# Question: Intel Corporation is a leading manufacturer of semiconductor chips The

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 have 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).

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 re-turn 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 8-9(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)? (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.)

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).

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 re-turn 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 8-9(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)? (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.)

**View Solution:**## Answer to relevant Questions

Opex Capital is a small investment advisory firm located in Portland, Oregon, that has been hired by Winston Winery to estimate the value of Hilco Wines. Hilco is a small winery that is being considered for purchase by ...The hybrid model used in this chapter discounts for-casted cash flows over a planning period and adds this to an estimate of the firm’s continuing value, which is estimated using comps. The length of the planning period is ...Terminal value refers to the valuation attached to the end of the planning period; it captures the value of all subsequent cash flows. Estimate the value today for each of the following sets of future cash flow forecasts. ...In 2014, Dub Tarun founded a firm using $ 200,000 of his own money, $ 200,000 in senior (bank) debt, and an additional $ 100,000 in subordinated debt borrowed from a family friend. The senior debt pays 10% interest, while ...A number of industrial products include gold and silver as a component because they have very good conductive properties. The S& M Smelting Company engages in the recovery of gold from such products and is considering a ...Post your question