Questions and Assumptions for Intel Case: Valuation of Intel using a discounted cash flow method.
The purpose of this case is to learn how to value a company and to estimate its stock price. Further, this case will guide our discussion of market efficiency. The company announced that growth in revenues was 3-5% in the third quarter, but analysts had expected 10-12% growth. What we want to consider is how this news affects the stock price and whether the market overreacted to the news.
The case is somewhat vague about its assumptions. Therefore, to guide your analysis, please consider the following:
- Use Exhibit 4 to project expected cash flows for the horizon 2000-2004. Assume that we are valuing the company as of January 1, 2000 (assume this is t=0).
- Assume initially that revenues grow 19% year over year during that time.
- Assume that Operating Income (EBIT) is 38.5% of revenues each year during 2000-2004.
- Intel pays a marginal tax rate of 33%.
- Depreciation is 9% of revenues each year. Note that depreciation expense has already been taken into consideration in the EBIT projections.
- Change in NWC is 1% of revenues each year.
- Capex is 12.5% of revenues each year.
- Assume that Intel is an all equity firm.
- The risk-free rate is 4.5% and the market risk premium is 6.5%.
- Intel’s beta of equity is 1.1.
- Assume that Intel’s pre-announcement stock price as of January 1, 2000 is $60.22.
- There are 6,710,000,000 shares outstanding.
You should address the following:
1. Prepare a valuation of Intel using a discounted cash flow method.
2. Calculate the present value (Jan 1, 2000 dollars) of Intel’s terminal value. What growth rate justifies a stock price of $60.22 per share?
3. After Intel announces that its revenues will not grow as fast as predicted, how much would revenue growth projections and growth in terminal value have to change to cause Intel’s stock price to drop to $43.31. Note that there is not one right answer.
4. Do you think that the market over-reacted to the news or this is justified by your valuation? There is no right answer to this question. The idea here is to support your opinion with evidence.
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