Forecasting and Estimating Share Value Using the DCF Model Following are the inc
ID: 2658416 • Letter: F
Question
Forecasting and Estimating Share Value Using the DCF Model
Following are the income statement and balance sheet for Intel Corporation.
*This should be considered as operating income.
** 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) Forecast Intel's sales, NOPAT, and NOA for years 2011 through 2014 using the following assumptions:
Forecast the terminal period value using the assumptions above and assuming a terminal period growth of: 1%.
* 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 $(21,178) 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.
(rounded to 5
decimal places)
(rounded to nearest
whole number)
(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)
Answeryesno
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.
Answeryesno
Our stock price estimate is higher than the INTC market price as of February 18, 2011, indicating that we believe the stock is undervalued.
Answeryesno
Stock prices are a function of expected NOPAT and NOA, as well as the WACC discount rate.
Answeryesno
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.
INTEL CORPORATIONConsolidated Statements of Income Year Ended (In millions) Dec. 25, 2010 Dec. 26, 2009 Dec. 27, 2008 Net revenue $ 44,123 $ 35,127 $ 37,586 Cost of sales 15,132 15,566 16,742 Gross margin 28,991 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 16,088 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 16,545 5,704 7,686 Provisions for taxes 4,581 1,335 2,394 Net income $ 11,964 $ 4,369 $ 5,292
Explanation / Answer
Solution to part a:
Calculation of Net Operating Assets (NOA)
NOA = Total Assets - Total Liabilities - Financial Assets + Financial Liabilities
= $63,186 - $13,256 – ($1,008 + $3,026 + $4,531 + $5,111 + $1,488 + $5,111) + ($1,677 + $38)
= $31,370
Solution to part b:
NOPAT = Operating Income * (1 – Tax Rate)
= $16,088 * (1 – 0.37)
= 10,135.44
Solution to part c:
Sales
$44,123
Sales Growth
10%
Terminal Growth
1%
NOPAT
$10,135.44
Margin
26%
NOA
$46,147
NOA Growth
1.50
INTC
Reported
Forecast Horizon
Terminal
($ millions)
2010
2011 Est.
2012 Est.
2013 Est.
2014 Est.
Period
Sales (rounded two decimal places)
$44,123
$48,535.30
$53,388.83
$58,727.71
$64,600.48
$65,246.40
Sales (rounded nearest whole number)
$44,123
$48,535
$53,389
$58,728
$64,600
$65,246
NOPAT (rounded nearest whole number)*
$10,135.44
$12,771
$16,091
$20,275
$25,546
$25,802
NOA (rounded nearest whole number)*
$31,370
$32,357 ($48,535 /1.5)
$35,593 ($53,389 / 1.5)
$39,152 ($58,728 / 1.5)
$43,067 ($64,600 / 1.5)
$43,498
Solution to part d:
Discount Rate = 11%
Common Shares = 5,511 million
NNO = -$21,178
INTC
Reported
Forecast Horizon
Terminal
($ millions)
2010
2011 Est.
2012 Est.
2013 Est.
2014 Est.
Period
DCF Model
Increase in NOA
$987
$3,236
$3,559
$3,915
$431
FCFF (NOPAT – Increase in NOA)
$11,784
$12,855
$16,716
$21,631
$25,372
Discount Factor @ 11%
(rounded to 5 decimal places)
0.90090
0.81162
0.73119
0.65873
Present Value of Horizon FCFF
(rounded to nearest whole number)
$10,616
$10,433
$12,223
$14,249
Cumulative Present Value of Horizon FCFF
$47,521
(rounded to nearest whole number)
Present value of terminal FCFF
$15,057 ($25,372 * 0.59345)
(rounded to nearest whole number)
Total firm value
$62,578 ($47,521 + 15,057)
(rounded to nearest whole number)
Plus: Negative NNO
$21,178
(rounded to nearest whole number)
Firm equity value
$62,578 ($62,578 + $21,178)
(rounded to nearest whole number)
Shares outstanding (millions)
5,511
(rounded to nearest whole number)
Stock price per share
$11.36 ($41,400 / 5,511)
(rounded to two decimal places)
Sales
$44,123
Sales Growth
10%
Terminal Growth
1%
NOPAT
$10,135.44
Margin
26%
NOA
$46,147
NOA Growth
1.50