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JRE300H1S – Foundations of Accounting and Finance – Project Part II
PROJECT (PART 2):
Question 1 - Stock Analysis
1a)
AMD
Intel
Stock Price / Earnings per
Share Ratio (diluted)
64.77/0.84 = 77.107
26.43/1.94 = 13.624
Stock Price / Book Value
per Share Ratio
64.77/33.96 = 1.907
26.43/24.52 = 1.078
Annual Dividend Yield
0%
5.52%
Market Capitalization*
64.77 * 1612 million = USD
$104.409 billion
26.43 * 4137 million = USD
$109.340 billion
Return on Equity
4.24%
8.14%
*Calculated Market Capitalization using Total Shares Outstanding
Page 1 of 10
Stock Price / Earnings per Share Ratio
- is also known as Price-Earnings (P-E)
Ratio, and it measures the relationship between the market price per share and earnings
per share [1]. Investors and analysts use P-E ratios to evaluate companies within the
same industry, or compare a company against its own historical record [1]. A higher P-E
ratio indicates that investors are expecting high growth rates in the future [2].
Stock Price / Book Value per Share Ratio
- this ratio is used to evaluate a
company’s current market value relative to its book value [3]. Investors use this ratio to
gauge whether a company’s stock price is valued properly. A lower ratio could indicate
that a stock is undervalued. When comparing two stocks with similar growth and
profitability, this ratio can be used to determined the best valued stock at a given time
[4].
Annual Dividend Yield
- it is expressed as a percentage, and it shows how much a
company pays out in dividends each year to its shareholders relative to the market price
of its stock [5]. Mature companies and companies in the utilities and consumer staple
industries are more likely to pay dividends [5].
Market Capitalization
- it refers to the total dollar market value of a company’s
all outstanding shares of stock. It is calculated by multiplying the number of outstanding
shares by the current market value of one share. It is often used by investors to
determine a company’s size [6].
Return on Equity
- it is a measure of a company’s net income divided by its
shareholder’s equity. It is used to measure and gauge a company’s profitability and how
efficiently it generates these profits [7].
1b)
AMD
is the more
expensive
stock as it has a higher
Stock Price / Book Value per
Share
ratio than Intel. However, a more expensive stock does not necessarily mean that
the stock is a bad investment. AMD also has a higher P-E ratio than Intel indicating that
the investors of AMD expect higher favourable earnings in the future than Intel.
Intel
is the
better performing stock
for investors as it has a higher
Return on
Equity
than AMD. With Intel having a higher ROE, it means that it is better at converting
its equity financing into profits [7].
1c)
When choosing the companies in the same industry as Intel and AMD to be
included in the calculation for the industry averages, we tried to the match companies
with similar sizes and/or revenue with Intel and AMD. The companies that are included
in the calculations for industry averages are: Intel, AMD, Qualcomm and Texus
Instruments.
Page 2 of 10
AMD
Intel
Industry Average
LTM Tangible Book
Value per Share
18.74
16.39
13.0
LTM Diluted EPS
0.84
1.94
5.64
Share Price/LTM
Diluted EPS
94.03/0.84 =
111.940
32.35/1.94 =
16.675
107.455/5.64 =
19.052
Share Price to LTM
Tangible Book Value
5.02
1.97
11.155
Note: Values in this table are calculated from FactSet as of April 12th, 2023. See Appendix, Figure 1.
LTM Tangible Book Value per Share
- both AMD and Intel are higher than the
industry average. This indicates that AMD and Intel have a higher potential value per
share of a company if the company must liquidate its assets. Intangible assets are not
included, like goodwill because they cannot be sold during liquidation [8].
LTM Diluted EPS
- both AMD and Intel are much lower than the industry average.
Diluted EPS can be used to compare with expectations for that company from analysts.
Diluted EPS is not comparable between two companies as they may have different
shares outstanding.
Share Price/LTM Diluted EPS
- Intel has a lower P-E ratio compared to the
industry average. This lower than the industry average indicates that investors expect
lower favourable earnings in the future than the companies in the same industry.
Investors expect lower growth rates from Intel. Whereas, AMD has a much higher P-E
ratio than the industry average which indicates that investors expect favourable earnings
in the future and higher growth rates [2].
Share Price to LTM Tangible Book Value
- Both AMD and Intel have much lower
values than the industry average, with AMD having a higher value than Intel. Price to
tangible book value (PTBV) measures a company’s market value relative to its tangible
assets. Stocks that trade at a higher PTBV have the potential to leave investors with a
greater share price loss that those stocks with a lower PTBV [9]. This leaves investors of
AMD and Intel with a better position than investing in other companies in this industry,
if the company has to liquidate its assets.
Question 2 - Discounted Cash Flow
2a) FCF = EBIT (1 - Tax Rate) + Depreciation & Amortization - Change in Net Working
Capital - CAPEX
For
AMD
(values in $millions):
Change in Net Working Capital = (Working Capital ‘22) - (Working Capital ‘21)
Page 3 of 10
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= (15019 - 6369) - (8583 - 4240) = $4307 million
CAPEX = PP&E ‘22 - PP&E ’21 = 1973 - 1069 = $904 million
Assumption: For calculating CAPEX, we ignored depreciation
Therefore, FCF = 1614(1 - 0.3) + 4262 - 4307 - 904 =
$180.8 million
For
Intel
(values in $millions):
Change in Net Working Capital = (Working Capital ‘22) - (Working Capital ‘21)
= (50407 - 32155) - (57718 - 27462) = -$12004 million
CAPEX = PP&E ‘22 - PP&E ’21 = 81347 - 63794 = $17553 million
Assumption: For calculating CAPEX, we ignored depreciation
Therefore, FCF = 2336(1 - 0.3) + 13035 + 12004 - 17553 =
$9121.2 million
For both AMD and Intel, the FCF have an explicit horizon upto Dec 2027 of 10% and 2%
respectively. From Dec 2027, there is a terminal horizon of 2.5% and 1% respectively. So
the Dec 2028 FCF is calculated using the terminal horizon growth value from Dec 2027.
See Appendix, Figure 2 and Figure 3 for AMD’s and Intel’s FCF.
2b) Weighted Average Cost of Capital (WACC) calculation for
AMD
:
K
e
= R
f
+
𝛽
(R
M
- R
f
) = 3.50% + 1.95 (5.60%) = 0.1442 = 14.42%
WACC = K
e
(S/V) + K
d
(1 - T) (D/V) = 14.42%(0.8) + 6% (1 - 30%) (0.2) = 0.12376 =
12.376%
Weighted Average Cost of Capital (WACC) calculation for
Intel
:
K
e
= R
f
+
𝛽
(R
M
- R
f
) = 3.50% + 0.81( 5.60%) = 0.08036 = 8.036%
WACC = K
e
(S/V) + K
d
(1 - T) (D/V) = 8.036%(0.75) + 5.5% (1 - 30%) (0.25) = 0.069895 =
6.9895%
See Appendix, Figure 4 and 5 for the values used on the WACC calculation for AMD and
Intel.
2c) See Appendix, Figure 6 and 7 for the Present Value FCFs calculation for AMD and
Intel respectively.
The Present Value (PV) Factors are calculated using the equation (1 + WACC)^(-n), where
WACC is the Weighted Average Cost of Capital for the company, and n is the number of
years to discount the cash flows by. Then the PV Cash Flows are calculated by multiplying
the FCF for the year with its PV Factor. The final PV of all FCFs is the sum of the PV Cash
Flows (PVCF) due to the explicit horizon and terminal horizon.
Page 4 of 10
For
AMD
, the PVCF for the explicit horizon is $1029.05 million and the PVCF for the
terminal horizon is $1686.31 million. Therefore, the total Enterprise Value for AMD is
$2715.36 million
.
For
Intel
, the PVCF for the explicit horizon is $48729.76 million and the PVCF for the
terminal horizon is $121137.29 million. Therefore, the total Enterprise Value for AMD is
$169867.05 million
.
2d) Equity Value calculation for
AMD
(values in $millions):
Net Debt = Gross Debt - Cash & Short-Term Investments = 2863 - 5855 = -$2992 million
Equity Value = Enterprise Value - Net Debt = 2715.36 + 2992 =
$5707.36 million
Equity Value calculation for
Intel
(values in $millions):
Net Debt = Gross Debt - Cash & Short-Term Investments = 42460 - 28338 = $14122
million
Equity Value = Enterprise Value - Net Debt = 169867.05 - 14122 =
$155745.05 million
See Appendix, Figure 8 and 9 for the Equity Values for AMD and Intel respectively.
2e) Stock Price Estimate for
AMD
:
Equity Value / Shares Outstanding = 5707.36 / 1612 =
$3.54
See Appendix, Figure 10 for values.
2f) Stock Price Estimate for
Intel
:
Equity Value / Shares Outstanding = 155745.05 / 4137 =
$37.65
See Appendix, Figure 11 for values.
2g) See the Excel Sheet linked, calculations are under the Sheet named ‘Q2g’
5% Higher Tax Rate and 5% Lower Tax Rate
New Tax Rate = 35%
Using the Formula from Part 2a,
Free Cash Flow for AMD in Dec ‘22 = $100.1 million
Free Cash Flow for Intel in Dec ‘22 = $9,004.40 million
Using the formula from Part 2b,
WACC of AMD = 12.316%
WACC of Intel = 6.92075%
Using the method outlined in Part 2c and 2d,
Enterprise Value for AMD = $1512.320031 million
Enterprise Value for Intel = $169303.3593 million
Equity Value for AMD = $4,504.32 million
Equity Value for Intel = $155,181.36 million
Using the method outlined in Part 2e and 2f,
Page 5 of 10
Estimated Stock Price of AMD =
$2.79
Estimated Stock Price of Intel =
$37.51
New Tax Rate = 25 %
Using the Formula from Part 2a,
Free Cash Flow for AMD in Dec ‘22 = $261.50 million
Free Cash Flow for Intel in Dec ‘22 = $9,238.00 million
Using the formula from Part 2b,
WACC of AMD = 12.436%
WACC of Intel =7.05825%
Using the method outlined in Part 2c and 2d,
Enterprise Value for AMD = $3904.232397 million
Enterprise Value for Intel = $169971.2753 million
Equity Value for AMD = $6,896.23 million
Equity Value for Intel = $155,849.28million
Using the method outlined in Part 2e and 2f,
Estimated Stock Price of AMD =
$4.27
Estimated Stock Price of Intel =
$37.67
2h) See the Excel Sheet linked, calculations are under the Sheet named ‘Q2h’
1% Higher Terminal Horizon and 1% Lower Terminal Horizon
1% Higher Terminal Horizon:
Using the Formula from Part 2a,
Free Cash Flow for AMD in Dec ‘22 = $180.80 million
Free Cash Flow for Intel in Dec ‘22 = $9,121.20 million
Using the formula from Part 2b,
WACC of AMD = 12.376%
WACC of Intel = 6.9895%
Using the method outlined in Part 2c and 2d,
Enterprise Value for AMD = $2923.648376 million
Enterprise Value for Intel = $195357.7933 million
Equity Value for AMD = $5,915.65 million
Equity Value for Intel = $181,235.79 million
Using the method outlined in Part 2e and 2f,
Estimated Stock Price of AMD =
$3.67
Estimated Stock Price of Intel =
$43.81
1% Lower Terminal Horizon:
Using the Formula from Part 2a,
Free Cash Flow for AMD in Dec ‘22 = $180.80 million
Free Cash Flow for Intel in Dec ‘22 = $9,121.20 million
Using the formula from Part 2b,
Page 6 of 10
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WACC of AMD = 12.376%
WACC of Intel = 6.9895%
Using the method outlined in Part 2c and 2d,
Enterprise Value for AMD = $2545.370382 million
Enterprise Value for Intel = $151280.485 million
Equity Value for AMD = $5,537.37 million
Equity Value for Intel = $137,158.48 million
Using the method outlined in Part E and F,
Estimated Stock Price of AMD =
$3.44
Estimated Stock Price of Intel =
$33.15
References
[1]
Price earnings ratio
. Corporate Finance Institute. (2023, March 14). Retrieved April 12,
2023, from:
https://corporatefinanceinstitute.com/resources/valuation/price-earnings-ratio/
[2] Fernando, J. (2023, March 25).
P/E ratio - price-to-earnings ratio formula, meaning,
and examples
. Investopedia. Retrieved April 12, 2023, from:
https://www.investopedia.com/terms/p/price-earningsratio.asp#:~:text=The%20price%
2Dto%2Dearnings%20ratio,earnings%20per%20share%20(EPS)
[3]
Market to book ratio
. Corporate Finance Institute. (2023, March 15). Retrieved April
12, 2023, from:
https://corporatefinanceinstitute.com/resources/valuation/market-to-book-ratio-price-b
ook/
Page 7 of 10
[4] Bromels, J. (n.d.).
Using price-to-book ratio to analyze stocks
. The Motley Fool.
Retrieved April 12, 2023, from:
https://www.fool.com/investing/how-to-invest/stocks/price-to-book-ratio/
[5] Fernando, J. (2023, April 5).
Dividend yield: Meaning, formula, example, and pros and
cons
. Investopedia. Retrieved April 12, 2023, from:
https://www.investopedia.com/terms/d/dividendyield.asp
[6] Fernando, J. (2023, April 5).
Market capitalization: How is it calculated and what does
it tell investors?
Investopedia. Retrieved April 12, 2023, from:
https://www.investopedia.com/terms/m/marketcapitalization.asp
[7] Fernando, J. (2023, April 5).
Return on equity (ROE) calculation and what it means
.
Investopedia. Retrieved April 12, 2023, from:
https://www.investopedia.com/terms/r/returnonequity.asp
[8] Hayes, A. (2022, December 7).
Tangible book value per share (TBVPS): Definition and
formula
. Investopedia. Retrieved April 12, 2023, from
https://www.investopedia.com/terms/t/tbvps.asp#:~:text=Tangible%20book%20value%
20per%20share%20(TBVPS)%20is%20the%20value%20of,equipment%20are%20conside
red%20tangible%20assets
[9] Hayes, A. (2023, February 15).
Price to tangible book value (PTBV)? definition and
calculation
. Investopedia. Retrieved April 12, 2023, from
https://www.investopedia.com/terms/p/ptbv.asp
Link To Excel Sheet
https://docs.google.com/spreadsheets/d/1sdSYkStqDFKOq2lHijfL-La3Nynr4QHB/edit?us
p=sharing&ouid=110615434818188780496&rtpof=true&sd=true
Appendix
Figure 1: Comps table from FactSet with the companies includes to calculate the
industry averages
Page 8 of 10
Figure 2: FCF for AMD
Figure 3: FCF for Intel
Figure 4: WACC for AMD
Figure 5: WACC for Intel
Page 9 of 10
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Figure 6: Present Value of FCFs for AMD
Figure 7: Present Value of FCFs for Intel
Figure 8: Equity Value for AMD
Figure 9: Equity Value for Intel
Figure 10: Stock Price Estimate for AMD
Figure 11: Stock Price Estimate for Intel
Page 10 of 10
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