Intel Corporation is a leading manufacturer of semiconductor chips. The firm was incorporated in 1968 in Santa Clara, CA 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 that there is some question as to whether the firm should continue to be evaluated as a high or stable growth company. For example, in December of 2007 the firm's shares were trading for $20.88 which represented a price-earnings ratio of only 17.61. Compared to Google Corporation'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 are $1.13 per share and its payout ratio is 48%. Furthermore, selected financial data for the sector, industry, and seven of the largest firms (including Intel) is found below:
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 that the 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 the 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 Emerson'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 part b above, 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 5 years at 12% and for years 6 forward at a constant rate.)
Attachment:- Solution_Format.xlsx