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 $ 44,123 $ 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 adminstrative 6,309 7,931 5,452 Restructuring and asset impairment charges 231 710 Amortization of acquisition-related intangibles 6 Operating expenses 12,903 13,850 11,890 Operating income 16,088 5,711 8,954 Gains (losses) on equity method investments, net* (147) (1,380) Gains (losses) on other equity investments, net (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 18 35 117 231 *This should be considered as part of operating income. Dec. 25, 2010 Dec. 26, 2009 INTEL CORPORATION Consolidated Balance Sheets As of Year-Ended (In millions, except par value) Assets Current assets Cash and cash equivalents Short-term investments Trading assets Accounts receivables, net Inventories Deferred tax assets Other current assets Total current assets Property, plant and equipment, net Marketable equity securities Other long-term investments** Goodwill Other long-term assets Total assets Liabilities Currnet liabilities Short-term debt Accounts payable Accrued compensation and benefits Accrued advertising Deferred income on shipments to distributors Other accrued liabilities Total current liabilities Long-term income taxes payable $ 5,498 11,294 5,093 2,867 3,757 1,488 1,614 31,611 17,899 1,008 3,026 4,531 5,111 $63,186 $ 3,987 5,285 4,648 2,273 2,935 1,216 813 21,157 17,225 773 4,179 4,421 5,340 $53,095 $172 1,883 2,448 $38 2,190 2,888 1,007 622 2,482 9,227 190 773 593 1,722 7,591 193 Dec. 25, 2010 Dec. 26, 2009 INTEL CORPORATION Consolidated Balance Sheets As of Year-Ended (In millions, except par value) Assets Current assets Cash and cash equivalents Short-term investments Trading assets Accounts receivables, net Inventories Deferred tax assets Other current assets Total current assets Property, plant and equipment, net Marketable equity securities Other long-term investments** Goodwill Other long-term assets Total assets Liabilities Currnet liabilities Short-term debt Accounts payable Accrued compensation and benefits Accrued advertising Deferred income on shipments to distributors Other accrued liabilities Total current liabilities Long-term income taxes payable $ 5,498 11,294 5,093 2,867 3,757 1,488 1,614 31,611 17,899 1,008 3,026 4,531 5,111 $63,186 $ 3,987 5,285 4,648 2,273 2,935 1,216 813 21,157 17,225 773 4,179 4,421 5,340 $53,095 $172 1,883 2,448 $38 2,190 2,888 1,007 622 2,482 9,227 190 773 593 1,722 7,591 193 1,677 926 1,236 13,256 2,049 555 1,003 11,391 Long-term debt Long-term deferred tax liabilities Other long-term liabilities Total liabilities 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 Accumulated other comprehensive income (loss) Retained earnings Total stockholders' equity Total liabilities and stockholders' equity 16,178 333 33,419 49,930 $ 63,186 14,993 393 26,318 41,704 $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 = $ 28,866 x 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) $ 44,123 $ 48,535.3 $ 53,388.83 $ 58,727.71 $ 64,600.48 $ 65,246.48 Sales (rounded nearest whole number) 44,123 48,535 53,389 58,728 64,600 65,246 NOPAT (rounded nearest whole number)* 11,750 12,619 13,881 15,269 16,796 16,964 NOA (rounded nearest whole number)* 11,750 X 0 X 0x * 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) OX Ox OX Ox Discount factor rounded to 5 decimal places) Ox 0 x OX Ox Present value of horizon ROPI (rounded to nearest whole number) OX OX 0x OX Cum present value of horizon ROPI $ 0x (rounded to nearest whole number) Present value of terminal ROPI $ 0x (rounded to nearest whole number) NOA 11,750 X (rounded to nearest whole number) Total firm value 0x (rounded to nearest whole number) Plus negative NNO 21,178 X (enter as anegative number) Firm equity value $ 0x (rounded to nearest whole number) Shares outstanding (millions) 5,511 (rounded to nearest whole number) Stock price per share 0X (rounded to two decimal places) 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 $ 44,123 $ 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 adminstrative 6,309 7,931 5,452 Restructuring and asset impairment charges 231 710 Amortization of acquisition-related intangibles 6 Operating expenses 12,903 13,850 11,890 Operating income 16,088 5,711 8,954 Gains (losses) on equity method investments, net* (147) (1,380) Gains (losses) on other equity investments, net (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 18 35 117 231 *This should be considered as part of operating income. Dec. 25, 2010 Dec. 26, 2009 INTEL CORPORATION Consolidated Balance Sheets As of Year-Ended (In millions, except par value) Assets Current assets Cash and cash equivalents Short-term investments Trading assets Accounts receivables, net Inventories Deferred tax assets Other current assets Total current assets Property, plant and equipment, net Marketable equity securities Other long-term investments** Goodwill Other long-term assets Total assets Liabilities Currnet liabilities Short-term debt Accounts payable Accrued compensation and benefits Accrued advertising Deferred income on shipments to distributors Other accrued liabilities Total current liabilities Long-term income taxes payable $ 5,498 11,294 5,093 2,867 3,757 1,488 1,614 31,611 17,899 1,008 3,026 4,531 5,111 $63,186 $ 3,987 5,285 4,648 2,273 2,935 1,216 813 21,157 17,225 773 4,179 4,421 5,340 $53,095 $172 1,883 2,448 $38 2,190 2,888 1,007 622 2,482 9,227 190 773 593 1,722 7,591 193 Dec. 25, 2010 Dec. 26, 2009 INTEL CORPORATION Consolidated Balance Sheets As of Year-Ended (In millions, except par value) Assets Current assets Cash and cash equivalents Short-term investments Trading assets Accounts receivables, net Inventories Deferred tax assets Other current assets Total current assets Property, plant and equipment, net Marketable equity securities Other long-term investments** Goodwill Other long-term assets Total assets Liabilities Currnet liabilities Short-term debt Accounts payable Accrued compensation and benefits Accrued advertising Deferred income on shipments to distributors Other accrued liabilities Total current liabilities Long-term income taxes payable $ 5,498 11,294 5,093 2,867 3,757 1,488 1,614 31,611 17,899 1,008 3,026 4,531 5,111 $63,186 $ 3,987 5,285 4,648 2,273 2,935 1,216 813 21,157 17,225 773 4,179 4,421 5,340 $53,095 $172 1,883 2,448 $38 2,190 2,888 1,007 622 2,482 9,227 190 773 593 1,722 7,591 193 1,677 926 1,236 13,256 2,049 555 1,003 11,391 Long-term debt Long-term deferred tax liabilities Other long-term liabilities Total liabilities 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 Accumulated other comprehensive income (loss) Retained earnings Total stockholders' equity Total liabilities and stockholders' equity 16,178 333 33,419 49,930 $ 63,186 14,993 393 26,318 41,704 $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 = $ 28,866 x 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) $ 44,123 $ 48,535.3 $ 53,388.83 $ 58,727.71 $ 64,600.48 $ 65,246.48 Sales (rounded nearest whole number) 44,123 48,535 53,389 58,728 64,600 65,246 NOPAT (rounded nearest whole number)* 11,750 12,619 13,881 15,269 16,796 16,964 NOA (rounded nearest whole number)* 11,750 X 0 X 0x * 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) OX Ox OX Ox Discount factor rounded to 5 decimal places) Ox 0 x OX Ox Present value of horizon ROPI (rounded to nearest whole number) OX OX 0x OX Cum present value of horizon ROPI $ 0x (rounded to nearest whole number) Present value of terminal ROPI $ 0x (rounded to nearest whole number) NOA 11,750 X (rounded to nearest whole number) Total firm value 0x (rounded to nearest whole number) Plus negative NNO 21,178 X (enter as anegative number) Firm equity value $ 0x (rounded to nearest whole number) Shares outstanding (millions) 5,511 (rounded to nearest whole number) Stock price per share 0X (rounded to two decimal places)