Intel Corporation, 1992

Course F-506: Cases in Financial Decision Making

Prepared for
M. Sadiqul Islam
Professor
Department of Finance
Faculty of Business Studies
University of Dhaka

Prepared by
Group 62
Section B
MBA 23rd Batch
Department of Finance
University of Dhaka

Date of Submission: 28 September 2022

 Group Members’ Profile
Group No.: 62

Group Members’

SL NO. Name MBA ID Remarks

01 Shaikh Saifullah Khalid 23-2027

02 Nusrat Jahan 23-2009

03 Md. Ullash Hossen 23-2227

 Letter of Transmittal

September 28, 2022

M. Sadiqul Islam
Professor
Department of Finance
Faculty of Business Studies
University of Dhaka

Subject: Submission of report

Dear Sir

We consider ourselves very fortunate to prepare this report under your valuable
guidance. Working for this report was both a challenge and pleasure to us. We are
indebted to you.

Your suggestion of the topic of our report “Intel Corporation, 1992” was very
appropriate. Your constant guidance helped us to apply our theoretical acquired in the
classroom to the practical world.

Thank you for giving this kind of challenging task.

Sincerely your

………………….

Shaikh Saifullah Khalid

Id No: 23-2027

On behalf of Group 62
 Executive Summary

Gordon Moore and Robert Noyce laid the groundwork for what would become Intel in
1968. Based on its current market valuation, Intel has joined a select group of American
companies that have never distributed a dividend.

An overview of the company is presented in the very first section of the report. Second,
it provides an examination of the state of the economy between the years 1980 and
1990. In addition to that, the report details the United States' inflation rate and GDP
growth rate. Thirdly, the report includes an analysis of the company, in which it
demonstrates the PESTEL (political, economic, social, technical, environmental, and
legal elements) study as well as the porter's five forces analysis. In addition, the study's
analysis of the company contains a ratio analysis, a five-element decomposition of
ROE, a risk analysis including financial risk and business risk, and a strategy analysis;
in addition to these, the report includes a SWOT analysis of the organization.

The statement of the problem has consequently been provided. Following that, a
discussion of potential alternate courses of action will take place. The final section
presents an in-depth examination of each available option. The recommendations are
based on the alternatives, and the best ones were picked out of those options. And
finally, the report comes to a general conclusion regarding the job that has been done
and presents this information.
Contents
Chapter 1: Introduction............................................................................................................... 2
Objectives of the Report ......................................................................................................... 2
Methodology ........................................................................................................................... 2
Limitations .............................................................................................................................. 2
Chapter 2: Industry Analysis ...................................................................................................... 3
PESTLE Analysis ................................................................................................................... 3
Five Forces Analysis .............................................................................................................. 4
Chapter 3: Economic Analysis ................................................................................................... 5
Chapter 4: Analysis of the Company .......................................................................................... 6
SWOT Analysis ...................................................................................................................... 6
Ratio Analysis......................................................................................................................... 7
DuPont Analysis ..................................................................................................................... 9
Business Risk Analysis ..........................................................................................................10
Financial Risk Analysis ..........................................................................................................10
Chapter 5: Problem Statement ..................................................................................................12
Chapter 6: Alternative Courses of Actions .................................................................................14
WACC Calculation .................................................................................................................14
Chapter 7: Analysis of Alternatives............................................................................................16
Basic Valuation......................................................................................................................16
Alternative 1: Share repurchase ............................................................................................17
Assumptions for Valuation and Result................................................................................17
Simulation Analysis ...............................................................................................................17
Alternative 2: Dividend Issue .................................................................................................19
Assumptions for Valuation and Result................................................................................19
Simulation Analysis ...............................................................................................................19
Alternative 3: Put Warrant Issue ............................................................................................20
Assumptions for Valuation and Result................................................................................20
Option Pricing ........................................................................................................................21
Simulation Analysis ...............................................................................................................22
Chapter 8: Recommendations and Justifications.......................................................................23

1
Chapter 1: Introduction
This report is prepared for the requirement of MBA program under Department of Finance,
University of Dhaka of course F-506: Cases in Financial Decision Making under the Academic
supervision of our course teacher. Dr. M. Sadiqul Islam, Professor, Department of Finance,
University of Dhaka. And the topic is “Intel Corporation, 1992”. While preparing the report, we
gave our best effort to incorporate the theoretical aspect of the subject. The report contains the
information on the assigned topic collected from assigned case and different books.

Objectives of the Report

The main objective is to prepare the report as a requirement of the course. Several specific
objectives of the report are:

 To present the condition of Intel corporation.

 To find out the appropriate cash disbursement policies.
 To measure the financial performance of Intel

Methodology
All the data used in this report have been gathered from the case and few from website of the
organizations. The theoretical part of this report has been collected from the case and text
provided by my honorable course teacher. Required assumptions have been made consistent
with the industry practice.

Limitations
While preparing this report we have faced these problems:
Lack of Experience: As we are new in this field, we felt lack of experience in every stage of our
work.
Insufficient Data in Internet: We didn’t get some data about the company’s financial
statements in the case.
Lack of Time: As we are new in this type of case analysis, we faced the time constraint.
Despite these limitations, we have tried to give our best effort to prepare the report as effective
as Possible. Lastly, we would like to seek pardon for any unintentional error which may exist in
the report.

2
Chapter 2: Industry Analysis
Due to its rapid capacity increase, Intel DRAMs were the most widely used semiconductor
component and the de facto industry standard by 1972. The corporation used "Moore's Law" as
a standard for determining the rate of technology advancement. This law illustrates the
exponential development of technical advances. Intel was able to consciously alter its licensing
policy because of the high cost of manufacturing microprocessors and the development of the
X86 series as the de facto industry standard. As determined in the given situation, NEC,
Motorola, TI, Hitachi, National, Toshiba, Fujitsu, Mastek are Intel Corporation's rivals.

PESTLE Analysis
A corporation is examined from several angles during a PESTLE examination, including the
political, economic, social, technological, legal, and environmental ones. It offers a wide range
of applications and could aid senior managers and human resources specialists in making long-
term smarter decisions. Below is a description of Intel Corporation's PESTEL analysis.
Political Factors: Intel focused on SRAM and DRAM semiconductors until the 1980s. Intel built
the first commercial microprocessor chip in 1971 but didn't promote them until the PC.
America's politics were stable. Current conditions are projected to persist. Political stability helps
businesses because they can predict economic growth.
Economic Factors: From 1980 to 1983, there was a recession in the early 1980s. A steady
decline in the economy started in January 1980. In the ten years that followed, the U.S.
experienced one of its longest and most stable periods of economic success since World War II.
The first hints of economic recovery appeared in 1983. Its expansion since WWII is one of the
longest in the country. The economic growth of the upcoming decade can be easily predicted.
Social Factors: The conventions, philosophies, and beliefs that are prevalent in a society play
a crucial role in the development of a company's culture. comprehension of society institutions,
the tastes of consumers, and the prevalent worldviews.
Technological Factors: In 1980, IBM's first microcomputer, the PC, used the i8088. Intel's
early breakthrough came in the 1970s. This innovation was the microprocessor, the "computer
inside the PC." Inventors and technologists drive the American economy. The nation has been
technologically advanced from its founding. Technology is always advancing. Despite strong
competition from other expanding economies, the country should maintain its technological
superiority.
Environmental Factors: Microprocessors that monitor the electrical system make it feasible to
keep the lights on and the heat flowing during severe weather. When preparing to do business
in a nation, the consideration is the business environment there. Companies may prosper in the
United States thanks to the atmosphere there.
Legal Factors: The information technology company is subject to a bare minimum of
regulation. However, for the firm to be allowed to register on the stock market, the Securities
and Exchange Commission (SEC) requires that it fulfill certain requirements and abide by
specific laws and regulations. Only then will the company be allowed to participate in the
market.

3
Five Forces Analysis
Threats of new entrants: Chips for computers are produced by Intel. New competitors pose no
threat to this business. The production of computer chips has advanced thanks to R&D.
(hardware and software). Making computer chips is challenging without IP rights. For the
development and production of chips, companies like AMD, Nvidia, Intel, QUALCOMM, and
others have invested significantly in R&D, real estate, and machinery. Only very large
companies that are willing to take risks may enter this sector. To increase market share, several
businesses in this industry have engaged in active advertising. Few businesses have lasted for
many years. Customers readily recognize trusted brands. It's difficult to break into this field.
Creating a brand will take years if anyone wants to enter. New players must endure aggressive
veteran players. Newcomers rarely present a threat.
Bargaining Power of Suppliers: The bargaining power of suppliers is impacted by these
factors. Many players, but only a few nations, have access to fabrication raw materials.
Materials for producing chips are readily available to Intel. Suppliers' negotiating power is
limited. Large Intel helps because moderate supplier size lessens firm pressure. As a result,
suppliers have little negotiation strength. Intel uses chips from select manufacturers. Supplier
gains from this. The supply chain at Intel is efficiently run. Forward supplier integration is
prevented by Intel's R&D and IP rights. Suppliers have little clout in negotiations.
Bargaining Power of Buyers: Customers of Intel have little negotiation power. A lot of
computer processors with high switching costs are used in hardware and software. It will cost a
lot of money and effort to change the products. Customers have limited negotiation leverage
and are unable to switch. decreased replacements Customers have few options because there
are few players in the business. low bargaining power of consumers. Brand recognition among
consumers: End users know Intel and prefer PCs and laptops powered by Intel. Due to
consumer demand, PC and laptop manufacturers must use Intel CPUs.
Current Rivalry: According to the findings of the presented case, the companies that compete
with Intel Corporation include NEC, Motorola, TI, Hitachi, National, Toshiba, Fujitsu, Mostek,
and General Instruments.
Threat of Substitutes: Few enterprises offer the same goods, limiting options. Intel's goods
outperform its competition. Intel is market leader. Intel's R&D decreases replacement risk. As a
result, its products are better. Compatibility and dependence issues in the computer chip sector
cause high switching costs. Availability is another factor. Intel supplies most semiconductors.
Because customers can't readily switch, they can't. Companies make comparable chips.
Business/consumer can swap products. Moderate replacement threat.

4
Chapter 3: Economic Analysis
USA is the largest and most developed county in the world. It has a well- educated, industrious
workforce and its large, affluent population makes it one of the world’s biggest consumer
markets. It is the top and higher growth of GDP. The GDP of USA in 1990, is 5.9 trillion that is
almost 6 trillion. The growth of GDP is 1.9% that is higher from any country.
USA has become largest economy because of its some significant decisions. USA achieved
one of the highest economic growth rates in the world. This growth was led by:

 High rates of investment in productive plant and equipment

 The application of efficient industrial techniques

 A high standard of education

 Good relations between labor and management

 Ready access to leading technologies and significant investment in research and

development

 An increasingly open world trade framework

 A large domestic market of discerning consumers, which has given American

businesses an advantage in their scale of operations.
In 1990 we are seeing stronger consumer growth as a result of three causes. First, after
dropping unemployment rates in the second half of the 1990s, incomes increased as a result of
quicker employment growth and faster pay growth. The second factor driving consumption was
the sharp increase in stock prices. Third, faster consumption growth depended on more
consumer debt
In response, banks made it harder for people to get loans. So, income growth is the only thing
that can keep up future consumption growth in a sustainable way. Because demand was high at
home, imports went up, but demand abroad was slow, so exports did not keep up. This caused
trade deficits to get bigger. During the 1990s, all of the U.S.'s major trading partners, except for
China, had slower GDP growth per person than the U.S.
GDP Growth Rate
The growth rate of GDP was increasing at increasing rate from 1971 to 1973. But after that in
1974 the growth was negative. Moreover, the average growth was positive from 1971 to 1991.
Growth was negative in 1974, 1975, 1980, 1982, and 1991, which suggests that the US GDP
growth rate slowed down. However, the recovery of the economy begins in 1983 and lasts until
1991. In 1991, the GDP growth rate was approximately -0.108. Aside from this, it was clear that
anytime an economy emerges from a recession, there will be sustained growth for the following
few years. Therefore, it can be predicted that the economy would have a significant rate of GDP
growth in the years to come. It is easy to predict that the US economy will increase by an
average of 5% during the next 5 to 10 years.

5
Chapter 4: Analysis of the Company
Moore and Robert Noyce, who had just died, started Intel in 1968. (Convector of the integrated
circuit and vice chairman of Intel until 1988). The company gained a reputation quickly as a
leader in designing, developing, and making semiconductors. In 1969, Intel made the first
random access memory that didn't move (SRAM). Then, in 1970, came the dynamic random-
access memory (DRAM) with 1024 bits. Intel DRAMs quickly grew in capacity and became the
standard in the industry. By 1972, they were the most popular semiconductor parts in the world.
In 1971, Intel also made the first EPROM chip, which stands for erasable programmable read-
only memory. This was a big step forward because it made a way to store data that was flexible
and cheap. Soon, Intel was the main company that made EPROMs for each new generation.
Intel has a strong track record of invention during its first 15 years. One observer claimed that
between 1971 and 1981, Intel was responsible for 16 of the 22 significant advancements in
microelectronics. "Moore's Law," which had developed into an industry standard, served as an
illustration of the rate of the company's technological progress. According to the law, a chip's
component count doubled every two years. Intel's approach had been to pull out of mature
product categories and shift resources to new products, which sold at higher prices, in order to
fund this ongoing innovation.
Risks were nevertheless introduced by the emphasis on product markets with quick
development and high learning curves. A significant error or delay in a product could cause Intel
to lag its rivals for all time. For instance, despite dominating the DRAM market in the 1970s,
Intel permanently stopped engaging in DRAM design and production efforts when it was unable
to create a marketable 256K DRAM product in the middle of the 1980s.
Despite these setbacks, Intel became the world's largest producer of metal-oxide-silicon (MOS)
and the second-largest maker of integrated circuits by 1991, with estimated integrated-circuit
revenues of close to $4.1 billion.
The goal of Intel in 1991 was to be the top "provider of building-blocks to the nascent computer
industry." Management considered that in order to accomplish this purpose, the company
needed to make investments in the design, development, and production of a range of
advanced microcomputer components and related products at various degrees of integration.

SWOT Analysis
Strength (S)
I. Quality Microprocessors & Product Innovation: The importance of expectations for
the Intel’s product market success means that Intel can gain by projecting an image of
confidence and endurance. Intel wavered with the introduction of its i386SL and the shift
to i486 production. Observers may have wondered whether these were signs that Intel
was losing its ability to control innovation in X86 products. In addition, some observers
believed that Intel’s future X86 processors would not be able to deliver the kind of
performance provided by some RISC chips. If the market doubts Intel’s products and
strengths, the door opens for other processors to become more important standard
setters.
II. First mover and second mover advantage: first movers might be able to gain an
advantage by creating a premium-brand image through advertising. (Intel is currently
attempting this with its “Intel Inside” campaign.

6
 III. Strong Captured Marketing & Promotional Advertisement: the value of advertising
and premium-brand recognition is that they benefit the Intel standard against different
standards, such as those of the RISC chips. Of course, to the extent Intel has its
products imitated, it cannot appropriate all of the gains from such recognition. It may well
be that Intel’s true advertising advantages are not based on Intel’s claims for
authenticity, but on the vast installed base of X86 products and the externalities
associated with that base.
IV. Highly Skilled Engineers & Researchers: The Engineers and researchers are very
much experienced as well as skilled. Moreover, the employees and workers are very
active in their respective workplace.
V. Strong Brand Equity: Every client of Intel Corporation is giving the new version of its
products and every new product is modified that is important services which is making
strong brand equity
Weakness (W)
I. Strong Competitors: IBM, Texas, AMD, IBM, Microchips are the strongest competitors
of Intel. This is huge challenge for Intel to competitor with the competitors.
II. Operation difficulties: As the franchisees are in every corner of the city, it ends up
being very tough for Intel to deal with its operations.
III. Higher production cost: The production cost of chips and processors is higher in USA
comparatively China. The chips & processors of computer are producing in China at
least cost.
Opportunity (O)
I. People interest growing on technology: The interest of mass people is growing day
by day significantly. It is positive side for Intel.
II. Huge global market: Global market is growing of Intel. The demand of processors and
microprocessors are increasing day by day.
Threats (T)
I. Direct and Indirect Competitors: Direct competitors are Texas, AMD, IBM, Microchips
etc. and indirect competitors are local manufacturer who produces microprocessor
internally.
II. Dumping issues: Sometimes some counties try to dump over USA like China. It is a
threat for a local company of USA. The chips & processors of computer are producing in
China at least cost. And China is trying to capture the market of processors all over the
world that is huge threat of Intel.
Ratio Analysis
Ratios can be used to scientifically analyze financial documents like the balance sheet and
income statement since they reveal information about a company's liquidity, operational
performance, and profitability. A crucial part of fundamental equity research is ratio analysis.
The current ratio, quick ratio, and operational cash flow ratio are a few examples of liquidity
ratios. These metrics are used to evaluate a company's safety margin and debt repayment
capacity. How effectively a corporation uses its internal assets and liabilities can be determined
using the efficiency ratio. The solvency ratio, which calculates how much operational cash flow
is used to reduce long-term debt, is one indicator of a company's financial health. A company's
ability to produce value and profit for its shareholders is measured using the profitability ratio.

7
 Profitability Ratio
70,0%
60,0%
50,0%
40,0%
30,0%
20,0%
10,0%
0,0%
-10,0%
-20,0%
1990 1989 1988 1987 1986 1985 1984
Gross Profit Margin 58,2% 53,9% 55,0% 54,3% 45,7% 42,6% 52,5%
Net Profit Margin 16,6% 12,5% 15,8% 13,0% -13,7% 0,1% 12,2%
Retrun on Asset (ROA) 12,3% 9,8% 12,8% 9,5% -8,3% 0,1% 9,8%
Return on Equity (ROE) 18,10% 15,34% 21,78% 18,99% -13,57% 0,14% 14,56%

Profitability Ratio of Intel Corporation

We can observe a versatile trend in the profitability ratio of Intel Corporation. There are ups and
downs in the profitability ratio of the organization. Finally, we can observe a increasing trend
during the latest years.
Activity Ratios of Intel Corporation

Activity Ratios
2,50

2,00

1,50

1,00

0,50

0,00
1990 1989 1988 1987 1986 1985 1984
Fixed Asset Turnover 1,77 1,74 1,86 1,65 1,21 1,22 1,55
Total Asset Turnover 0,74 0,78 0,81 0,73 0,61 0,63 0,80
Asset to Equity Ratio 1,47 1,57 1,71 1,99 1,63 1,51 1,49
Equity Turnover 1,09 1,23 1,38 1,46 0,99 0,96 1,20

We can observe a stable trend in efficiency ratios of the organization that have been measured
in terms of fixed assets turnover ratio and total asset turnover ratio. But the outcome is not so
satisfactory. But equity turnover and fixed asset turnover have a trend line that is satisfactory.
Liquidity Ratio of Intel Corporation
The current ratio of the organization also followed a versatile trend over the years. If we
compare the ratios with standard, we will find the current ratio was good during the year 1986,
1985 and 1984 and ratio of the rest of the years are well.

8
 Current Ratio
4,00

3,50 3,34

3,00 2,74
2,37 2,35 2,46
2,50
2,11
2,00
1,62
1,50

1,00

0,50

0,00
1990 1989 1988 1987 1986 1985 1984

Solvency Ratios of Intel Corporation

Solvency Ratios
2,50
2,00
1,50
1,00
0,50
0,00
1990 1989 1988 1987 1986 1985 1984
D/E Ratio 0,50 0,57 0,71 0,99 0,63 0,51 0,49
Debt to Capital 0,34 0,36 0,41 0,50 0,39 0,34 0,33
Debt to Asset ratio 0,34 0,36 0,41 0,50 0,39 0,34 0,33

Debt to Asset ratio Debt to Capital D/E Ratio

The above chart plotted the leverage ratio of the organization over the time. In the beginning the
ratio was low but in the middle the ratios were high. And latest years we can observe a low
leverage ratio that indicates a less probability of financial risk.

DuPont Analysis
To compare a company's effectiveness, the DuPont we made the DuPont analysis widespread.
The factors affecting return on equity can be separated using the DuPont analysis (ROE).

Year 1990 1989 1988 1987 1986 1985 1984

Profit margin 0.17 0.13 0.16 0.13 -0.14 0.00 0.12

Asset turnover 0.74 0.78 0.81 0.73 0.61 0.63 0.80

9
Total 1.47 1.57 1.71 1.99 1.63 1.51 1.49
Assets/Equity
Rerun on 18.10% 15.34% 21.78% 18.99% -13.57% 0.14% 14.56%
Equity
From the DuPont analysis table, we seeing that the worst period for Intel is 1986. In 1986, the
profit margin is negative asset turnover is very low. Return on Equity is also negative and it is
very much significant. After that period the condition of Intel became good. And it was
sustainable as well as growing all over the period. After the recession, the whole picture of Intel
was changed. Though profit margin, asset turnover, asset to equity turnover and return on
equity were some ups and down, all the factors are growing trend that is satisfactory.

Business Risk Analysis

A multiple called the degree of operational leverage (DOL) gauges how much a company's
operating income will fluctuate in reaction to changes in sales. Businesses with a higher level of
operating leverage have a larger ratio of fixed costs (or costs that don't fluctuate with
production) to variable costs (costs that change with production volume). The DOL ratio helps
analysts assess how any change in sales will affect the company's profits or profit.

DOL
10

0
ACHSENTITEL

-5

-10

-15

-20
1985 1986 1987 1988 1989 1990
DOL 7,651363636 -17,0625 -5,56092073 2,786887724 0,134446315 1,684092843

The degree of operating leverage is observed to be moderately fluctuating over the time with a
little exception which indicates that the company has moderate operating risk.

Financial Risk Analysis

Degree of Financial Leverage: A degree of financial leverage (DFL) gauges a company's
sensitivity to changes in its operational income due to changes in its capital structure. DFL
measures the percentage change in EPS per unit change in operating income (EBIT). The
higher financial leverage, the more variable earnings.

10
 DFL
1,6
1,4
1,2
1
Achsentitel

0,8
0,6
0,4
0,2
0
1984 1985 1986 1987 1988 1989 1990
DFL 1,0638298 0,6976744 0,7758621 1,3666667 1,1511628 1,2044088 1,1349206

We have found that Intel’s average DFL is 1.06 implying its EBIT is less volatile, subsequently
their EPS.
Times Interest Earned Ratio: The ratio is a number, not a percentage, and the values to
compute times interest earned appear on a company's income statement. A ratio of 5 suggests
the business can cover its long-term debt interest payments five times over, or that its annual
income is five times higher than its interest expenses.

TIE
20

15
Achsentitel

10

-5
1984 1985 1986 1987 1988 1989 1990
TIE 16,666667 -2,307692 -3,461538 3,7272727 7,6153846 5,8921569 8,4117647

Intel’s TIE ratio is greater than 2.5 in the last four years, implying they have five times higher
annual income to cover their interest expenses. As a result, their financial risk is low.

11
Chapter 5: Problem Statement
Intel, Microsoft, Lotus, etc. are today's computer industry heroes. These companies focus on
microprocessors and software products, which have proprietary standards. Standard-setting
companies dominate their markets. Distribution, sales, and production of "boxes" and
accessories have fragmented off into distinct, low-margin enterprises. Chip and software design
and manufacture give almost all value to today's desktop computers. The computer "shell,"
peripherals, and distribution have become commodities with fragmented producers. The
computer industry has evolved from vertical to horizontal integration.
Intel had $1,785 cash balance on their balance sheet in 1990, which was approximately 33% of
their total assets. According to the analysts, they would still 30 to 40% cash to total assets in
their balance sheet. As a result, Intel was planning to reshape their capital structure and cash-
disbursement policy.
Pros and cons of holding cash balance:
i) Tax Purpose: The easiest cost to get a handle on is that of the foregone tax shields.
A simple example suffices to see the magnitude of the tax shields. Suppose that
Treasury bill interest rates are at 7 percent. Of this amount a corporation taxed at 34
percent will owe 2.38 percent in taxes, which on a $1 billion investment in T-bills,
comes to $24 million per year. If this is treated as a perpetuity at 7 percent, the value
to shareholders is $340 million, or $1.65 per share. In addition, there is some
evidence in the case that the Intel Treasury has used the large stock of capital as
collateral for certain arbitrage activity. Suppose, for example, that Intel’s Treasury
can outperform T-bills by, say an additional 100 (risk-adjusted) basis points on the
funds. This creates an after-tax savings for Intel of 66 basis points. On $1 billion, this
is worth about $7 million per year. The net tax burden of the last $1 billion in cash
therefore falls from $24 million per year to $24-$7 = $17 million per year. In
perpetuity at 7 percent this is worth $243 million, or $1.15 per share. Clearly, the
more that the Treasury can outperform, the less significant is the cash’s tax burden
to shareholders.
ii) Agency Issues: Another cost of holding cash is that it might exacerbate agency
problems. Takeover targets are often under levered and cash rich, and typically,
management cannot spend as frivolously if the company has little financial slack to
fritter away. It may be worth suggesting that some of the preconditions for a severe
agency problem are in place for Intel. The firm holds lots of cash, and the incumbent
management is protected by a strong poison-pill provision in Intel’s Common Stock
Rights. The Rights make a hostile takeover of Intel all but impossible. There is lots of
innovation; various measures of operating margins and efficiency have been rising,
etc. But, as the product-cycle model above shows, a policy of aggressive innovation
(although no sign of complacency) may nevertheless provide shareholders with
inadequate returns. Management may be ready to fight a crusade to make Intel THE
microprocessor leader, but shareholders could still prefer surrender.
iii) Signaling: A final kind of cost of holding cash relates to signaling issues. Intel could
probably increase its current share price by signaling management’s belief of a
strong future through a dividend or (better yet) share repurchase. (In the case of a
dividend announcement, several observers have argued that Intel’s stock price might

12
 fall. A more unusual explanation for why Intel might reasonably care about its short-
run stock
price would rely on the network externalities discussed above. Typically, we think
that a deviation of the stock price from the present value of future expected corporate
cash flows has no effect on those cash flows. If the stock market sours on a
company, the stock price will be low, but the reality of the company’s future is not
affected by the market’s perception. This may not be the case when expectations of
FUTURE demand are an important source of CURRENT demand—i.e., when
complimentarily externalities are present. Negative sentiment in the stock market
may indicate negative sentiment in the product market, which in turn may CAUSE
lower expected future sales. Demand for Intel’s semiconductors may be subject to
self-fulfilling prophecies (i.e., multiple equilibria driven by expectations of future
demand).

iv) Timing: Intel has used timing against the market as a source of long-run value for
shareholders who remain with the firm. To the extent Intel can use its information to
exploit market mispricing, there may be an additional benefit to holding cash (which
gives greater flexibility in timing the buy versus sells decision). Clearly, if stock prices
exogenously differ from true value, holding more cash (or less debt) has extra value
because it gives
the firm the option to trade more vigorously on the mispricing and prevents it from
having to raise cash at the (arbitrary) moments when investment opportunities
happen to arrive.

What could Intel have done better to reshape their capital structure
and cash disbursement policies?

13
Chapter 6: Alternative Courses of Actions
We have examined the alternatives we have established in this section of the report. Every
alternative has been examined in terms of WACC, FCFF valuation, share price, and simulation
operation. We have examined the information provided in the lawsuit regarding Intel
Corporation. The valuation was then based on reasonable assumptions that we had made. In
addition, we have performed simulation tests that will help us comprehend value ranges. Now,
to find a solution, we considered the following two categories of likely actions:
Alternatives for sash disbursement policies:

Alternatives Descriptions
Alternative Shares Intel is considering buying back their shares through Dutch
01 repurchase auction/fixed-price tender offer when stock price is unduly
low. In our case, we assume Intel will use 20% of their
cash reserve ($357 million) to buy back 9.27 million of
their shares at $38.5
Alternative Dividend Intel is also considering the option to pay 40 cents per
02 declaration shares (approximately $84 million) to its shareholders
Alternative Put warrant Intel is planning to issue put warrant for their shares. They
03 issue are considering put warrant with a strike price of $50, for
their shares which are currently trading at $38.5
WACC Calculation
We calculated our WACC (discount rate) based on the given data of case and realistic
assumptions. Here are our WACC for different scenarios:
i) Base Case Valuation:

WACC for Basic Valuation

Risk Free Int. Rate 10.78%
Equity Beta 1.70
Equity Risk Premium 3.00%
Cost of Equity 15.88%
Cost of Debt 29.57%
After tax cost of debt 19.49%
Total debt 345
Total equity 3,592
Weight of equity 91.24%
weight of debt 8.76%
Base WACC 17%
Business risk premium 1.00%
Financial risk premium 1.50%
Risk adjusted WACC 19.58%
ii) Shares repurchase:

WACC for Repurchased stock

Risk Free Int. Rate 10.78%
Equity Beta 1.7
Equity Risk Premium 3.00%
Cost of Equity 15.88%

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 Cost of Debt 29.57%
After tax cost of debt 19.49%
Total debt 345
Total equity 3,235
Weight of equity 90.36%
weight of debt 9.64%
Base WACC 17.2%
Business risk premium 1%
Financial risk premium 1.5%
Risk adjusted capital 19.70%
iii) Dividend Issue:

WACC for Dividend Issue

Risk Free Int. Rate 10.78%
Equity Beta 1.70
Equity Risk Premium 3.00%
Cost of Equity 15.88%
Cost of Debt 29.57%
After tax cost of debt 19.49%
Total debt 345
Total equity 3,592
Weight of equity 91.24%
weight of debt 8.76%
Base WACC 17%
Business risk premium 1.00%
Financial risk premium 1.50%
Risk adjusted WACC 20%
We used the average US medium- and long-term treasury loan as our risk-free rate proxy. Cost
of debt is 29.57% (calculated by dividing the interest expense with long-term debt. We assumed
our equity risk premium is 3%. We also included business risk premium and financial risk
premium in our WACC. We got our applicable by dividing income tax with pretax income.

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Chapter 7: Analysis of Alternatives
Basic Valuation
In this section, we will analyze the value per share of Intel based on the given information of
case.
Assumptions:
i) YoY debt growth rate (interest bearing debt) will continue to grow at 5.22%
ii) Interest rate 28.93% will remain to be constant
iii) Using the tax rate of 1991 which is 31.46% and assuming this tax rate will be
constant over the years
iv) Terminal growth rate is 5%

Forecasted
1990 1991(F) 1992(F) 1993(F) 1994(F) 1995(F)
Earnings estimates from analysts:
Average 819 862 1,028 1,166 1,339
Pessimistic 819 485 595 700 900
Estimated net income 819 748.9 898.1 1026.2 1207.3
Interest bearing debt (Long term debt) 345 363 381.94 401.87 422.83 444.89
YoY debt growth rate 5.22%
Interest expense 102 105 110.48 116.24 122.31 128.69
Interest rate 29.57% 28.93%
Depreciation 292 418 666 971 1044 1235
Pretax income 986 1195
Total income taxes 336 376
Tax rate 34.08% 31.46%
Net additions to PPE 530 534 409 543 511
Decrease in Net Working Capital 58 11 42 35 43
Terminal growth 5%
WACC 19.58%

Valuation
$10,025.59
Enterprise value
$1,785.00
+ Surplus Cash & Marketable securities
$11,810.59
Firm value
$345.00
(-) Value of Debt
(-) PV of agency cost $354.32
Value of equity $11,111.28
(÷) Number of Shares 199.65
Value per Share $55.65
In basic valuation, enterprise value is $5904 million and firm value is $7689 million. Finally value
per share is $55.

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Alternative 1: Share repurchase
This is the first broad scenario under which the management should have used guanidine in
combination with tetrazole as the combined chemical is more stable which would have allowed
the company to avoid the recall situation completely. Assumptions some major assumptions
under this probable Action are as follows.

Assumptions for Valuation and Result

Assumption set: Repurchase of share with 20% excess cash ($1785 million*20%=357)
% of Sales
Sales growth rate 10.82% Stock closing price 38.5
Cost of goods sold (% of sales) 41.78% Cash for repurchase 357
R&D 13.19% Shares repurchase 9.27
advertising expense 2.40%
Others 5.94%
Debt 345
Interest expense 102
Interest income 5.18%
other non operating income 0.69%
Terminal growth rate 5%
WACC 19.70%

Valuation
Enterprise value 9042.56

+ Surplus Cash & Marketable securities 1428

Firm value 10470.56
(-) Value of Debt 345
(-) PV of agency cost 314.1167152
Value of equity 9811.44
(÷) Number of Shares 190.38
Value per Share 51.54
From the above valuation, we got the enterprise value of Intel Corporation about $9042 million
and equity value of Intel $9,255.99 million. Also, value per share under this alternative was $
51.54.

Simulation Analysis
For this alternative, a simulation test was run. In this simulation test, WACC, terminal growth
rate, and tax rate were taken as input variables to understand the impact on the value per
share. The result is given below.

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According to the simulation, value per share is negatively and mostly sensitive to cost of sales.
The coefficient of variation in this simulation is 0.2283 which means that this alternative involves
low risk. Moreover, value per share will be more than $32 with 95% certainty.

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Alternative 2: Dividend Issue
Under this alternative, Intel could have provided $84 million dividend. The valuation
assumptions under this scenario are showed below.

Assumptions for Valuation and Result

i) Sales growth rate 10.82%
ii) Cost of goods sold (% of sales) 41.78%
iii) R&D (% of sales) 13.19%
iv) Advertising expense $2.40%
v) Others $5.94%
vi) Debt $345
vii) Interest expense $102
viii) Interest income 5.18%
ix) Other non-operating income 0.69%
x) Terminal growth rate 5%
xi) WACC 19.58%

Valuation
Enterprise value 9085.50
+ Surplus Cash & Marketable securities 1701.00
Firm value 10786.50
(-) Value of Debt 345.00
(-) PV of agency cost 323.60
Value of equity 10117.91
(÷) Number of Shares 199.65
Value per Share 50.68
From the above valuation, we have the enterprise value of Intel Corporation about $9085 million
and equity value of Intel $9,562.46 million. Also, value per share under this alternative was $
50.68.

Simulation Analysis

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According to the simulation, value per share is negatively and mostly sensitive to cost of sales.
The coefficient of variation in this simulation is 0.2249, which means that this alternative
involves low risk.

Alternative 3: Put Warrant Issue

Under this alternative, Intel could have provided $84 million dividend. The valuation
assumptions under this scenario are showed below.

Assumptions for Valuation and Result

i) Sales growth 10.82%
ii) COGS (% of sales) 41.78%
iii) R&D (% of sales) 13.19%
iv) Advertising expense (% of sales) 2.40%
v) Others (% of sales) 5.94%
vi) Interest income (% of sales) 5.18%
vii) other non-operating income 0.69%
viii) YoY debt growth rate 5.22%
ix) Interest expense $102
x) Interest rate 29.57%
xi) Tax rate 34.08%
xii) Terminal growth rate 5.00%
xiii) WACC 19.58%
From the above valuation, we have the enterprise value of Intel Corporation about $9085 million
and equity value of Intel $10,199.64 million. In addition, value per share under this alternative
was $ 59.6.

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 Valuation
Enterprise value 9085.76

+ Surplus Cash & 1785.00

Marketable securities

Firm Value 10870.76

(-) Value of debt 345

(-) PV of agency cost 326.12

Value of equity 10199.64

(÷) Number of Shares 199.65

Value per Share 51.09

Option value* 8.58887213

Total price 59.68

Option Pricing
OPTION PRICE CALCULATION
S 38.5 Current Asset Value
X 50 Exercise (Strike) Price
T 2.00 Time to Maturity (Years)
RF 10.78% Riskless Interest Rate (% p.a.)
SIGMA 0.348 Volatility (% p.a.)

D1 0.1529
D2 -0.3390

N(D1) 0.5608
N(D2) 0.3673

PE 8.588872 European Put Value ($)

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Simulation Analysis

According to the simulation, value per share is negatively and mostly sensitive to cost of sales.
The coefficient of variation in this simulation is 0.1856, which means that this alternative
involves low risk.

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Chapter 8: Recommendations and Justifications
Based on our analysis it can be concluded that Put Warrant issue will be the most financially
viable option for cash disbursement. Value per share is maximized in this alternative. However,
all the alternatives have coefficient of variations less than 0.5, implying the alternatives are not
risky. WACC is highest in shares repurchase option and lesser in dividend and put issue.
Alternatives Value per share WACC CV
Shares repurchase 51.54 19.70% 0.2283
Dividend Issue 50.68 19.58% 0.2249
Put warrant 59.68 19.58% 0.1856

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