Question

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	$ 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

*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	$ 5,498	$ 3,987
Short-term investments	11,294	5,285
Trading assets	5,093	4,648
Accounts receivables, net	2,867	2,273
Inventories	3,757	2,935
Deferred tax assets	1,488	1,216
Other current assets	1,614	813
Total current assets	31,611	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	$63,186	$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	33,419	26,318
Total stockholders' equity	49,930	41,704
Total liabilities and stockholders' equity	$ 63,186	$ 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) Forecast Intel's sales, NOPAT, and NOA for years 2011 through 2014 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)	$Answer	$Answer	$Answer	$Answer	$Answer	$Answer
Sales (rounded nearest whole number)	Answer	Answer	Answer	Answer	Answer	Answer
NOPAT (rounded nearest whole number)*	Answer	Answer	Answer	Answer	Answer	Answer
NOA (rounded nearest whole number)*	Answer	Answer	Answer	Answer	Answer	Answer

* 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.

INTC	Reported	Forecast Horizon				Terminal
($ millions)	2010	2011 Est.	2012 Est.	2013 Est.	2014 Est.	Period
DCF Model
Increase in NOA		Answer	Answer	Answer	Answer	Answer
FCFF (NOPAT - Increase in NOA)		Answer	Answer	Answer	Answer	Answer
Discount factor	(rounded to 5 decimal places)	Answer	Answer	Answer	Answer
Present value of horizon FCFF	(rounded to nearest whole number)	Answer	Answer	Answer	Answer
Cumulative present value of horizon FCFF	$Answer	(rounded to nearest whole number)
Present value of terminal FCFF	Answer	(rounded to nearest whole number)
Total firm value	Answer	(rounded to nearest whole number)
NNO	Answer
Firm equity value	$Answer	(rounded to nearest whole number)
Shares outstanding (millions)	Answer	(rounded to nearest whole number)
Stock price per share	$Answer	(rounded to two decimal places)

(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.

Answer 1

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)