a two-stage growth model where Intels earnings grow for five years at 12% and from year 6 forward at a constant rate.)

Please use below sheet for solution

PROBLEM 8-9

Given

Beta

1.66

Dividend payout ratio

48%

EPS for 2007

$ 1.13

Stock Price (12/07/06)

$ 20.88

Anticipated growth rate in EPS (5 years)

12%

Description

Market Cap

P/E

Return on Equity %

Dividend Yield %

Long-term Debt to Equity

Price to Book Value

Net Profit Margin

Price To Free Cash Flow

Sector: Technology

5344.81B

27.716

14.77%

1.90%

0.691

5.588

10.39%

55.435

Industry: Semiconductor - Broad Line

252.89B

19.9

16.20%

1.30%

0.096

3.42

15.50%

193.3

Intel Corp.

120.51B

17.622

19.63%

1.90%

0.064

3.437

18.72%

121.039

Texas Instruments Inc.

44.62B

11.08

22.94%

0.50%

0.004

3.71

18.67%

-5577.55

STMicroelectronics NV

16.35B

24.959

7.81%

0.70%

0.209

1.764

8.24%

-11.219

Advanced Micro Devices Inc.

11.79B

21.152

12.61%

0.00%

0.138

2.088

10.13%

-58.916

Analog Devices Inc.

11.48B

22.667

15.42%

1.90%

NA

3.342

21.48%

311.392

Maxim Integrated Products Inc.

10.28B

23.025

16.93%

1.90%

NA

3.681

21.39%

NA

National Semiconductor Corp.

8.04B

18.049

25.67%

0.60%

0.012

4.481

22.18%

154.483

Solution

a.

Intel Comparison to Industry

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

Dividends

2007

$ 1.13

2008

2009

2010

2011

Future growth rate

Value of Intel Shares (2-stage)

2007-2011

2011 and beyond

Estimated equity value