Intel Corporation is a leading manufacturer of semiconductor chips. The firm was

Question

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 firm’s shares were trading for $20.88, and has a price–earnings ratio of 17.622. 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 below

Industry Comparables for Intel Corporation

a. Is Intel’s 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 Intel’s stock using CAPM? What rate of growth in earnings is consistent with Intel’s policy of paying out 48% of earnings in dividends and the firm’s historical return on equity? Using your estimated growth rate, what is the value of Intel’s 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 (b), what growth rate is consistent with Intel’s current share price of $20.88?

d. 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.)

Please use below template 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

Explanation / Answer

Solution A)

Solution b) :

Estimated cost of equity and growth rate

using CAPm model Ke = Rf + Beta (RM-Rf)

5.02% + 1.66(5%)

Hence Ke = 13.32%

To compute the growth rate we need to apply the gordans model

also known as dividend discount model = Ke = Dividend /Po + G

Hence Growth G = Ke - dividend /Po

= 13.32% - 1.13*48%/20.88

=10.72% is the growth rate

Particulars Formula Intel Sector /Industry Explanation P/E Market price/EPS 17.622 27.71/19.9 The intel P/E ratio is less than the industry and sector hence it is good because lesser the P/E more the return. It describes that to earn $1 profit the company is ready to pay $17.62. ROE Profit/Equity 19.63 14.77/16.20 The ROE is more for intel company hence the shareholders would get more return from the investment . Dividend Yield Dividend/Current price 1.90% 1.90/1.30% It clearly shows that the company’s dividend issue policy and yield is in hand with the industry and pays good amount to the shareholders which in turn increase the funds. LTD to Equity Debt /Equity 0.064 .691/.096 Lesser the debt -equity ratio lesser the risk for the company and lesser the fixed csot hence the intel company has less debt companred to the total sector and industry wise hence the company has less amount of fixed cost. Price to Book Price /Book value 3.437 5.588/3.42 Price to book ratio is again the comparison between the book value and the market price hence the price to book is at par with the industry standards Net Profit Margin Profit/Sales 18.72 10.39/15.50 Since the net profit margin is calculated using the formula profit /Sales which clearly shows that the company has good operational efficiency and the net profit is more than the industry standard and sector wise. Price to Cash Flow Price/Cash 121.039 55.43/193.3 In terms of liquidity the company has some drawbacks as the standard as per industry is more and hence intel has to work more on the price to the cash flow liquidity.

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