Question

Estimating Share Value Using the ROPI Model

Assume the 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	$ 44,223	$ 35,127	$ 37,586
Cost of sales	15,132	15,566	16,742
Gross margin	29,091	19,561	20,844
Research and development	6,576	5,653	5,722
Marketing, general and adminstrative	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	16,188	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	16,645	5,704	7,686
Provisions for taxes	4,581	1,335	2,394
Net income	$ 12,064	$ 4,369	$ 5,292

*This should be considered as part of 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	2,667	2,273
Inventories	3,757	2,935
Deferred tax assets	1,888	1,216
Other current assets	1,614	813
Total current assets	31,811	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	$63,386	$53,095
Liabilities
Currnet 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	33,619	26,318
Total stockholders' equity	50,130	41,704
Total liabilities and stockholders' equity	$ 63,386	$ 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.

HINT: Gains/losses on equity method investments are considered operating income. Round your answer to the nearest whole number.
2010 NOA = $Answer

(b) Compute net operating profit after tax (NOPAT) for 2010, assuming a federal and state statutory tax rate of 37%.(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)
Sales (rounded nearest whole number)
NOPAT (rounded nearest whole number)*
NOA (rounded nearest whole number)*

* Use sales rounded to nearest whole number for this calculation.

(d) Estimate the value of a share of Intel common stock using the residual operating income (ROPI) 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.

INTC	Reported	Forecast Horizon				Terminal
($ millions)	2010	2011 Est.	2012 Est.	2013 Est.	2014 Est.	Period
ROPI Model
ROPI [NOPAT - (NOA beg x WACC)] (rounded to nearest whole number)
Discount factor (rounded to 5 decimal places)
Present value of horizon ROPI (rounded to nearest whole number)
present value of horizon ROPI		(rounded to nearest whole number)
Present value of terminal ROPI		(rounded to nearest whole number)
NOA		(rounded to nearest whole number)
Total firm value		(rounded to nearest whole number)
Plus negative NNO		(enter as a negative number)
Firm equity value		(rounded to nearest whole number)
Shares outstanding (millions)		(rounded to nearest whole number)
Stock price per share		(rounded to two decimal places)

Answer 1

Solution:

a. Net Operating Assets (NOA)= Operating Assets- Operating Liabilities, where,

Operating Assets=Total Assets - excess cash and cash equivalents- Financial assets and investments

Oerating Liabilites=Accounts Payable+deferred op. expenses+Reserves for op expenses+taxes on op. profit (Accrued)+Reserves for taxes on operating profit.

Hence Intel Corporation's NOA for 2010 is $24,373

Operating Assets	Amount in $	Amount in $
Total Assets		63386
Cash and cash equivalents	5,498
Short-term investments	11,294
Deferred tax assets	1,888
Marketable equity securities	1,008
Goodwill	4,531
Other long-term assets	5,111	29,330
Total Operating Assets                 (A)		34,056
Operating Liabilities		Amount in $
Accounts payable		2,190
Accrued compensation and benefits		2,888
Accrued advertising		1,007
Other accrued liabilities		2,482
Long-term income taxes payable		190
Long-term deferred tax liabilities		926
Total Operating Liabilities            (B)		9,683
Net Operating Assets (A)-(B)		24,373

b. NOPAT=Operating Income X (1- Tax rate)

Operating Income = Gross Profit - Operating Expenses

Gross Profit for 2010 = $29,091 (Given)

Operating Expenses = $12903 (Given)

Operating Income =$16188

Tax Rate = 37%

Therefore NOPAT=Operating Income X (1- Tax rate)

NOPAT= $16188 X (1- 0.37)

  = $16188 X 0.63

= $10198 (Rounded off)

c.Forecasting Statement of Income, NOPAT & NOA

Year Ended (In millions $)	2010 (Reported)	2011 (Proj)	2012 (Est)	2013 (Est)	2014 (Est)
Sales in Million $	44,223.00	48,645.30	53,996.28	60,475.84	68,337.70
Sales (Rounded off)	44,223	48,645	53,996	60,476	68,338
Net Operating Profit	16,188	12,648	14,039	15,724	17,768
NOPAT	10,198	7,968	8,845	9,906	11,194
NOA	24,373	11,952	13,268	14,859	16,791

d. Estimating the Value of a share under ROPI model: $11.41 (See the Working)

No. of common stock=5511million

INTC	Reported	Forecast Horizon	Terminal Period
($ millions)	2010	2011 Est.	2012 Est.	2013 Est.	2014 Est.
ROPI Model
ROPI [NOPAT - (NOA beg x WACC)] (rounded to nearest whole number)	13,507	11,333	12,580	14,090	15,921
Discount factor @11%	1	0.9009	0.8116	0.6587	0.5935
Present value of horizon ROPI (rounded to nearest whole number)	13,507	10,210	10,210	9,281	9,449

Working:

present value of horizon ROPI	10,210
Present value of terminal ROPI (10210+9281+9449)	28,940
NOA (13268+14859+16791)	44,918
Total firm value	84,068
Plus negative NNO	-21,178
Firm equity value	62,890
Shares outstanding (millions)	5,511
Stock price per share	11.41