Case Report

Page | 1
Case Analysis of

Submitted To:
Dr. Sadiqul Islam
Professor
Department of Finance
University of Dhaka

Submitted By:
Group # 23
MBA 13
th
Batch
Department of Finance
University of Dhaka

Date of Submission:
September 06, 2012
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Group Members

Name MBA ID BBA ID Comment
Md. Imran Hossain 13-573 13-011
Subarna Roy 13-557 13-035
Md. Mahfuz Alam 13-613 13-097
Md. Monsur Rahman 13-497 13-117
Tahmina Tamanna 13-617 13-153
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Particulars Page No.
Introduction 4
Case Overview 5
Background of the company 6
Economy Analysis 8
Industry Analysis (Porters 5 forces) 9
PEST analysis 11
SWOT analysis 12
Ratio analysis 15
Du-Pont analysis 25
Risk Analysis 27
Altman Z score model 29
Problem statement 32
Valuation of Problem-1 34
Recommendations 53
Table of Contents

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Introduction

Background of the report:
This assignment has been undertaken as a part of our course F-506 (Cases in Financial Decisions
Making) under the MBA program. Our course instructor Dr. Sadiqul Islam has assigned us this
task so to gain some practical knowledge about practical cases in business world. This really
provides us the opportunity to explore and confront the reality about financial analysis.

Objective of the study
The main objective of the study is to fulfill the requirement of our course on Cases in Financial
Decision Making and to apply our theoretical knowledge in solving business cases.
The other objectives behind conducting this study are as follows:
To have knowledge about the capital structure options for business firms
To learn how to evaluate different financing options

Scope of the study
The study topic allows us to analyze the cases related to capital structure decisions. We analyzed
the problems of this company and try to find out solutions of these problems. Finally we have
reached recommendations that will help to take the ultimate decision.

Methodology of the Report
All the data used in this report have been gathered from the case regarding Intel Corp..
The theoretical part of this report has been collected from the case and text provided by
our honorable course teacher.

Data Analysis:
To analyze and solve the problems we have used Discounted Cash Flow Method,
FCF method and other relative valuation methods.
Crystal ball software is used to complete the simulation analysis

Limitations of the study
Learning all functions, moods of business, risk factors were quite tough within specified
time framework.
Time constraint.
While attempting to solve the problem we have to assume some factors which may not be
in realty.

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Case Overview
The case deals with Intel Corporation which Gordon Moore, Intel Corporations co-founder and
chairman of the Board founded the firm in 1968. After completing the successful five years, Intel
Corporation found itself with $2.4 billion cash balance. It manufactures & sells mainly three
kinds of products such as Memory (10% of sales), Microprocessors & co-processors ( 52% of
sales), and Microcontrollers, peripherals and systems ( 38% of sales).
In 1971 Intel Corporation went into public offerings in which year it recorded its first net profit
with no debts on its books. The firms policy was to issue debts only when the terms were
attractive. After the subsequent period it issued $110 million of 20 year adjustable-rate industrial
revenue bonds in 1983, $150 million of 20 year 7% convertible subordinated debentures in 1980,
$236.50 million of zero coupon and $110 million of 8.125% notes in 1985 & 1987 respectively.
During the 1980s Intels net cash position grew steadily. After IBMs stock purchase , issuance
of 10-year notes in 1985 , Intels cash and equivalents plus long term investments less long term
debt rose to nearly 15% of total assets in December 1986. Besides Intel Corporation experienced
very rapid revenue growth increasing at a compound annual rate of over 30%.
Now Moore wondered whether Intels cash balance grew unnecessarily large this made him to
rethink about the companys capital structure and cash disbursement policies. At this time Intel
started to explore several cash disbursement policies such as
1. To continue or expand its market-repurchase program but this open-market repurchase
could be executed only when the management could agree that the stock price was
unduly low.
2. To declare a $40 cent per share as an annual dividend on its common stock but Hughes
and Sodhani opposed that proposal claiming that dividends were a tax disadvantage
means of disbursing corporate cash and act as a ongoing commitment that could be
difficult to maintain.
3. To issue a package of two less conventional securities. One consists of distributing to
shareholders a two-year put warrant, one warrant for each share of stock. Second consists
of issuing $ 1 billion 10 year convertible subordinated debentures with 5% coupon.
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Background of the Company
Intel was founded in 1968 by Moore and Robert Noyee. The company quickly established a
reputation as a leading innovator in the design, development, and manufacture of
semiconductors. Intels most important early breakthrough was the microprocessor.
During its first 15 years, Intels record of innovation had been impressive. Intel was responsible
for 16 of the 22 major breakthroughs in microelectronics between 1971 to 1981.the pace of the
firms technological innovation were exemplified by Moores Law, which had become an
industry wide benchmark.
By 1991 Intel had become the worlds second-largest manufacturer of integrated circuits and the
worlds largest metal-oxide-silicon (MOS) manufacturer. In 1991, Intels mission was to be the
leading building-block supplier to the new computer industry.
Intel had become a public corporation in 1971, the year it recorded its first net profit. The firms
policy was to issue debt only when and if the terms were attractive.
Product
Intel supplied a broad line of memory components, including EPROMs, DRAMs and
SRAMs and flash memories which consists 10% of sales.
It also produced several families of processors for personal computers, minicomputers,
parallel-processing systems and engineering workstations. In the total sales 52% is the
microprocessors and coprocessors.
Intels microcomputers were designed to be embedded within an application and to be
programmed to control the operation of that application. They typically integrated a
central processing unit (CPU), memory, and other features on a single chip and were used
in computer and communication systems, automobile-control applications, robotics,
electronic instrumentations, home video machines and other applications.

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Microprocessors product life cycle

Three Step Analysis

Phase R&D Introduction Growth Maturity Saturation Decline Phase out
2-6 years 1-1.5 years 2-4 years 2-4 years 2-3 years 2-2.5 years 2-5 years

Unit next-
Generation
CISC RISC
0 times

32-
bit
RISC
32-
bit
CISC
16/32-
bit
CISC
32-bit
CISC
16-
bit

8-bit

Production
Unit
Volume
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1. Economy Analysis:
Business cycle reflects movements in economic activity as a whole, which is comprised of much
diverse part. The diversity of the parts ensures that business cycle is virtually unique, with no
two parts identical. However, cycle does have a common framework, with a beginning, a peak
and an ending. Thus economic activity starts in depressed conditions builds up in the
expansionary phase, and ends in a downturn, only to start again.
The economy: (Developed and Matured)
American Intel Corporation is a company of USA which is one of the developed country. As
being develop country its economic condition is matured. The United States of America (US or
USA) has the worlds largest economy.
Technology & Infrastructure: (Modern and sufficient)
As being develop country Technology & Infrastructure are Modern and Sufficient. For example,
Semiconductor, microprocessor, metal oxide silicon, Advanced micro devices, microchips while
represent vital technology infrastructure. The technology infrastructure is equally composed of
the protocols, tests, and other methodologies devised to improve R&D efficiency and
effectiveness. These infrastructure components are often overlooked.
Legislation & regulation: (Rigid and restrictive)
USAs legislation and regulation are very rigid and restrictive. No one can an easy going process
riding a business because he/she has to honor the Legislation and regulation USA. If company
violets the legislation and regulation then the company may become as bankruptcy as
punishment.

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2. Industry Analysis:
Porters 5 force model:
Threat of New Entrants: Low
Huge amount required for R&D. so it causes low threats of new entrants.
To be successful a company in this sector requires innovation. So innovation
limits threat of new entrants.
The design, development and production costs of successive generation of
microprocessor were rising rapidly.
The cost of building state- of-the art fabrication facilities & equipment capable of
producing processors were increasing even more rapidly.
Huge set up costs lower threat of new entrants.

Rivalry among the competitors : High
Imitations of the Intels proprietary microprocessor products had recently
obtained sustainable market share.
Rapidly developing product markets with steep learning curves created rivalry
among the existing competitors. A major mistake or delay in a product can result
in a firms falling permanently behind its competitors.
The design, development and production costs of successive generation of
microprocessor were rising rapidly.
Imitation of the products is one of the sources of competitions.
Imitations were much less expensive to develop than the original processor and
tended to appear after demand for the original had already ramped-up.

Threat of substitute products: Low
Dramatic decline in marginal costs were very common for new microprocessor
products. This lowers threat of substitute products.

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Bargaining Power of the Buyer : High
As the competition is very high among the rivals, so bargaining power of the
buyers is very high.
Imitation of the product causes high bargaining power of the buyers
Uncertainty of rapid growth causes high bargaining power of the the buyer.
Bargaining power of the Supplier : High
Imitation of the products causes higher bargain power of the Supplier
Semiconductor producers typically cross-licensed products with competing
companies.

So, overall industry competition is High.

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PEST Analysis:
P-Political Analysis:

Political Situation of a country largely depends on its stability of the Government.
Political environment of any country fully depends on govt. policies to the
economy.
Law, taxation policy, foreign trade regulation and government stability.
Lowest risk of military invasion due to well democracy practices.
Legal framework is existed in the USA for contract enforcement.
Therefore, it may be concluded that political scenario of USA is very much stable
and favorable for business proliferation and development.

E-Economy Analysis:

One countrys economy is affected by business cycles, GNP trends, Interest rate,
inflation, energy availability & cost and so on.
Positive growth in economy.
Activities were centered on the investment in and management of income producing
Technological properties.

S-Social Analysis:

Socio-cultural environment is mostly affected by Population demographics, Income
distribution, Levels of education etc.
The economy is basically a free market and the government tends to apply statutes and
policies less strict.
Diversified Demography
High immigration rate toward USA
High entrepreneurial spirit among American people and lower unemployment rate.

T-Technological Analysis:

Government encourages investing in technology based industry as it ensured to develop
research group.
Recent technological developments are radical and revolutionary.
Technology's impact on product offering is significant.

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3. Company Analysis:
Intel is the worlds largest organization, which makes semi-conductor chipmakers for computers.
It is an American based company and has the highest revenue worldwide in semiconductor chips.
Almost every computer has these Intel chips in it. Intel Corporations came into existence in the
year 1968 and from its existence it has made its presence felt in every persons life. Intel
production is not just restricted to semiconductor chips but it produce variety of other products
which becomes useful in computing such as motherboard chipsets, graphic chips, flash memory
and integrated circuits etc.
Intel is the first brand, which has launched first commercial microprocessor chip. Intel has
invested a very large amount of money in new microprocessor designs because computer
industry took a rapid boost in the year 1990s. To understand the market condition of Intel, we
should focus on the SWOT analysis of Intel Company. SWOT analysis is well renowned
business term, which focuses on both internal and external factors of the organizations. It
displays a clear picture of where the company stands. SWOT analysis of Intel Company is no
different from the other companies SWOT analysis.
SWOT ANALYSIS
Strengths
Intel has the large market share all over the world which seems more or less like a
monopoly for Intel Corporation. And has a very strong brand value attached to it.
Intel was the first company, which came up with the idea of microprocessor, and it has
continued that legacy by making advanced changes in it with time.
Intel Corporation has loyal customers all over the world and in many parts of the world;
people are not familiar with any other brand apart from Intel.
It has invested a very heavy amount in its Research and Development department, which
has played a very crucial role in the success of its brand value.
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Intel has a reputation as a leading innovator in the design, development and manufacture
of semiconductor.
In 1971 it introduced the first erasable programmable read only memory (EPROM) chip.
This was an important innovation because it created versatile and inexpensive data
storage medium. Intel soon was the leading supplier of successive generations of
EPROMs.
By 1991 Intel had become the worlds second largest manufacturer of integrated circuits
with estimated 1991 integrated circuits revenues of almost $4.1 billion and worlds
largest metal oxide silicon (MOS) manufacturers.
Weaknesses
Sometimes Intel comes up with a very technical strategy in response to its competitors,
which is not easily understood, by most of the people.
Intel saw a loss in the financial year of 1986 in terms of revenue i.e. they failed to meet
their expected profit.
They have taken the advantage of being a brand leader, by not taking benefits from
economies of scale, and provide cheaper items to its consumers.
The production and development of new Intel products required ever-larger up-front
expenditures. The rapid rate of innovation in Intels business meant that it would be
extremely costly-perhaps even fatal-to delay or scrimp on these expenditures.
Intel underestimated the importance of technology, missing the opportunity to
commercialize its early stand alone personal computer to compete with Apple, whose
first 8-bit machine was introduced in 1978.
Opportunities
Intel should keep customers as their first preference and make changes on regular basis to
meet the needs of their users.
Market penetration and product development will be more than useful if they focus on
their existing market.
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IBMs sheer size and open architecture policy quickly made its PC and AT important
standards, in turn propelling Intels microprocessors into a position of dominance.
Demand for Intels i386 microprocessors seemed to be less price sensitive than that of
earlier processors because there were no competing suppliers.
Intel had the option to exchange the rights (other than those held by the acquirer) for
shares of common stock, with an exchange ratio one to one.
They can reduce their production cost by opting for forward and backward integration. It
will not only reduce cost but will also result in better quality also.
Threats
As the technology is increasing rapidly, the present manufacturing might just go to waste.
Customer taste might change and their preferences will shift to the other competitive
products if they do not get what they need.
Some of its other strong competitors, which it should take into considerations, are Dell
and IBM etc.
The focus on rapidly developing product markets with steep learning curves created risks,
a major mistake or delay in a product could result in Intel falling permanently behind its
competitors.
The cost of building state of the art fabrication facilities (fabs) and equipment capable of
producing 32-bit processors were increasing even more rapidly.

Apart from all these factors, we can trust Intel in every situation because it has been present in
the market for a very long time.
SWOT analysis of Intel Company has focused on both negatives and positives of the
organization and it helps them in a great in the future that what possible options are available to
them. With its present market share, it does not need to worry much about others but it is always
works in the best interest of the organization to stay on the safer side.
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Ratio Analysis
I ntel vs. I ndustry average:
1. The net profit margin tells how much profit a company makes for every $1 it generates
in revenue or sales. Profit margins vary by industry, but all else being equal, the higher a
company's profit margin compared to its competitors, the better. A low profit margin
indicates a low margin of safety: higher risk that a decline in sales will erase profits and
result in a net loss, or a negative margin.

From the above graph, it can be seen that Net Profit Margin of Intel corporation.is higher than
the industry average. In1991 Net Profit Margin was significantly higher .Over time the company
enjoyed increasing amount of net profit margin that causes increase its profitability. This ratio
indicates that Intel Corporation is one of the most profitable company among the semiconductor
industry on USA.
2. Earnings per share represent the net profit that can be distributed to the common stock
holder.

0.0%
10.0%
20.0%
year 1987 year 1988 year 1989 year 1990 year 1991
A
x
i
s

T
i
t
l
e

Net Profit Margin
Intel
Industry Average
0
5
10
Earning Per Share
Intel Industry Average
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From the graph it is apparent that the EPS of the Intel Corporation is lower than that of the
industry, because it has large number of common shares. In 1990 the numbers of shares was
199.65 million. But its EPS is increasing over time though number of shares is also increasing.
this represents that there net income is also increase with higher pace than the increase in the
number of common shares. In 1991 the EPS is slightly higher than that of the industry, which is a
good sign for the common stock holders.
3. Total Asset turnover measures a firm's efficiency at using its assets in generating sales
or revenue - the higher the number the better. It also indicates pricing strategy: companies
with low profit margins tend to have high asset turnover, while those with high profit
margins have low asset turnover.

Following the above graph, it can be seen that Total Asset Turnover Ratio of Intel Corporation.is
slightly lower than that of the industry average. That means the company has efficiency to
manage its assets but somewhat less than the industry average.
4. The ratio of net income to total assets measures the return on total assets after interest
and taxes. This ratio measures the efficiency with which total assets are employed within
the firm.

0.000
0.500
1.000
year 1987 year 1988 year 1989 year 1990
Total Assets Turnover
0.0%
20.0%
year 1987 year 1988 year 1989 year 1990
Return on Assets
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From the above graph it is apparent that ROA of Intel Corporation is higher than that of the
industry average. It is somewhat volatile. But in the industry the ROA is decreasing. This
represents that the firm is doing well than the other company in average.
5. Return on the equity measures the efficiency with which the common shareholders
equity is being employed within the firm. It indicates the rate of return that management
has earned on the capital provided by the owner after meeting all payments to all other
capital suppliers.

ROE of the Industry is decreasing, a major shock in the year 1990 as shown in the graph. The
ROE of the Intel Corporation is higher than that of the Industry average but has low decreasing
pattern. The ratio of the company shows that the Intel Corporation is quite good to manage the
investment of the common stockholders to earn profit.
6. Price/earnings ratio represents that the willingness of the shareholders to give price for
$1 earnings. The lower price/earnings ratio, the better signal for the corporation.

0
20
40
Return on Equity
0.00
50.00
100.00
Price/Earning Ratio
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P/E ratio of the Intel Corporation is lower than that of the Industry average. In 1989, the gap is
highest. But the P/E ratio has deceasing pattern for the Intel corporation. This is a good signal for
the stockholders of the Intel Corporation.
7. Sustainable growth rate represents the opportunity to growth in the future.

In the graph it is apparent that the growth rate of the Intel Corporation is much higher than that
of the industry average. The growth rate of the industry is decreasing. The growth rate of the
Intel it is decreasing but at a slower rate. The higher growth rate is followed by the 100%
retention of the net income. The company did not give any dividend for the last five years.
8. Beta represents the systematic risk or non-diversifiable risk of the company.

Beta of the Intel is higher than that of the Industry average. This means that the Intel corporation
has higher risk than that of the other companies in the industry.

0
10
20
30
Growth Rate
1.3
1.4
1.5
1.6
1.7
1.8
Beta
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9. The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of
shareholders' equity and debt used to finance a company's assets. A high debt/equity ratio
generally means that a company has been aggressive in financing its growth with debt.
This can result in volatile earnings as a result of the additional interest expense.

From the above graph, it can be seen that the Debt to Equity Ratio of Intel Corporation.is higher
than that of the industry average. That means the company is conservative in financing its growth
with the debt. This result represents stability in earnings for the additional interest expense.
Liquidity Ratio

1. Current ratio:
It exerts the relationship between current assets (CA) and current liabilities (CL). Higher
current ratio indicates high capacity to repay the short-term obligation and lower ratio
indicates less capacity to repay the short-term obligation and firms always prefer higher ratio.

0.00
0.50
Debt to Equity Ratio
0
2
4
1980 1981 1982 1983 1984 1985 1886 1987 1988 1989 1990 1991
Current ratio
Current ratio
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From the graph it is seen that the current ratio is decreasing slightly over time. But it is
inacceptable range. The standard current ratio is 2:1. In all years ratio is higher than the standard
except in the year 1987.
2. Quick ratio
Cash, short-term marketable securities, accounts receivables are included in the Quick Assets.

The quick ratio of Intel Corporation is volatile over the last 10 year. But in all years it is in the
acceptable range.
Activity/Asset mgt. Ratio
The Assets management ratios measure how effectively the firm managing its assets. The
following turn over ratios shows efficiency with which assets are utilized.
1. Accounts Receivable Turnover
The Account receivable turnover ratio is calculated as sales divided by accounts receivable. The
inverse of this ratio times the number of days in a year gives the Average Collection Period.

0
5
1980 1981 1982 1983 1984 1985 1886 1987 1988 1989 1990 1991
Quick ratio
Quick ratio
0
5
10
1980 1981 1982 1983 1984 1985 1886 1987 1988 1989 1990 1991
Accounts Receivables Turnover
Accounts Receivables Turnover
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We can see that the accounts receivable turnover of the company is increasing than the previous
year. This shows that Intel Corporation is efficient to turn the accounts receivable to cash
quickly.
2. Inventory turnover
The inventory turnover ratio is calculated as sales divided by inventory. The inverse of this ratio
times the number of days in a year gives the inventory conversion period. The higher the
turnover and the lower the conversion period, the quicker is inventory turned into cash and the
more liquid the firm is said to be.

From the graph it is apparent that the inventory turnover is decreasing in 1980 but in 1986 it has
increasing pattern. This is a good sign for the company.
3. Accounts Payable Turnover

From the graph it is apparent that accounts payable turnover ratio is decreasing over time. This is
also a good sign for Intel Corporation.
0
10
20
1980 1981 1982 1983 1984 1985 1886 1987 1988 1989 1990 1991
Inventory turnover
Inventory turnover
0
20
40
1980 1981 1982 1983 1984 1985 1886 1987 1988 1989 1990 1991
Accounts Payable Turnover
Accounts Payable Turnover
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4. Cash Conversion Cycle
Cash conversion cycle is average collection period+ Inventory conversion period-Payment
deferral period. This ratio indicates the efficiency of the company to convert the current asset to
cash. The lower cash conversion cycle, the better for the company.

From the graph it is apparent that the ratio is decreasing which represents the efficiency of the
Intel Corporation.
5. Fixed Asset turnover
Fixed Asset turnover measures a firm's efficiency at using its fixed assets in generating sales
or revenue - the higher the number the better. It also indicates pricing strategy: companies
with low profit margins tend to have high asset turnover, while those with high profit
margins have low fixed asset turnover.

The fixed asset turnover is volatile over the last 10 years, but for the last 4 years it shows
decreasing pattern. That means Intel is losing its efficiency to use its fixed asset to generate
profit.
0
200
1980 1981 1982 1983 1984 1985 1886 1987 1988 1989 1990 1991
Cash Conversion Cycle
Cash Conversion Cycle
0
5
1980 1981 1982 1983 1984 1985 1886 1987 1988 1989 1990 1991
Fixed Asset turnover
Fixed Asset turnover
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Leverage Ratios:
Such ratios provide insight into the extent to which non-equity capital is used to finance the
assets of the firm. Some representative ratios are
1. Debt ratio
Debt Ratio is a financial ratio that indicates the percentage of a company's assets that are
provided by liabilities. The higher the ratio, the greater risk will be associated with the firm's
operation. In addition, high debt to assets ratio may indicate low borrowing capacity of a firm,
which in turn will lower the firm's financial flexibility.

From the above graph it is apparent, debt ratio is decreasing over the last 5 years, it is a good
sign for Intel Corporation. This ratio of Intel indicates that Intel is using fewer amounts of
liabilities to finance its total assets.

Profitability Ratios:
Profitability refers to the ability of a firm to generate revenues in excess of expenses.
Profitability ratios show the combined effects of liquidity, asset management, and debt on
operating results.

0
0.1
0.2
0.3
0.4
0.5
0.6
1980 1981 1982 1983 1984 1985 1886 1987 1988 1989 1990 1991
Debt ratio
Debt ratio
Page | 24

1. Gross profit margin
This margin relates gross income to sales. GPM indicates how much gross income is earned from
each dollar of sales revenue.

Gross profit margin is volatile over the last 10 years. It ranges from 42% to 60%.
2. Operating profit margin
This ratio is calculated by dividing operating profit (EBIT) by sales.

In 1986 the margin was negative, but for the last 5 years it is increasing. It is a good sign for the
Intel Corporation.

0.0%
20.0%
40.0%
60.0%
80.0%
1980 1981 1982 1983 1984 1985 1886 1987 1988 1989 1990 1991
Gross profit margin
Gross profit margin
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
1980 1981 1982 1983 1984 1985 1886 1987 1988 1989 1990 1991
Operating profit margin
Operating profit margin
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Du-Pont analysis
The return on equity (ROE) ratio is a measure of the rate of return to stockholders. Decomposing
the ROE into various factors influencing company performance is often called the Du Pont
system. Through earning decomposition, we can find out the catalyst behind the change in ROE.
Increase or decrease in ROE is influenced by the increase or decrease in profit margin, total asset
turnover and financial leverage.

Where
Net profit = net profit after taxes
Equity = shareholders' equity
EBIT = Earnings before interest and taxes
Sales = Net sales
Pretax profit= EBIT Interest
ROE can also be stated as:

ROE = Interest burden x Tax burden x Margin x Turnover x Leverage
Influences of the five ratios on the ROE:

-1
-0.5
0
0.5
1
1.5
2
2.5
year
1980
year
1981
year
1982
year
1983
year
1984
year
1985
year
1986
year
1987
year
1988
year
1989
year
1990
year
1991
Du-Pont Analysis
1. Net profits/Pretax profit 2.Pretax Profit/EBIT 3.EBIT/Sales
4.Sales/Total Assets 5.Total assets/Equity ROE
Page | 26

From the graph we see that, out of the five ratios Total Assets/Equity that is financial leverage
has the highest influence on the ROE. Asset turnover has the second highest influence on the
ROE. Whereas tax burden and profit margin have more or less the equal influence on the ROE.
In 1985 & 1986 all ratios the low because in these two year negative net income occurred.
Comparison of ROE between Intel and industry:

year
1987
year
1988
year
1989
year
1990 year 1991
Company ROE 18.99% 21.78% 15.34% 12.53% 18.19%
Industry ROE 15% 15% 10% 18% 4%

Following the above graph, it can be seen that ROE of Intel corporation is lower than the
industry average.In1990 ROE was significantly lower of Intel corporation. In 1991, the ROE of
Intel Corporation is close to industry average.

0.00%
10.00%
20.00%
30.00%
40.00%
Industry ROE
Company ROE
Page | 27

Risk Analysis
Business risk:

1. Input Cost Volatility: The CV of input cost is higher than 50% so Intel Corporation is
volatile to cost of goods sold or input cost.
2. Capital Expenditure Volatility: The CV of capital expenditure is higher than 50% so
Intel Corporation is volatile to capital expenditure.
3. ROIC Volatility: The CV of return on invested capitals 91% so Intel Corporation is
volatile to return on invested capital.
4. Sales Volatility: the CV of sales is 65% so Intel Corporation is volatile to sales.
5. Technological Risk: Intel belongs to semiconductor industry which involves with higher
level of technology. As Over time the technology changes there is a risk of technology
obsolesce.
6. Business Cycle Risk: Intel produce different types of memory, microprocessors,
coprocessors, microcontroller, peripherals and systems. We know technological products
demand is cyclical. So, Intel Corporation has business cycle risk.

Particulars Coefficient of Variation Judgment
1. Input cost Volatility 56% Volatile
2. Capital Expenditure Volatility 73% Volatile
3. ROIC Volatility 91% Volatile
4. Sales Volatility 65% Volatile
5. Technological Risk Volatile
6. Business Cycle Risk Volatile
Page | 28

Degree of Operating Leverage (DOL):
It measures the sensitivity of % change in EBIT with respect to % change in Sales. This ratio can
also be used to help the firm determine the most appropriate level of operating leverage in order
to maximize the company's EBIT.

From the above table it is found that 1% change in sales will cause to increase EBIT by 1.73%on
an average. So, from this point of view Intel Corporation has some business risk.
Overall Business Risk: Intel Corporation faces high business risk.
Financial Risk Analysis:
Degree of Financial Leverage (DFL):
It measures the sensitivity of % change in EPS with respect to % change in EBIT. This ratio can
also be used to help the firm determine the most appropriate level of financial leverage in order
to maximize the company's EPS. It is a way to measure the financial risk of a firm. It indicates
the interest burden of the firm.

EBIT 30 28 139 250 -60 -135 246 594 601 858 1,080
%
change
in EBIT
-83.6% -6.7% 396.4% 79.9% -124.0% 125.0% -282.2% 141.5% 1.2% 42.8% 25.9%
Sales 789 900 1,122 1,629 1,365 1,265 1,907 2,875 3,127 3,921 4,779
%
Change
in Sales
-7.7% 14.1% 24.7% 45.2% -16.2% -7.3% 50.8% 50.8% 8.8% 25.4% 21.9%
DOL 10.83 -0.47 16.07 1.77 7.65 -17.06 -5.56 2.79 0.13 1.68 1.18
Average 1.73
Page | 29

Year 1980 1981 1982 1983 1984 1985 1886 1987 1988 1989 1990 1991
EBIT 183 30 28 139 250 -60 -135 246 594 601 858 1,080
EBT 185 40 30 178 298 -5 -175 288 629 583 986 1,195
DFL 0.99 0.75 0.93 0.78 0.84 12.00 0.77 0.85 0.94 1.03 0.87 0.90
Average 1.81

From the above table it is found that 1% change in EBIT will cause to increase EPS by 1.81%.
So, it can be said that Intel Corporation face some financial risk because of the debt.

Altmans Z score Model
Edward Altman has developed a model using financial statement ratios and multiple
discriminated analyses to predict bankruptcy for publicly traded manufacturing firm and
privately held non manufacturing firms.
The model is- Z-score estimated for publicly traded Manufacturing is:
Z = 3.3T
1
+ 1.2T
2
+ 1.0T
3
+ .6T
4 +1.4T5
T
1
= EBIT/ Total Assets
T
2
= Net working capital / Total Assets
T
3
= Sales/ Total Assets
T
4
= Market Value of Equity /Book value of debt
T5=Retained earnings/Total assets

Page | 30

The calculation of Altman z-score from year 1988-1991:
Factors Ratios
year
1988
year
1989
year
1990
year
1991
EBIT/Total Asset 0.167324 0.150476 0.162623 0.171647
T1=3.3 coefficient 3.3 3.3 3.3 3.3
Adjusted rarios 0.552169 0.49657 0.536657 0.566434
Net Working Capital /Total Asset 0.291831 0.310966 0.342115 0.377622
T2=1.2 coefficient 1.2 1.2 1.2 1.2
Adjusted ratio 0.350197 0.37316 0.410538 0.453147
Sales/Total Asset 0.809859 0.782924 0.743177 0.759536
T3=1 coefficient 1 1 1 1
Adjusted rarios 0.809859 0.782924 0.743177 0.759536
Market valu of Equity/Book value of debt 1.415929 1.765235 2.012325 2.627089
T4=.6 coefficient 0.6 0.6 0.6 0.6
Adjusted rarios 0.849558 1.059141 1.207395 1.576254
Retained Earnig /Total Asset 0.34338 0.385078 0.414708 0.477908
T5=1.4 coefficient 1.4 1.4 1.4 1.4
Adjusted rarios 0.480732 0.539109 0.580591 0.669072
Altman z score 3.042515 3.250904 3.478358 4.024442
Decision safe zone safe zone safe zone safe zone

3.71
2.73
2.44
2.99
3.24
2.56
2.07
2.32
3.04
3.25
3.48
4.02
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991
Altman's Z score
Altman z score Minimum Safe Zone Minimum Grey zone
Page | 31

The following table shows the decision about bankruptcy of Intel corporation from year 1880-
1991:
Year value Decision
year 1980 3.70600598 safe zone
year 1981 2.731077982 Grey area
year 1982 2.439364311 Grey area
year 1983 2.990082565 safe zone
year 1984 3.240529365 safe zone
year 1985 2.557983157 Grey area
year 1986 2.06795479 Grey area
year 1987 2.320957455 Grey area
year 1988 3.042515269 safe zone
year 1989 3.250903918 safe zone
year 1990 3.478357809 safe zone
year 1991 4.024441778 safe zone

Z score value for the year 1981,1982,1985,1986 & 1987 shows that the company was in grey
zone for bankruptcy prediction. Z score value for the last four years for has shown that the
company was not in a bankruptcy prediction. They were in the safe zone.

Page | 32

Problem Statement
1. Whether Intels current capital structure is appropriate or not?
2. If not, then how Intel can change its capital structure to the optimal level?
3. Should Intel go for changing its cash disbursement policy? If yes, then what strategy it should
follow?
Problem 1&2:

Problem 3:
Current Capital Structure
(Determining equity value/share & comparing with Industry
benchmark)
Appropriate Not appropriate
Change the capital structure
(Assuming 1000 mln
financing)
1.1000 mln
equity
2.1000 mln debt
3.500 mln equity,
50mln debt
4.750 mln equity,
250 debt
5.250 equity,
750 mln debt
Choose the one in which equity value/share is maximum and greater than
current equity value.
Page | 33

Problem 3:

Cash disbursement policy
(Assuming 1 billion=1000 mln cash)
1.Stock
repurchases
1000 mln
2. Dividend
84 mln each
year
3.Put
warrant
1000 mln
4. Debenture
100mln
5. Rep-500, Put-
500

8.Rep-
750,put-250
7.put-500,
debt-500
6. Rep-500, Deb-
500
9.Rep-250,
put-750
10.. Rep-750,
debt-250
11. Rep-250,
debt-750
12. put-250,
debt-750
13. put-750, debt
250
Choose the one in which equity value/share is maximum and greater than
current equity value.
Page | 34

Valuation of Intel Corporation
Problem-1: Whether the Current Capital Structure is appropriate or not.

Current WACC of INTEL
current WACC OF
INTEL amount weight Cost
After tax
cost WACC
Long term debt 363 0.07377 0.1175 0.07755 0.005720514
Equity 4558 0.92623 0.1684 0.1684 0.155977891
total 4921 0.161698405

Cost of equity:

Cost of equity
Rf = 0.1
Rm= (Industry avg of ROE) 0.14
Beta= 1.71
Ke= 0.1684
TAX RATE 34%

DCF- Current value of Intel (Average)

Page | 35

Simulation analysis:

Coeff. of Variability 0.1035

INDUSTRY COMPARISON

So, Intel's capital structure is not appropriate.

As its debt-equity ratio is lower than the industry, it can maximize its firm value by issuing more
debt, thus minimizing WACC.

0.00
0.20
0.40
0.60
Debt to Equity Ratio
Page | 36

Problem-2: How can the Current Capital Structure be appropriate?
Intel can make its capital structure appropriate by changing the debt equity ratio. Here, we have
tried to determine the optimum level of capital structure.

Assumption:

Total financing needed for R&D, plant & equipment is =1000 mln or 1 billion.

2 possible financing alternatives are:
Equity issuing up to 1000 mln or,
11.75% Bank debt up to 1000 mln fpr 10 years

Here we are proposing different combinations of these alternatives along with their WACC:

No. Alternative cap. Structure Amount WACC
1 common stock 1000 mln 0.16283

2 bank loan 1000 mln 0.14749
bank loan 500 mln
bank loan 250 mln
bank loan 750 mln

Alternative 1: Issuing common stock 1000 mln

Page | 37

Simulation analysis

Alternative 2: Taking Bank debt 1000 mln



Page | 38

Alternative 3: common stock 500 mln & Bank debt 500 mln

Simulation analysis



Page | 39





Page | 40

Decision:
No. Alternative cap. Structure Amount WACC
Equity
value/share
1 common stock 1000 mln 0.16283 39.99

2 bank loan 1000 mln 0.14749 40.36

3 common stock 500 mln 0.15516 40.27
bank loan 500 mln

40.97
bank loan 250 mln

5 common stock 250 mln 0.14833 40.34
bank loan 750 mln

Current cap. structure

0.1617 39.85

From the analysis, it is clear that the firm can maximize its share price by choosing the optimum
level of capital structure of issuing common stock of 750 mln & taking bank loan of 250 mln.

Problem-3: Should Intel go for change in the cash disbursement policy?
If yes, then what strategy it should follow?

Intels current cash balance in 1991 is $2277 mln. We are assuming that Intel will disburse cash
of $1000 mln. The rest amount should be used for R7D, plant & equipment etc in future.

I ntel has 4 alternatives as follows:
Stock repurchase $1000 mln
Annual dividend $84 mln each year
Put warrant $1000 mln exercisable after 2 years
5% debenture $1000 mln Convertible after 2 years

Page | 41

Based on these alternatives, we are showing different combinations for cash disbursements:

No. Alternatives Amount WACC
1 stock repurchase 1000 mln 0.1617

2 Annual dividend 84 mln each year 0.1617

3 Put warrants 1000 mln 0.1617

4 Debenture 1000 mln 0.14


Put warrants 500 mln


Debenture 500 mln


Debenture 500 mln






Debenture 250 mln


Debenture 750 mln


Debenture 750 mln


Debenture 250 mln

Page | 42

Alternative 1: stock repurchase 1000 mln



Alternative 2: Annual Dividend 84 mln each year

1992 1993 1994 1995 1996
Dividend/share 0.4 0.4 0.4 0.4 0.4
No. of shares 208.99 208.99 208.99 208.99 208.99
Annual dividend 83.596 83.596 83.596 83.596 83.596
Pv of dividends 71.96005853 61.94375358 53.32164378 45.89966754 39.51077519
Total PV of
dividends 272.6358986
Cash 2277
Net cash after
PV of dividends 2004.364101

Page | 43



Alternative 3: Put warrants $1000 mln exercisable after 2 years
Outstanding
shares
208.99
Put warrants
distributed
208.99
Exercise price
after 2 yrs
$50

1991 1992 1993 1994 1995 1996
Intel's Earnings 819 941.85 1083.1275 1245.596625 1432.436119 1647.301537
Intel's
outstanding
share
208.99 208.99 208.99 208.99 208.99 208.99
Intel's EPS 3.918847792 4.506674961 5.182676205 5.960077635 6.854089281 7.882202673
P/E ratio of
Intel
11
Expected
share price
43.10732571 49.57342457 57.00943825
65.56085399 75.39498209 86.7042294

Page | 44

As in 1993 (after 2 years), expected share price (57) is higher than the exercise price (50),
shareholders won't exercise the put warrants to Intel rather sell them in the open markets.
So there will be no impact on the firm's value.

But if the actual share price is lower than the exercise price950) at the end of year 1993, they
will exercise put warrants & Intell will be bound to buy back 10% of the outstanding shares
(208.99/10= 20.9 mln) @ 50
Total cash paid for buying put warrants in 1993 will be 20.9 mln * $50 = $1045 mln.
PV of cash paid is = 1045/1.1811^2 = 749.105 mln
Net cash in 1991 = 2277-749.105 = 1527.895 mln.
No. of shares outstanding = 208.99-20.9 = 188.09 mln.



Page | 45

Alternative 4: 5% Debenture $1000 mln convertable after 2
years



Alternative 5: Repurchase $500 mln & Put warrants$500 mln

Page | 46



Alternative 6: Repurchase $500 mln & Debenture $500 mln


Page | 47

Alternative 7: Put warrants $500 mln & Debenture $500 mln



Alternative 8: Repurchase $750 mln & Put warrants $250 mln

Page | 48



Alternative 9: Repurchase $250 mln & Put warrants $750 mln



Page | 49

Alternative 10: Repurchase $750 mln & debenture $250 mln



Alternative 11: Repurchase $250 mln & debenture $750 mln

Page | 50



Alternative 12: Put warrants $250 mln & debenture $750 mln



Page | 51

Alternative 13: Put warrants $750 mln & debenture $250 mln



Page | 52

Decision:
No. Alternative cap. Structure Amount WACC Equity value/share
1 stock repurchase 1000 mln 0.1617 39.83

2 Annual dividend 84 mln each year 0.1617 38.55

3 Put warrants 1000 mln 0.1617 40.29

4 Debenture 1000 mln 0.14 38.53

5 stock repurchase 500 mln 0.1617 40

Debenture 500 mln

7 Put warrants 500 mln 0.1432 40.88
Debenture 500 mln



Debenture 250 mln

Debenture 750 mln

12 Put warrants 250 mln 0.1447 44.33
Debenture 750 mln

13 Put warrants 750 mln 0.1418 43.75
Debenture 250 mln
Here, the 12
th
alternative (Put warrants 250 mln & debenture 750 mln) provides the maximum
equity value/share of $44.33. Then the 11
th
alternative (stock repurchase 250 mln & debenture
750 mln) provides the second maximum equity value/share of $44.30. Both of them are greater
than the current equity value/share of $39.85. So Intel should go for change in the cash
disbursement policy.
Page | 53

Recommendations:

1. Intels current capital structure is not appropriate. So it should change the existing debt-
equity ratio to optimize the capital structure.
For example, for $1 billion financing, Intel should -
Issue Common stock of $750 mln consisting of 17.65 mln shares @ $42.5 (current mkt
price) &
Take Bank debt of $250 mln @ 11.75% for 10 years
This will give the maximum equity value/share of $40.97.
New debt equity ratio will be 13.88% which is not so large.
Expected Altmans Z score will be 3.85 which is also in the safe zone.

2. Intel should go for change in the cash disbursement policy. It should follow the 12
th

alternative of Put warrants 250 mln (exercisable @ $50 after 2 years) & 5% convertible
debenture 750 mln as it gives the maximum equity value/ share of $44.33.
In this case, total outstanding shares after 2 years will be:
Calculation No. of shares
From Put warrants 208.99*2.5% (5.22475 mln)
From Convertible debenture 750 / 75 10 mln
Existing shares 208.99 mln
Total 213.76525 mln

Page | 54

Limitation: Exercise of put warrants is dependent on the market value of shares at the end of
year 1993.
As it is uncertain, we are also recommending the 11
th
alternative of stock repurchase 250 mln
@ $40 per share(Lower than current mkt value $42.5) & 5% convertible debenture 750 mln as
it provides the second maximum equity value/share of $44.30.
In this case, total outstanding shares will be:
Calculation No. of shares
From stock repurchase 250 mln / 40 (6.25 mln)
From Convertible debenture 750 / 75 10 mln
Existing shares 208.99 mln
Total 212.74 mln

In case of stock repurchase, Intel should follow Dutch auction method as it reflects
the shareholders expectations.

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