Intel Group Equity Valuation

April 1, 2005

Paul Gilliam paul.t.gilliam@ttu.edu

Michael Fanuzzi

mfanuz7@yahoo.com

Yolanda Martinez y.martinez@ttu.edu

Brett Stratil

brettstratil@hotmail.com

Josh Vickers jbv405@hotmail.com

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Intel Valuation

Table of Contents

Executive Summary………………….………………3

Business and Industry Analysis……….………….6

Company Overview……………………………………………..6 Five Forces Model……………………………………………….6 Key Success Factor Identification and Analysis…….11 Competitive Strategy…………………………………………11

Accounting Analysis…………………….………….13

Key Accounting Policies…………………………..………………..13 Assessment of Potential Accounting Flexibility….……..…..14 Evaluation of Accounting Strategy……….……………..………16 Evaluation of Quality of Disclosure……….…………..………..18 Quantitative Measures and Indicators…..…….….…………..20 Identification of Potential Red Flags….….…………..………..22 Undo Accounting Distortions…….………….………..………….23

Ratio Analysis and Financial Forecasts….…….24

Financial Ratios………………………………..……………………..24 Cross Sectional Analysis……………………..…………………….28 Financial Statement Forecasting Methodology…………….33

Valuation Analysis…………………………….….37

Method of Comparables…………………..………………………39 Discounted Dividend Model…………………..……….…………41 Discounted Free Cash Flows………………..…………………..42 Discounted Residual Income…………………………………….43 Abnormal Earnings Growth………………..…………………….44 Conclusion……………………………………………………………..45

Appendix……………………………………….……….

Works Cited…………………………..……………………………….46 Appendix A…………………………..………………………………..47 Appendix B………………..………………………………………..…52 Appendix C…………………..……………………………………..…53 Appendix D……………….…………………………………………..54

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Executive Summary Nasdaq EPS Forecast52 Week Range $19.64 - $29.01 FYE 12/25 2004A 2005E 2006E 2007E

$1.17 $1.08 $1.18 $1.29Revenue (2004) $34,209,000,000Market Capitalization $141,040,000,000 Ratios Intel Avg of CompetitorsShares Outstanding 6.4B Forward P/E 15.34 40.56

Forward PEG 1.30 5.68Dividend Yield $0.16 M/B 3.72 2.373-Month Avg Daily Trading Volume 64.39M

Book Value Per Share $6.03 Actual Current Price $23.01Return on Equity 19.48%Return on Assets 15.61% Ratio Based ValuationsEst. 5 Year EPS Growth Rate 11.78% P/E Valuation $51.40

PEG Valuation $24.27Cost of Capital Estimates M/B Valuation $18.60

Value Ke R-Squared Ford EpicBeta (5yrs) 2.336 7.05% 50.48%Beta (3yrs) 2.024 7.43% 48.30% Intrinsic ValuationsBeta(2yrs) 1.990 7.75% 35.72% Discounted Dividends Valuation $8.38Published 2.352 7.16% Discounted Cash Flows Valuation $37.04

Residual Income Valuation $16.97Performance of Intel Abnormal Earnings Growth Valuation $17.39Trailing 3 Months 6 Months 12 MonthsReturn on Intel -0.02% 10.36% -15.96%Return on S&P 500 -0.05% 6.15% 2.58%

Recommendation – Slightly Undervalued Security

We recommend Intel’s stock to be a hold security. The semiconductor

industry is a highly competitive market and Intel leads the way being the largest

(70% of market share) and most recognized company in this in this industry and

having the broadest product line. With AMD and TXN lagging behind in the

Industry we do not feel that Intel’s competition is much of a threat at all and it is

promising that our recommendation will soon change for the better.

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Industry Demand Drivers

Growth in this industry relies heavily on new innovations. Intel’s biggest

growth opportunity comes from their emergence into the wireless communication

industry. It will be important for Intel to gain a significant market share in the

cellular market now that it’s shifting to 3G, the new standard for all devices and

with proper partnerships they can easily do so. Along with this emergence into

the wireless industry, Intel recently introduced their Pentium Processor Extreme

Edition in April of 2005. The new Pentium is like two processors in one which

enables multiple programming at a faster speed. (Intel.com) With Intel’s past

experience in being the first to innovate and wanting to stay ahead of the

competition, we believe only great things will evolve from them.

Healthy Financials

Intel’s cash flows have been positive and we feel they will remain positive

many years to come. The net profit margin for Intel in the year 2004 stands at

21.97%; far higher than the industry average of only 8.12 %. Revenues in the

past have fluctuated slightly but in a consistently upward trend. The drop in

revenues in 2001 and 2002 are a result of the terrorist attacks of 9/11 but

quickly bounce back and grow in the years after. One of the more impressive

characteristics of Intel when compared to their industry is their returns on equity

and assets. In 2004 Intel had a ROE of 19.48% with an industry average of only

9.22%. ROA for the year 2004 for Intel stood at 15.61% with the industry

lagging behind at 6.33%. Intel leads the industry in most all the financial

performance measures. They appear to be a very stable corporation with the

appropriate people in place looking out for the best interests of the business’s

future success.

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Valuation

Based on the valuation models, Intel’s stock is slightly undervalued with

their actual price per share at $23.01. Intel is primarily an equity financed

company. In fact, its stockholders equity section of the balance sheet is nearly 4

times the value of its liabilities. Intel’s lack of liabilities allows for it to maintain a

low cost of debt which is .67%. Using a five year beta in the CAPM method, we

calculated Intel’s cost of equity to be 7.05%. While we do recommend holding

Intel’s stock, with the evolving technology we do expect the stock to become a

buy in the near future.

Risks

The semiconductor industry is characterized by rapid advances in

technology and new product introductions and as a result, there is a lot of risk in

this industry. This is an industry where quantity demanded by the consumers

varies greatly at different times of the year and companies who wish to keep

from losing their customers to the competition must be able to adjust output and

costs to efficiently match the current market conditions.

As with any company in any industry, Intel’s future and success relies on being

able to supply the demand of the modern consumer. This means consistently

searching for new advances in technology and looking for or even creating new

markets in which to sell their product to a new group of consumers. In the

semiconductor industry, this means that tens of millions of dollars need to be set

aside each year for research and development of new products.

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Business and Industry Analysis

Company Overview

Intel Corporation is one of the leading technology developers in the world.

Starting with the creation of the world’s first microprocessor in 1971, Intel has

developed many products that have aided the computer and internet revolution.

Intel’s mission is to be the preeminent building block supplier to the Internet

economy. Intel consists of three product line operations: Intel Architecture

Business, Intel Communications Group and Wireless Communications Group.

Their major products include: microprocessors, chipsets, boards, wired Ethernet,

and wireless connectivity products. Major customers include Original Equipment

Manufacturers (EOM’s) and retail and industrial distributors, who contributed to

the rise in revenues for Intel, which rose 13 percent to 34.21 billion last year

(2004). Net income also rose 33 percent to 7.53 billion (Intel’s 10K). The

following pages take an in depth look at Intel’s competition (five forces model),

KSF identification and analysis, and competitive strategy analysis to discover

what keeps Intel ahead of the game.

Five Forces Model

Competitive Force 1: Rivalry among Existing Firms

Rivalry in the semiconductor industry is very high. Growth for Intel is at a

rate of 12-13% as new technology is introduced to the semiconductor industry

(Intel’s Annual Report). Sales continue to grow as companies in the industry

expand and compete in all areas of the globe. As there is a high level of

competition in the industry, a number of rival companies work together. For

example, many of Intel’s key competitors are also their customers and even

suppliers. They have made agreements with some businesses that license them

to use each others patents. Differentiation and switching costs in the

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semiconductor industry are relatively high and low, respectively, as a number of

products quickly become obsolete and are compatible with products of the

competition. The main way in which they compete is through increased product

performance, added features, and lower prices. Fixed costs remain high as a

result of the large quantity of capital needed for research and development of

new products. Intel has realized that as technology keeps advancing rapidly, the

products they offer should also advance accordingly. This requires sources to

large sums of capital and keeping a watchful eye on new and existing

competition. Since Intel is the world’s largest semiconductor chip maker, their

ability to raise large amounts of capital surpasses that of all competition in the

industry (Intel.com).

Competitive Force 2: Threat of New Entrants

Large economies of scale exist in the semiconductor industry. Smaller

companies in the industry have trouble raising the capital needed for marketing

there products to the public and research and development of new products.

Intel has a well-earned, long standing reputation of having high quality products

on the leading edge of technology. This shows a high level of brand recognition

and customers who actively seek out their products. New entrants to the

semiconductor industry may have difficulty establishing distribution channels

because larger companies such as Intel and their competitors control most of

them. These smaller companies will have trouble acquiring raw material at a

cheap price. The first mover advantage has given Intel a large consumer base

as well as cost advantage and a wide range of distribution channels in which to

promote their product. They have already set up networks with other companies

to drive down costs even lower and make selling of their product easier. Legal

barriers pose another problem. In such a big industry, it is difficult for new and

smaller companies to get licenses and patents needed to effectively compete in

the industry.

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Competitive Force 3: Threat of Substitute Products

There are many players in the semiconductor industry that make it a

highly competitive market, however when it comes to the best, Intel is the

market leader. Intel’s competitive advantage has some “cost leader” in it, but

for the most part this company has a high degree of “differentiation” as their

competitive advantage. Because of the high availability of substitute products,

fairly low switching costs, and the fact that the products for the most part are

very similar, you could say that there is a high level of rivalry and competition

(as it would be in most cases) and it wouldn’t matter what product you choose.

But if there was ever an exception to the rule, Intel would be it. Intel’s brand

identification is like Nike, Wal-Mart, or Coca-Cola; their brand name is so big that

it constrains rivalry. People want an Intel chip in their PC’s and the company

knows this, thus giving them power to affect prices. It’s hard for other suppliers

or products that are not well known to compete in this competitive market.

However, the threat comes from smaller companies who have begun to create

similar products at cheaper prices. This is the only way these less sophisticated

companies can stay competitive. In response, Intel has to constantly work and

stay ahead of the game by spending billions of dollars on R&D and the creation

of better, smaller, faster chips to make customers upgrade their computing and

electronic devices more often. Yes, there are many competitive players (like

Texas Instruments, and Advanced Micro Devices), and the threat is there that

their lower prices may induce buyers to switch to the substitute. Comparing

Intel to its competitor is like comparing bottled water to tap water. Even though

they serve similar functions, customers are still willing to pay more and not

switch because of their name, reputation, and superior product quality and

variety.

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Competitive Force 4: Bargaining Power of Buyers

In the past, due to Intel’s superior quality and practically one-of-a-kind

products they possessed an enormous amount of power over the buyers of their

product. Intel has been similar to Microsoft because they both are considered

somewhat of a monopoly in their field. Intel’s microprocessors and chipsets are

a necessity for companies such as Gateway and Dell and since Intel was the only

manufacturer there was no room to argue for these companies. However, due

to several strong rivals entering the market in recent years Intel’s dominance has

somewhat decreased. They have also moved into new product lines with stiffer

competition as they now market networking and communications processors,

handheld and handset components and other various forms of software.

There are now several other companies that produce motherboards,

microprocessors and chipsets therefore the power Intel once had is not as

prevalent. Intel could still set a price above the norm and get away with it, but

businesses, government and schools now will only pay a certain amount before

they switch to a cheaper product from ABM or Texas Instruments two of Intel’s

biggest rivals. Intel also has produced processors in the past that were only

compatible for small servers and personal systems. Intel has recently decided to

come out with processors that will be used in supercomputers and large servers.

The switching cost for companies who decide not to do business with Intel is not

real high but Intel’s reputation for superior products is why these companies

stick with Intel.

Companies that resell Intel’s products such as Dell and Gateway also give

Intel a tug of war when it comes to power. They both depend on each other

even though it would seem Intel would have the power since they provide a

product that pc’s have to have. However, since these companies are reselling

Intel’s products which in turn markets for Intel and they are two of Intel’s

biggest customers they hold a certain amount of power and receive a big

discount on the products they buy.

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The craze of cutting cost across the board to lower prices and gain an

edge on the competition has hit almost every business and industry in America.

This has been especially true in the computer industry, where you can now buy

pc’s way cheaper than you could ten years ago. Intel has had to meet the

demand in its business as well with the barriers to entry being enormously low in

the pc market thus increasing competition amongst each other. Michael Dell

started his business out of his dorm room at the University of Texas (dell.com).

Computers are also practically a commodity now people used to have them at

work only but now an enormous amount of people have a cpu in their home.

Even with the emergence of recent trends taking their toll on Intel’s power

over its customers, Intel still wields more power in most of its relationships

because of its name recognition and superior product quality.

Competitive Force 5: Bargaining Power of Suppliers

Intel has a unique relationship with the software companies it deals with.

Intel is both a supplier and a buyer with the software company. Intel knows that

software is useless if they don’t provide the components that run them and

software companies products are needed to boost the sales of Intel’s products.

Both companies agree to make products compatible with each other so they can

continue to run efficiently.

None of Intel’s other suppliers have any power over Intel. Manufacturing

equipment and raw material suppliers have very little bargaining power since

Intel is one of the few people that buy their product as well as other people in

the semiconductor industry. Intel’s most integral supplier is probably

engineering schools which produce graduates who are the brain behind Intel’s

operation. They have a pretty good relationship with these schools and they

have several projects that they use to promote themselves among the schools

students.

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Key Success Factor Identification and Analysis

One key success factor for Intel is their focus on research and development.

They set aside millions of dollars each year for making new products and

exploring new technology. R&D also allows for them to differentiate their

products from that of the competition, offering new and enhanced features that

their customers want or feel they need.

Another key success factor for Intel is entering new market segments. This

company is constantly looking to increase their number of customers by

introducing a new product to a new group of consumers, such as wireless

communications, the 3G Standard, and the recently released Intel Pentium

Processor Extreme Edition (intel.com).

Staying the low cost producer is a third key success factor for Intel. With

such a large volume of consumers, Intel is able to produce more goods at a

lower prices by purchasing raw material in larger quantities than that of their

competition, or constructing the needed material themselves (intel.com).

A final factor, and maybe the most important, is Intel’s image. Intel has a long-

standing, well earned reputation of producing quality products that consumers

seek out. Another benefit comes from their image: this positive reputation

makes it easy for them to choose the best candidates from engineering schools

throughout the country because after all, today’s graduates are tomorrow’s

innovators of new technology.

Competitive Strategy Analysis

Intel is the world’s largest chip maker and leading manufacturer in

computer products largely due to their product differentiation. Intel achieves

and maintains its competitive advantage through intense research and

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development, spending on capital investments and focusing on e-Business to

become worldwide.

In order to increase manufacturing capacity Intel spent $3.7 billion on

capital investments which in turn increased efficiency and cut costs by 30

percent. In addition they spent $4.4 billion in research and development in order

to overcome technical barriers and to sustain competitive advantage. Intel is an

e-Corporation and therefore handles everything online, which helps in reaching

people worldwide and also maximizes profitability. Combining all these factors

Intel’s differentiation strategy is not only being achieved but is sustainable as

well.

Overall Intel is a well managed company with a strong focus on success.

They constantly explore new opportunities while keeping a sharp eye on their

competition. They have made some costly mistakes (such as the failure of their

Rambus Memory) but appear to learn greatly from them. They now use more

caution before introducing their product to the public. Intel is the powerhouse of

their industry and should stay that way well into the future.

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Accounting Analysis

Identify Key Accounting Policies

As stated already, the semiconductor industry is a very competitive

market. Although many competitors such as “Texas Instruments” and

“Advanced Micro Devices” can offer similar products at competitive prices, Intel

offers a great opportunity for differentiation of products at lower costs. Because

of these lowered prices, the product variety, and quality, Intel hopes to maximize

sales and increase revenues. Therefore, Intel has developed a list of critical

accounting policies which it believes are key factors that help to determine the

success of the company. They are as follows:

Intangible Assets

In an industry that competes so much in product quality and innovation,

intangibles such as Research and Development (R&D), marketing, and

trademarks are more than huge for Intel. One might not realize that these are

as important as other assets since they don’t show up on the balance sheet

when in reality they are a big chunk of Intel’s assets. By looking at the income

statement, you can see R&D and marketing are the biggest expenses. R&D

rose 1 billion dollars from 2001 to 2004 equaling to $4.7 bill. and $4.6 billion in

marketing (gen. & admin.). Compared to AMD at $1 billion and Texas

Instruments at $2 billion for R&D. Obviously Intel puts more money into this

because they want to innovate and it pays off in their income and revenues

which have been skyrocketing these past four years, unlike these competitors.

Another interesting point is when you leave out intangible assets from the

balance sheet there is an inflated measure on the rates of return on capital such

as ROA or ROE. This is definitely true for Intel who’s ROA of 19.48% and ROE of

15.61% is well above the industry average because of the large amount of R&D

and marketing. One other point is that there is nothing in the books or numbers

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that can fairly judge or estimate Intel’s brand name or trademark and the

amount of revenue it accounts for. Part of the reason Intel holds nearly 50%

market share and controls the industry is partly due to they’re name and

reputation.

Investments

Intel Capital, is the investment program that typically invests in non-

marketable equity securities of private companies alongside high quality co-

investors to help these companies grow from initial stages to successful Initial

Public Offerings or acquisitions. About 40% of Intel Capital's new deals in 2004

were in early stage companies. Investments accounted for under the equity

method is usually classified as “other assets” in the balance sheet. So even

though “other assets” on the balance sheets have been declining in past years, it

is most likely that this number will rise since there were so many early stage

companies that will soon grow. Short term investments have grown every year

now for the past four along with trading assets which is a sub category

investment. It is important to point out again that Intel invests a lot into R&D

which allows them to come up with new technology and new innovations. This

in-turn creates more capital for the company and allows them to keep investing

more money elsewhere. Notice that R&D rises along with the Gains on

Investments and so does Net Income and Revenues.

Goodwill

This is one of the more difficult judgments for management to identify.

Basically we are looking to see how our company is doing on an acquisition, and

if we made the right choice or if we overpaid and whether there any warning

signs. When looking at the Income Statement you can see that in 2002 and

2004 goodwill was not impaired and their acquisition was in excess of its carrying

value. However, in 2003 there is a $617 million impairment when management

went back to review. When we look back at notes from Intel’s 10k, we find that

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the flash memory products and cellular baseband chipsets were growing more

slowly than projected and not accepted by the customers as Intel had hoped.

This delayed their transition into next generation phone networks and lowered

their growth expectations which caused this impairment on goodwill. Thus, since

the carrying value exceeds the fair value, we see this $617 million impairment

charge, which by the way was included in “all other” in the operating income.

Assessment of Degree of Potential Accounting Flexibility

After looking at different accounting policies we also see that there are

different levels of flexibility. In the semiconductor industry the firms have a fairly

equal amount of constraints; however, because the industry is so ever changing

there are many differences when it comes to the choices each one makes and

what all they want to disclose.

The first point of disclosure in which in which Intel has some flexibility is

in their Inventory. Intel chooses to compute their inventory using FIFO which

approximates actual cost on average and is a currently adjusted standard basis

while stating their value at lower of cost or market (not valuing inventory in

excess of saleable amounts). Possible methods to calculate inventory that firms

could choose from are first-in-first-out (FIFO), last-in-last-out (LIFO), or the

average cost method. Actually, most firms in this industry also calculate

adjusted standard basis. Inventories on hand in excess of forecasted demand of

generally six months or less are not valued. Intel also writes-off inventories that

are obsolete. Also, as stated in the annual report, “the estimates of future

demand that we use in the valuation of inventory are the basis for our published

revenue forecast, which is also consistent with our short term manufacturing

plan. If our demand forecast for specific products is greater than actual demand

and we fail to reduce manufacturing output accordingly, we could be required to

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record additional inventory reserves, which would have a negative impact on our

gross margin.” 1

Another area in which firms have flexibility to choose their method of

disclosure is in Property, Plant, and Equipment and how to treat depreciation.

You can either use the straight line method or the accelerated method to record

depreciation. According to Intel’s annual 10K from 2003, Intel stated PP&E at

cost and they use the straight line method of depreciation, having an estimated

useful life for machinery and equipment at 2-4 years and 4-40 years for

buildings. Intel chooses to write off fully depreciated assets against accumulated

depreciation. One rival, AMD, also uses straight line depreciation and stated their

PP&E at cost which is very conservative. A company like Intel or AMD might use

straight line method because of the ease of calculation for a larger corporation,

but a smaller firm in the industry might choose to use accelerated depreciation to

get more in the asset’s earlier years of use and also maybe since there is such

quick technological advancements in our industry, machines could become

obsolete fairly quickly.

The Intel Corporation believes that its research and development is a key

factor in enabling them to be a continued leader in the industry. Intel has spent

$4.4 billion on R&D in 2003 and increasing every year and is disclosed on the

Income Statement. Although the number of workers for Intel has stayed level,

the number of R&D workers has increased to 23,000 in December of 2003 from

21,000 in 2002. According to Intel’s 10-k the corporation continues to work with

hardware and software companies and industry groups to encourage the

development of product offerings designed to take advantage of our product

features. Although a lot of our design and development is primarily done in the

U.S, production development is increasing around the world.

Advertising is another important variable in the Intel Corporation. Intel

reportedly spent $1.8 billion in 2003 for advertising and disclosed. According to

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the company’s 10-k cooperative advertising obligations are accrued and the cost

is expensed at the same time the related revenue is recognized.

For post retirement benefits the Intel Corporation expensed $302 million

for the qualifiers and non qualifiers of their profit sharing retirement plans.

Amounts are contributed yearly into the funds and the distributions are

ultimately determined by the CEO of the corporation. Intel’s contribution to

retirement benefits are noted in the statement of retained earnings.

Evaluation of Accounting Strategy

A corporation’s accounting strategy is frequently influenced by top

management; stock compensation and pressure from investors often provides

management with an incentive to manipulate the reporting of financial

information in order to make a corporation appear more profitable than it really

is. Upon first examination of Intel’s financial reports, one may be led to believe

management is trying to hide financial information that may reflect poorly on its

performance. This is because Intel presents investors with disaggregated

financial statements, requiring additional research to find where Intel is getting

its numbers. However, upon further review, it can be found that the accounting

strategy used by Intel accurately represents the company’s financial activity and

value. Rather than using the flexibility allowed by generally accepted accounting

policies in the U.S. to overstate its’ financial condition, Intel uses a conservative

approach to its accounting strategy. Intel’s conservative approach reflects

industry norms and can be identified through a number of its accounting policies,

including estimates on impairment of goodwill, non-marketable equity securities,

inventory, and long-lived assets.

After reviewing many of Intel’s leading competitors, including AMD and

Texas Instruments, it can be established that Intel’s accounting strategies and

practices are in-line with industry norms. All of the corporations apply the same

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policies for revenue recognition, expense recognition, and impairment of assets.

Although there has been opposition to Intel’s policy of not claiming employee

stock options as corporate expenses, this is an industry-wide practice. Many

economists blame this accounting practice for the inflated high-tech stock prices

of the late 1990s (http://www.portlandtribune.com/archview.cgi?id=19512);

however, it does not indicate Intel is manipulating its financial statements to

manage earnings. Management’s decision to not identify employee stock options

as corporate expenses is simply a result of following industry norms.

Changes in accounting policies often indicate a corporation is attempting

to manipulate its financial statements to hide losses or create false profits.

However, in the case of Intel, the sole change in accounting policies as stated by

Ernst and Young LLP, the firm responsible for auditing Intel and many of its

competitors, came as a result of a change handed down by the Financial

Accounting Standards Board. Released during fiscal year 2002, Statement of

Financial Accounting Standard No. 142 allowed Intel, as well as its competitors,

to altar its policies regarding accounting for goodwill and other various intangible

assets. In fiscal year 2003, Intel, as well as its competitors, stopped amortizing

goodwill and now test the remaining book value of goodwill for impairment

annually. They also stopped amortizing goodwill recorded on their equity

investments.

Management is often influenced to inflate a corporation’s earnings as a

result of incentives through stock compensation. Upon evaluation of Intel’s stock

distribution, it was found that insiders do not own a significant portion of Intel’s

stock. In fact, insiders account for just 3% of Intel’s shares. Although Intel’s

largest single shareholder is one of its Directors, he owns a very small

percentage of the shares as a whole. The majority of Intel’s stock ownership

(52%) can be found in mutual funds (http://finance.yahoo.com/q/mh?s=INTC).

These findings lead us to believe managers do not confront strong incentives to

use accounting discretion to manage earnings.

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Evaluating the Quality of Disclosure

Intel’s financial statements over the last few years have been similar to

others in there industry. While some of the numbers and accounting procedures

are somewhat broad, this seems to be the industry norm. Intel really has

nothing to hide in there financial statements since they are the dominant force in

their marketplace. They are the world’s largest producer of semiconductor chips

and their revenue has increased substantially over the last two years along with

their net income.

The letter to shareholders that is sent out along with the 10-k clearly

states the condition of the industry, plans for the future and how their previous

plans failed or succeeded. Intel is also quick to point out that they are the leader

in the industry they serve.

Intel does a great job of explaining their numbers and accounting policies

in the footnotes of the financial statements. They explain how they account for

and report goodwill, intangible assets, warranties, revenue recognition,

advertising expenses, etc. Their policy is to report and accrue information as

quickly as possible for example; their property plant and equipment may become

obsolete due to the constant evolution of the high tech industry they belong to.

Therefore, at the end of each year any equipment that is deemed useless is

written off and depreciated off the books. Intel may report this more often than

yearly if they deem necessary. They also explain changes in the accounting

policy as they occur. For example, in 2002 they no longer amortized goodwill

because it was diluting earnings per share this new policy was explained well in

the footnotes.

There is plenty of discussion and explanation of the firm’ performance in

the management discussion and analysis section. When the firm has performed

poorly in certain areas or product lines management usually list several reason’s

for this. Poor performance in their wireless communications and computing

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group segment was linked to lost business as a result of the pricing strategy on

certain products.1 Intel also points out their plan to fix these problems in the

future as well as comments on why they have performed well in certain areas.

They do a great job of explaining their business in product and geographic

segments. The company is broken down into three product segments while the

architecture component usually compromises over 70% of Intel’s revenue. They

also report the amount of revenue they bring in based on location of consumers.

There is a chart that shows how much revenue was earned in America, Asia,

Europe and Japan. Intel also devotes a section of the 10-k to its tax and legal

proceedings. In this section, they explain the lawsuits: who won and lost and

the amount of money that was required to settle them. They also explain there

tax issues as most businesses of their size they are not always on the same page

as the IRS and sometimes have to pay more tax’s than they see fit.

Overall Intel is very thorough and transparent in the way they disclose

their financial information. Ever since the corporate scandals in recent years,

companies are very careful to report accurate and honest information or else

they may lose shareholders. They are also under a stronger restrictions and

regulations. Intel has done a good job of adhering to the rules now in place.

Quantitative Measures and Indicators

In order to better analyze Intel’s performance in the last five years, we

take a look at the sales manipulation diagnostics, core expense manipulation

diagnostics as well as the percent changes.

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Sales Manipulation Diagnostics

2004 2003 2002 2001 2000Net Sales/Cash from Sales 7.57 11.24 49.29 -20.17 5.26

Net Sales/Net Accounts Receivable 11.4 10.39 10.41 10.21 8.22

Net Sales/ Unearned Revenue 57.8 47.6 56.3 63.5 50.0

Net Sales/Warranty Liabilities NA NA NA NA NA

Net Sales/Inventory 13.05 11.97 11.76 11.78 15.05

Net sales decreased dramatically from 2000 to 2001 but what is

interesting is that Net Sales were very similar in 2001 and 2002 which shows us

Cash from sales must have been much lower in 2002. The next two years show

an increase in Net Sales and Cash from Sales. The ratios also show increase in

sales over accounts receivable. The inventory ratios show the variability of our

inventories through the years and how they stay somewhat consistent with Net

Sales. You can also see that Intel does not have much in terms of Unearned

Revenue from its ratio.

Core Expense Manipulation Diagnostics 2004 2003 2002 2001 2000

Sales/Assets 0.71 0.64 0.61 0.6 0.7

CFFO/OI 1.3 1.53 2.07 3.74 1.24

∆CFFO/∆OI 0.62 0.76 0.16 0.50 0.43

CFFO/NOA 3.59 2.82 1.84 1.9 1.88Total Accruals/∆Sales 1.01 1.06 13.26 (0.42) NA

Pension Exp./SGA 0.08 0.08 NA NA NAOther Employment Expense/SGA NA NA NA NA NA

22

Sales to assets have been increasing since 2001, which means with

increasing sales we have increasing assets as well. The ratios also show an

increase in the cash flow from operations but the reason the ratio has been

declining is because Operating Income is increasing even faster. The change in

CFFO over the change in OI has stayed somewhat consistent; however, the

CFFO over NOA ratio is increasing because NOA is staying level while CFFO is

rising. When looking at Total Accruals over change in Sales we find a negative

2001 ratio because Intel declined from 2000. And we also see a big jump from

2001 to 2002 because Sales stayed the same and Accruals increased. Intel has a

Pension Plan set up but it doesn’t make a big mark in its ratios with SGA.

Percent Changes in Measures:

2004 2003 2002 2001Net Sales/Cash from Sales -48.45% -338.42% 140.91% -73.89%Net Sales/Net Accounts Receivable 9.72% -0.20% 1.96% 24.21%

Net Sales/Inventory 9.04% 3.70% -3.57% -21.28%

Sales/Assets 10.94% 4.92% 1.67% -14.29%

CFFO/OI 129.51% 152.86% 208.33% 389.58%

Identification of Potential Red Flags:

Intel’s changes in their accounting policies have been clearly and

accurately described in their footnotes. Intel has some critics regarding their not

claiming employee stock options as company expenses, but upon closer

investigation, we have discovered this to be a common practice in the industry.

There has been a change in accounting policy regarding the allocation of

goodwill in 2002 under the provisions of the Statement of Financial Accounting

Standards No. 142, but Intel clearly relates the results of the actions in under

Goodwill in Footnote 16 of their financial statements.

23

Intel is a well established company on the cutting edge of their industry.

We have found no red flags and believe that Intel satisfactorily relates all

pertinent information regarding their day to day activities. If you were to just

glance at the diagnostics above, some numbers might jump out at you that

might be mistaken for a red flag, such as: Net Sales decreased dramatically from

2000 to 2001 but that was due in large part to 9/11. Another point that might

raise a flag is why Total Accruals over change in sales is negative in 2001, jumps

really high in 2002 to 13.26, and then drops back down to 1.06. The reason this

is so different is because normally Intel increases their sales each year however

from 2000 to 2001 they didn’t which caused a negative number. 2002 had a

high ratio because its sales jump really high also. Then the change in sales from

2002 to 2003 is basically nothing, therefore causing another low number.

Undo Accounting Distortions

After analyzing the important financial information regarding Intel, we

have come to the conclusion that the data in the company’s financial reports

clearly and accurately reflects the financial position of the firm. We saw no

indiscretions that would lead us to believe that Intel’s management was trying to

misrepresent the figures in favor of the firm. Any changes in accounting were

clearly backed up with good reason. Flexibility in accounting methods is

important for firms in this technological industry and Intel appears to be applying

this method responsibly while backing their actions up in the footnotes. We feel

that adjustments to the financial statements are unnecessary since we were

unable to identify any accounting distortions.

24

Ratio Analysis and Financial Forecasts

The financial statements of a company contain information that reveals

the company’s position. This information can be manipulated by using various

ratios to assess the company’s current financial position as well as form a

prediction of their future position. This portion of the assignment is devoted to

using the information in Intel’s financial statement as well as their competitors to

see where Intel stands in comparison to their competitors and if their accounting

procedure contains any hidden information. We will find an industry average by

using the financial statements of AMD and Texas Instruments combined with

Intel to see where Intel stands in comparison to the industry as a whole. We will

also use these ratios from years past to try and predict their future income

statements. We feel that these ratios will bring Intel’s strengths and weaknesses

to light. We performed three types of ratio analysis Liquidity, Profitability and

Capital Structure.

Financial Ratio Analysis:

Liquidity Analysis2000 2001 2002 2003 2004

Current Ratio 2.45 2.68 2.87 3.33 3.13

Quick Asset Ratio 2.19 2.34 2.52 2.96 2.80

Inventory Turnover 5.64 5.99 5.91 5.18 5.52

Days Supply of Inventory 64.72 60.93 61.76 70.46 66.12

Accounts Receivable Turnover 8.17 10.18 10.40 10.18 11.41

Days supply of Recievables 44.68 35.85 35.1 35.85 31.99

Working Capital 2.70 2.40 2.17 1.88 2.01

25

The first four ratios we used were strictly to discover how liquid Intel is as

a whole. Liquidity is the firm’s ability to repay its current liabilities at a given

period in time. The first ratio used was current ratio which has been increasing

every year from 2000-2003 and contained a slight decrease in 04. This is very

good because the firm’s assets have been increasing while the company’s

liabilities have been decreasing when compared to each other. The firm’s quick

asset ratio was also encouraging as it was also increasing every year. The

quick asset ratio measures the firm’s ability to pay back liabilities immediately

because it measures the firm’s quick assets such as cash and accounts

receivable. The positive outcome using the account’s receivable turnover

showed us that Intel sells about ten accounts for every one accounts receivable

so they are not reporting a bunch of sales that they haven’t received payment

on. The inventory turnover for Intel has been around 5 for the last few years

which mean the company has been investing about the same amount of money

in inventory each year in comparison to what they sell. Overall Intel has passed

the liquidity analysis test and generally has become more liquid as time goes on.

To forecast future ratio’s we have taken the last five years and made an average

of each and used that for our future forecast. We have also omitted any

numbers that were out of the ordinary or skewed due to special circumstances.

Profitability Analysis2000 2001 2002 2003 2004

Gross Profit Margin 62.49% 49.18% 49.76% 56.71% 57.72%

Operating Profit Margin 30.82% 8.50% 16.37% 24.99% 29.61%

Net Profit Margin 31.24% 4.86% 11.65% 18.72% 21.97%

Asset Turnover 0.70 0.60 0.61 0.64 0.71

Return on Assets 21.97% 2.91% 7.05% 11.97% 15.61%

Return on Equity 28.23% 3.60% 8.79% 14.91% 19.48%

26

The first ratio we used to measure Intel’s profitability was the gross

profit margin which dropped over 10% in 2001 but has been on a steady

incline ever since and is almost back to where it was in 2000. This measure tells

us how much money Intel is able to net for each sale they make and the amount

has generally been about 55% which is good. The operating expense ratio

for Intel has been one of the most erratic we have found and we believe that

this is due to different amounts of money being spent on research and

development each year. The higher the percentage the less efficiently the

company is running. We believe this number should be about 30% and the

reason it dropped so low in 2000 is because we weren’t producing as much due

to 9/11 and the economic recession that followed. So normally this ratio will be

between 25 and 30 which means 30 cents of every sell goes to expenses. The

net profit margin tells us how much money the company is able to keep out of

what it earns from sales. The higher the number the better in this ratio because

it means the company is efficient and not spending all of its money on cost etc.

This number for Intel dropped dramatically in 2001 once again due to 9/11 but

now is almost back to normal which is about 20%. Asset turnover measures a

company’s productivity of its assets. This is measured by dividing sales by total

assets and Intel has stayed right at about .65 which isn’t very good this means

that for every dollar invested in assets Intel only generated .65 cents. This

number seems low but there is a great amount of money spent on R&D in this

industry so it isn’t as bad as it sounds. The return on assets for Intel has

steadily increased since 2001 and should hold steady around 12%. Intel has an

average of 15% for return on equity and should grow closer to 20% the

reason it is only 15% is once again due to decreased profit in 2001. The fact

that this number is growing is good because it means the company is not

reinvesting everything they earn back into the company and the shareholders

stand to gain money on their investment.

27

Capital Structure Analysis2000 2001 2002 2003 2004

Total Liabilities/Total Equity 0.28 0.24 0.25 0.25 0.25

Times Interest Earned 15.34 5.55 21.67 38.76 36.04

Debt Service Margin 5.37 4.97 5.92 6.94 6.75

The Capital Structure of Intel is very good and has been for the last five

years. For every dollar of liability there are four dollars of owners equity which

means the company is profitable and has very little debt. The debt equity

ratio has been consistent at this rate with an average of .25 over the last 5

years. The times interest earned ratio shows that Intel is earning more and

more each year as the average now is 23% which is well above the industry

average. The debt service margin also proves Intel is credit worthy because

the average ratio for the last five years is 6 and it has grown every year since

2000. This means the company has plenty of cash on hand to pay any current

liabilities that may arise. Having a sound capital structure is crucial because it

shows your company is not in debt and there is no potential for bankruptcy.

Sustainable Growth Rate

The sustainable growth rate is the percentage growth in sales the

company is able to attain year in and year out. Considering the expansion into

the international market as well as the expansion into new product lines we feel

that Intel will continue to grow each and every year. Sales drastically decreased

from 2000 to 2001 but since they have grown significantly. We forecast sales to

continue growing at 15% for the next three years; we attained this from an

analyst at www.yahoo.finance.com. We also feel that 15% is a little too high of

a growth rate year in and year out so we forecast Intel to grow at a decreasing

rate beginning with 12% in 2008 and 10% in 2011. We develop this theory of

28

growth at a decreasing rate by recognizing the increase in competition Intel will

face.

Sustainable Growth Rate

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

80.00%

2000 2001 2002 2003 2004

Year

Valu

e

Advanced Micro Devices

Texas Instruments

Intel

Industry Average

Cross Sectional Analysis:

Liquidity Ratios

Intel has been the dominant leader in the semiconductor industry for a

good amount of years now and seeing that they are such an older and larger

company they really don’t have any major competitors. However, I would say

that AMD and Texas Instruments are their two biggest rivals. A complete cross

analysis of the following ratios can be found in appendix A.

Over the past five years, Intel has better numbers when it comes to

comparing liquidity ratios with the other two companies. Intel’s current ratio has

gradually increased every year averaging about 3 which is better than AMD at

1.84 but less than TXN which is averaging almost 4. But when comparing the

quick asset ratio, Intel was better by at least 1 each year than the other two

(except TXN in 2004) and increased this ratio each year just like the current

ratio. Inventory Turnover had little fluctuation with all three companies but over

the past years has been pretty equal. However, Intel dominated the whole

industry in Accounts Receivable Turnover, increasing every year again and

averaging about 10, whereas the others were below 7. For the most part you

can see that Intel’s ratios outperformed the competition which is consistent with

the fact that they are larger and have a reputation of performing well

consistently.

29

Current Ratio

0.001.002.003.004.005.006.00

2000 2001 2002 2003 2004

YearVa

lue

Advanced Micro Devices

Texas Instruments

Intel

Industry Average

Qui c k A sse t R a t i o

0.001.002.003.004.005.00

2000 2001 2002 2003 2004

Y ear

Advanced Micr o Devices

Texas Instr uments

Intel

Industr y Aver age

I nv e nt or y Tur nov e r

0.002.004.006.008.00

10.00

2000 2001 2002 2003 2004

Y ear

Advanced Micr o Devices

Texas Instr uments

Intel

Industr y Aver age

Accounts Receivable Turnover

0.002.004.006.008.00

10.0012.00

2000 2001 2002 2003 2004

Year

Valu

e

Advanced Micro Devices

Texas Instruments

Intel

Industry Average

Working Capital Turnover

0.00

1.00

2.00

3.00

4.00

2000 2001 2002 2003 2004

Year

Valu

e

Advanced Micro Devices

Texas Instruments

Intel

Industry Average

30

Profitability Ratios

Once again, in the profitability analysis section of ratios, Intel was better

with higher gross profit margin, net profit margin, return on assets, and return

on equity. Intel is averaging about 8 ticks over the industry. This shows their

incomes and profits are doing really well respectfully. All three were around the

industry average of .72 in asset turnover.

Gross Profit Margin

0.00%10.00%20.00%30.00%40.00%50.00%60.00%70.00%

2000 2001 2002 2003 2004

Year

Valu

e

Advanced Micro Devices

Texas Instruments

Intel

Industry Average

Operating Profit Margin

0.00%10.00%

20.00%30.00%40.00%

50.00%60.00%

2000 2001 2002 2003 2004

Year

Valu

e

Advanced Micro Devices

Texas Instruments

Intel

Industry Average

Net Profit Margin

-60.00%

-40.00%

-20.00%

0.00%

20.00%

40.00%

2000 2001 2002 2003 2004

Year

Valu

e

Advanced Micro Devices

Texas Instruments

Intel

Industry Average

31

Asset Turnover

0.00

0.20

0.40

0.60

0.80

1.00

2000 2001 2002 2003 2004

YearVa

lue

Advanced Micro Devices

Texas Instruments

Intel

Industry Average

Return on Assets

-30.00%-20.00%

-10.00%0.00%

10.00%20.00%

30.00%

2000 2001 2002 2003 2004

Ye a r

Advanced Micro Devices

Texas Inst rument s

Int el

Indust ry Average

Return on Equity

-60.00%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

2000 2001 2002 2003 2004

Year

Valu

e

Advanced Micro Devices

Texas Instruments

Intel

Industry Average

Capital Structure Ratios

Ratios in the capital structure analysis show that Intel has much larger

return on equity and smaller debt to equity when compared to its rivals. In

many cases larger companies such as Intel are more likely to issue debt than the

smaller ones that have fewer employees and low profits but not necessarily in

this case. Yes Intel has a decent amount of debt, but Intel’s higher return on

equity is reflected more by its high net income. You know this because AMD and

TXN have larger debt to equity ratios than Intel every year due to the fact they

have more total liabilities. In Times Interest Earned, AMD is definitely the worst

of the three averaging below 0. Both TXN and Intel are above the industry

32

average, but Intel is high because of high operating income and TXN is high

because of low interest expense. Also, Intel has a higher debt service margin;

the other two are very low.

Total Liabilities/Total Equity

0.00

0.50

1.00

1.50

2.00

2000 2001 2002 2003 2004

Year

Valu

e

Advanced Micro Devices

Texas Instruments

Intel

Industry Average

Times Interest Earned

-40.00-20.00

0.0020.0040.0060.0080.00

100.00120.00

2000 2001 2002 2003 2004

Year

Valu

e

Advanced Micro Devices

Texas Instruments

Intel

Industry Average

Debt Service Margin

-2.00

0.00

2.00

4.00

6.00

8.00

2000 2001 2002 2003 2004

Year

Valu

e

Advanced Micro Devices

Texas Instruments

Intel

Industry Average

You can infer from this analysis that Intel is at the top of the industry and

ahead of their biggest two rivals. Yes Intel is larger and the industry is young,

but TXN and AMD are both good companies that are constantly learning and

improving which at least gives Intel a good cross sectional analysis to look at.

33

Financial Statement Forecasting Methodology

Income Statement

In determining Intel’s 10 year forecast, we first look at the income

statement, which can be found along with forecasts in appendix B, to determine

how much sales will grow and we decided to use the 5 year moving average

model. Taking a look at our past sales growth, we decided to throw out 2001

and 2002’s percentages because of unusual circumstances including 9/11. We

then looked at the remaining percentages and decided to increase the sales

growth because we felt that the increase in technology would play a major part

in our sales growth. Looking at the Yahoo! Finance the analysts predict that the

growth rate would be 15% which is slightly lower than the industry prediction

which was 15.11% (Yahoo Finance). Although the analysts predicted this

number for the next five years, we decided to use it for only the next three years

because increasing 15% five years in a row is a bit unrealistic. We chose to

increase the percentage to 15% sales growth for the next three years then drop

it to 12% the following three years and finally have the percentage drop to 10%

the remaining years. Because sales growth tends to be mean-reverting, we

expect Intel’s growth to return to a normal level over time.

The weakness in using this model is that the average is only based on two

years and is not an accurate measure of prior year sales growth. The strength

comes from the fact of knowing that technology is evolving and sales will without

a doubt increase for the next couple of years.

The next item we forecasted was gross margin. We found that the

average percentage of sales from the last five years was 55.17%, which means

out of 100% of sales we were able to keep 55% of it as profit. In the forecasts

for the next 10 years we predicted that this percentage would stay constant and

therefore our gross margin would increase every year due to growth in sales. In

forecasting we took net revenues and multiplied the forecast assumption which

34

was 55% to get our final number. In looking at the predictions we see that the

jump in gross margin is a very realistic forecast.

The two most important forecasts on the income statement for Intel are

Research & Development and Marketing. The average increase in the last five

years is 13.87%; therefore we will predict that R&D will increase every year by

at least 14%. Marketing is also another important expense and the average

percentage for the last five years was 15%. Because new products are

constantly being developed, we feel Intel will increase their marketing yearly, but

at the same time at a constant rate. We used our 15% average as a constant

forecast for the next 10 years.

There were a few things on the income statement that we were not

predictable. Impairment of goodwill, Amortization of goodwill, and amortization

and impairment of acquisition-related intangibles and cost were some of the

items that were non-forecastable. Because Intel had no percentages for goodwill

we were unable to forecast for the next 10 years. Also because we are unable to

determine whether or not we will acquire another company in the future, the

acquisition-related intangibles and costs are impossible to forecast.

Balance Sheet

We constructed our forecasts for our Balance Sheet using the same

methods as that of our Income Statement. Our forecasts, which can be found in

appendix B, extend out ten years and both the weighted growth rate and the

moving average methods were used in computing the figures.

Intel’s asset forecasts were calculated using a combination of the

weighted growth rate and the moving average. Under Current Assets, items

such as trading assets and inventories did not appear to follow any particular

trends so we resorted to the moving average method in making these forecasts.

We also saw that marketable securities, intangibles, and other assets under the

Non-current Assets section of the Balance Sheet seemed to have random

35

fluctuations that called for use of the moving average method. All remaining

asset forecasts, such as Property, Plant and Equipment, were calculated using

the weighted growth rate. Here we figured PP&E will remain at about 36% of

the total non-current assets with a projected growth next year of 13% and

slowly falling to about 9% by 2014.

A variety of forecasting methods was also used calculating liabilities up to

2014. Short-term debt, accrued compensation and benefits, deferred income on

shipments, accrued advertising, income taxes payable, and long-term debt all

changed sporadically in the past and we feel this trend will continue as Intel

pursues future business ventures. Here we felt that using a moving average was

the appropriate method to use. Short-term debt is expected to fall while other

liabilities such as accrued advertising and other accrued liabilities should rise.

Income taxes payable were calculated at a constant 12% of Intel’s total current

liabilities. The remaining liability forecasts were calculated under the weighted

growth rate.

We figured the Shareholder’s Equity section of the Balance Sheet, Intel’s

growth rate for 2005 is projected to be about 13.80% but fall to about 9.09% by

2014.

Our group feels that the weighted growth rate and moving average were

the most appropriate models to use in making our forecasts for Intel’s Balance

Sheet. Forecasting is a tricky job if not done carefully and it becomes very

difficult to predict accurate forecasts beyond a couple of years in the future.

Statement of Cash Flows

After making forecasts for the balance sheet and the income statement,

we then take our estimated information and predict future cash flows. These

forecasts can be found in appendix B. The cash flow to capital is calculated by

taking net operating profits after tax (NOPAT) minus increases in net working

36

capital and net long-term assets; the cash flow to equity is cash flow to capital

minus net interest after tax plus increase in net debt (Business Analysis and

Valuation). In forecasting the last year we assume that there will be a growth in

sales (as there has been), and ratios remain the same in 2015 in order to

complete the forecast for 2014.

37

Valuation Analysis

In this section of our project we will be valuing Intel through a series of

ratios which will compare Intel to its competitors. We will also use several other

methods which involve forecasting and manipulation of numbers past and

present to try and put a value on the firm. The first method we will use is the

method of comparables in which we will use 6 ratios based on industry averages

to compare Intel with the rest of the industry. Then we will move to the intrinsic

methods of valuing such as discounted dividends, discounted free cash flows,

discounted residual income, abnormal earnings growth, and long run average

residual income. Each of these methods will derive a price per share of the

company and we can use these in comparison to the market value of the firm to

decide whether the firm is over, under or fairly valued. It is important we

perform this valuation so we can make decisions for the future based on these

assessments and know what our strengths and weaknesses are as a company.

These calculations will also help investors make a more educated decision.

The Discounted Dividends Model is the value of the firm’s equity expressed

as the present value of forecasted dividends. To reach this prediction we must

use dividends paid, market value, growth and ke (cost of equity).

Discounted Free Cash Flows are a by product of the discount dividend model

but the assumption is that the dividends can be switched to free cash flows back

to the firm.

Discounted Residual Income is computed with the following equation:

( )VE, t = +

−⎛⎝⎜

⎞⎠⎟

+

+

+=

∞

∑BVEE NI k BVE

kt

t t e t

e

tt

( ) ( )~

1

10 1

38

Abnormal Earnings Growth the book value of the firm’s equity is added to the

discounted forecast of abnormal earnings.

Long Run Average Residual Income is calculated by using a long run

average of ROE, K and SGR.

Kd Calculation

Intel is primarily an equity financed company. In fact, its stockholders

equity section of the balance sheet is nearly 4 times the value of its liabilities.

Intel’s lack of liabilities allows for it to maintain a low cost of debt. The following

chart shows how we calculated Intel’s cost of debt at .67%.

Intel Corp 10-K 2004-12-25: Balance Sheet

2004/12/25

Percent of Total

LiabilitiesComputed

Interest Rate

Value Weighted

RateCurrent liabilities: Short-term debt $178,000,000 1.86% 0.00% 0.00% Long-term debt reclassified to short-term debt $33,000,000 2.12% 7.11% 0.15% Accounts payable $1,943,000,000 20.32% 0.00% 0.00% Accrued compensation and benefits $1,858,000,000 19.43% 0.00% 0.00% Deferred income on shipments to distributors $592,000,000 6.19% 0.00% 0.00% Accrued advertising $894,000,000 9.35% 0.00% 0.00% Other accrued liabilities $1,355,000,000 14.17% 0.00% 0.00% Income taxes payable $1,163,000,000 12.16% 0.00% 0.00%Total current liabilities $8,006,000,000 83.71% 0.00%Long-term debt $703,000,000 7.35% 7.11% 0.52%Deferred tax liabilities $855,000,000 8.94% 0.00% 0.00%Product Warranties $0 0.00% 0.00% 0.00%Commitments and contingencies $0 0.00% 0.00% 0.00%

Total non-current liabilities $1,558,000,000 16.29% 0.00%Total Liabilities $9,564,000,000 100.00% 14.22% 0.67%

Weighted Average cost of Debt 0.67%

Ke Calculation

To calculate Intel’s cost of equity, we used the CAPM method. A detailed

view of the CAPM calculations can be found in appendix C. According to our

calculated R-Squares, our five year beta calculation was our best option. Using

this beta, our cost of equity calculation was as follows: Average Risk Free Rate Estimated Beta Hisorical Market Price Premium Average Risk Free Rate Ke

0.029 + 2.33555339 * ( 0.04677 - 0.029 ) = 0.071

39

Method of Comparables

This section will give us values based on the industry average of Intel’s

strongest competitors. We will compare Intel to its two chief competitors Texas

Instruments and Amd.

In this portion of our valuation we have valued Intel’s stock price based

on the industry average of numbers in the year 2004. We did this by using

several price multiples beginning with the price/earnings ratio. According to our

calculations there is much room to grow as our assumed price per share

according to the P/E ratio reaches $51.40. This number may be a bit skewed

though as AMD has a rather high P/E ratio in comparison to the industry. Price to Earnings Ratio

Company PPS EPS P/E Ratio

Texas Instruments 24.96 1.08 23.11

Amd 16.19 0.25 64.76

Intel 23.01 1.17 19.67

Industry Average P/E Intel's Expected Share Price

43.94 $51.40

The expected share price found was $51.40. Intel's actual share price is $23.01, therefore Intel is undervalued according to this model.

The M/B ratio is much more symmetrical across the industry as all three

competitors lie within 1.1 of each other and according to this ratio Intel has the

most room to grow because they have the highest P/B multiple. This calculation

also implies Intel is overvalued slightly as the price per share is only $18.60. Market to Book Ratio

Company PPS BPS M/B Ratio

Texas Instruments 24.96 7.52 3.32

Amd 16.19 6.22 2.60

Intel 23.01 6.28 3.66

Industry Average M/B Intel's Expected Share Price

2.96 $18.60

The expected share price found was $18.60. Intel's actual share price is $23.01, therefore Intel is overvalued according to this model.

40

The Dividend/Price ratio isn’t very accurate due to AMD not paying out

dividends and TXI paying out less than Intel. The industry average is based on

TXI alone and that causes this number to be distorted at a price per share of

$44.37. Dividend to Price Ratio

Company DPS PPS D/P Ratio

Texas Instruments $0.09 $24.96 0.004

Amd N/A $16.19 N/A

Intel $0.16 $23.01 0.007

Industry Average D/P Intel's Expected Share Price

0.004 $44.37

The expected share price found was $44.37. Intel's actual share price is $23.01, therefore Intel is undervalued according to this model.

The Price/Sales ratio indicates that Intel is way overvalued as it depicts

the PPS to be only $12.33. This price is small because Intel has a significantly

higher amount of shares outstanding than its competitors, which drives down the

SPS number while increasing the Price/Sales ratio. Intel pays out significantly

more than its competition. Price to Sales Ratio

Company PPS SPS P/S Ratio

Texas Instruments $24.96 7.24 3.45

Amd $16.19 13.93 1.16

Intel $23.01 5.35 4.30

Industry Average P/S Intel's Expected Share Price

2.30 $12.33

The expected share price found was $12.33. Intel's actual share price is $23.01, therefore Intel is overvalued according to this model.

41

In our Price Earnings Growth model we used a forward P/E ratio and

divided that by our forecasted earnings per share growth to get the PEG ratio of

each company. Once again we found out the industry average PEG then

multiplied that by our forecasted earnings per share growth to get an expected

share price of $24.33. The share price this model gave us was the closest we

have found to our actual market price, we feel that this was the most accurate

multiple of the six methods we used.

Price Earnings Growth Ratio

Company P/E EPS Growth PEG Ratio

Texas Instruments 21.24 14.45 1.47

Amd 59.87 18.27 3.28

Intel 15.34 11.78 1.30

Industry Average PEG Intel's Expected Share Price

2.37 $24.27

The expected share price found was $24.33. Intel's actual share price is $23.01, therefore Intel is undervalued according to this model.

Discounted Dividend Model

When looking at the discounted dividend model (appendix D), our first

step was to find the dividends per share. In looking at Yahoo! Finance we find

that dividends are .32 per share. So for the first two years our dividends per

share are .32, they grow every two years to .40, then to .48, to 56, to 64 and

finally to.72 which we believe will be our terminal dividend per share. According

to this model of valuation, Intel is currently overvalued at a value of $8.53.

Although this is the not the only model presenting this conclusion, it is the lowest

value compared to all the models which we feel is due mainly in part to Intel’s

low dividend yield. In the sensitivity analysis we forecast what will happen if

42

growth occurs and also if cost of equity increases. Looking at the sensitivity

analysis we find that the blue shading is what our actual estimated value per

share is and the yellow area is where we don’t want to be, which is below the

actual value. If growth was to increase to 3% and/or the cost of equity was to

also increase, our estimated values would all be below the actual values and

would be undesirable.

Sensitivity AnalysisKe 5.50% 7.05% 8.50% 10.00%

Growth0% $11.15 $8.38 $6.73 $5.543% $20.35 $12.21 $8.77 $6.735% N/A $20.98 $12.08 $8.32

Discounted Free Cash Flows

Under the Free Cash Flows model (appendix D), we expect to see Intel’s

equity to more than double. We predict free cash flows into the firm to steadily

increase and see this trend continuing into the future. Terminal value was

calculated using our estimated free cash flows through 2014 and then dividing

that number by the WACC of 5.74%. Taking the book value of equity of

$237,038 and dividing that figure by the number of shares outstanding for Intel

we arrived at an expected value of $37.04 per share. Upon looking at the

sensitivity analysis, it is not until the WACC reaches 9% with zero growth that

Intel’s estimated stock price falls below its current price level.

Sensitivity AnalysisWACC 4.50% 5.74% 8.00% 9.50%

Growth0% $48.92 $37.04 $25.05 $20.343% $124.80 $66.33 $34.57 $25.795% N/A $217.78 $51.49 $33.45

Discounted Residual Income:

43

The Residual Income model (appendix D) is an effective way of estimating

the price of Intel’s stock. By calculating a stream of residual incomes over the

next ten years, we are able to discount all numbers back to the present time.

First, we find the book value of equity per share, add in earnings per share and

then subtract the dividends per share from that, thus giving us the ending book

value of equity (which then gives us the next year’s beginning equity). We are

then able to find the “normal income” by multiplying the beginning book value of

equity with the cost of equity (Ke). Now we can find the residual income by

subtracting earnings per share and the normal income. After that, the present

value factor must be calculated for each of the next ten years using the formula:

1/(1+Ke)^t where Ke is cost of equity and (t) is the number of years

discounting. Next we will multiply that year’s residual income with the PV factor

to calculate the present value of residual income. The sum of each years PV of

residual income gives us a total. Then a terminal value is calculated using the

perpetuity formula based on a given growth rate which is a variable in the

sensitivity analysis. These residual incomes are discounted back to present time

and added up to give us an estimated value share price. We will use an

estimated cost of equity of 7.05% (which was calculated using a five year beta).

Using the estimated beta and Ke of 7.05%, Intel’s stock price came to

$16.97 with zero growth. The actual current price per share is $23.01. Obviously

this estimate is too low due in large part to the high Ke. Plus, this estimated

price value of $16.97 doesn’t include growth, which means if Intel wants to grow

larger, the price should be even higher. Thus, this shows that using this 7.05%

rate, Intel is overvalued. To raise the price back up to its actual price of $23.01,

we will perform a sensitivity analysis to try and get a more realistic Ke and

growth rate.

44

Sensitivity AnalysisKe 5.50% 7.05% 8.50% 10.00%

Growth0% $22.31 $16.96 $14.19 $12.503% $35.88 $21.38 $15.93 $13.145% N/A $31.49 $18.75 $14.00

Looking at the data above, we can see our Ke with its stock price in

yellow. We found the share price drops with an increase in Ke; however, the

price does not drop with an increase in growth rate unless it was negative which

would be a wrong assumption. You can see based on this model that 7.05%

makes the company overvalued. Thus, we estimate the market assumes a cost

of equity between 5% and 7%. If Intel could lower their cost of equity the share

price would rise closer to the current market value.

Abnormal Earnings Growth

Another valuation method done is the abnormal earnings growth method

(appendix D). In this model we use the earnings per share and dividends per

share in order to forecast valuation of the firm. The first step in the valuation is

to calculate the dividend per share invested at the cost of equity. We do this by

dividing by the dividend per share of the previous year by the cost of equity.

Next, we need to find the cumulative dividend earnings. This is found by adding

the earnings per share with the dividend per share at the 7.05% rate. In finding

the normal earnings we multiply the earnings per share by one plus the cost of

equity. The abnormal earning growth is then calculated by subtracting the

cumulative dividend earnings with the normal earnings. After finding the PV

factor and the total PV of AEG we then take a look at the terminal value. The

terminal value is calculated by dividing AEG by the cost of equity minus the

growth. In our case the cost of equity is 7.05% and our growth is zero. Finally

in finding the value per share for Intel, we have to add the EPS to the PV of AEG

45

and add the PV of terminal value and the total present value of AEG. Once those

things are added up we divide the number by the cap rate which is Ke.

Looking at the sensitivity analysis we see that our value per share is

$17.69, if a growth occurred by 3%, and our cost of equity remained the same

or were to grow to 8% we would be above the actual value per share. We begin

to fall below the actual value when we have no growth and cost of equity

increases to 9%.

Sensitivity AnalysisKe 5.50% 7.05% 8.50% 10.00%

Growth0% $22.28 $17.38 $14.42 $12.253% $35.76 $23.07 $17.50 $14.075% N/A $36.12 $22.48 $16.50

Conclusion We were able to come to a number of conclusions after reviewing the

previous models used to estimate the share price of Intel.

First, with our estimated cost of equity at 7.05%, we feel that this is too

high and a cost of equity at 5.5% with zero growth would be more appropriate

to suit Intel. However, if Intel’s growth rate was 3%, our estimated 7.05% cost

of equity would be fitting. We were able to draw up this conclusion after using a

pure sensitivity analysis in each of the models listed above.

Next, we have come to the conclusion that Intel is either fairly valued of a

little overvalued. We are confident our work is accurate, but with a little more

accurate information, such as knowing dividends declared in the future, we

would be able to come up with a more accurate picture of Intel’s future. We feel

we were able to accurately capture Intel’s future prospects, but until those

prospects occur, one can never be completely sure.

To the best of our knowledge, Intel is fairly priced and we do not

anticipate any drastic changes or volatility in the stock price in the near future.

46

Works Cited

1. Business Analysis and Valuation, 3rd Edition 2. Intel’s 2003 Annual Report 3. Intel’s 10k 4. www.amd.com 5. www.dell.com 6. www.edgarscan.com 7. www.intel.com 8. www.txn.com 9. www.marketguide.com 10. www.morningstar.com 11. www.portlandtribune.com/archview.cgi?id=19512 12. www.yahoo.finance.com

a. http://finance.yahoo.com/q?s=amd b. http://finance.yahoo.com/q/ae?s=intel c. http://finance.yahoo.com/q?s=txn

47

48

Appendix A: Financial Forecasts INTEL CORP 10-K Balance Sheet

FORECASTS2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

AssetsCurrent assets: Cash and cash equivalents $2,976,000,000 $7,970,000,000 $7,404,000,000 $7,971,000,000 $8,407,000,000 $10,452,428,377 $12,020,292,633 $13,823,336,528 $15,482,136,912 $17,339,993,341 $19,420,792,542 $21,362,871,797 $23,499,158,976 $25,849,074,874 $28,433,982,361 Short-term investments $10,497,000,000 $2,356,000,000 $3,382,000,000 $5,568,000,000 $5,654,000,000 $7,069,158,277 $8,129,532,018 $9,348,961,821 $10,470,837,240 $11,727,337,709 $13,134,618,234 $14,448,080,057 $15,892,888,063 $17,482,176,869 $19,230,394,556 Trading assets $350,000,000 $1,224,000,000 $1,801,000,000 $2,625,000,000 $3,111,000,000 $3,934,035,000 $4,524,140,250 $5,202,761,288 $5,827,092,642 $6,526,343,759 $7,871,774,626 $8,658,952,089 $9,524,847,298 $10,477,332,028 $11,525,065,230 Accounts receivable, net of allowance $4,129,000,000 $2,607,000,000 $2,574,000,000 $2,960,000,000 $2,999,000,000 $3,934,035,000 $4,524,140,250 $5,202,761,288 $5,827,092,642 $6,526,343,759 $7,309,505,010 $8,040,455,511 $8,844,501,062 $9,728,951,168 $10,701,846,285 Inventories $2,241,000,000 $2,253,000,000 $2,276,000,000 $2,519,000,000 $2,621,000,000 $3,133,302,212 $3,603,297,544 $4,143,792,176 $4,641,047,237 $5,197,972,905 $5,821,729,654 $6,403,902,619 $7,044,292,881 $7,748,722,170 $8,523,594,387 Deferred tax assets $721,000,000 $958,000,000 $1,136,000,000 $969,000,000 $979,000,000 $1,246,786,477 $1,433,804,448 $1,648,875,116 $1,846,740,130 $2,068,348,945 $2,316,550,819 $2,548,205,900 $2,803,026,490 $3,083,329,140 $3,391,662,054 Other current assets $236,000,000 $265,000,000 $352,000,000 $270,000,000 $287,000,000 $36,919,405,385 $42,457,316,192 $48,825,913,621 $54,685,023,256 $61,247,226,046 $68,596,893,172 $75,456,582,489 $83,002,240,738 $91,302,464,812 $100,432,711,293Total current assets $21,150,000,000 $17,633,000,000 $18,925,000,000 $22,882,000,000 $25,048,000,000 $27,501,930,831 $31,627,220,455 $36,371,303,524 $40,735,859,947 $45,624,163,140 $51,099,062,717 $56,208,968,989 $61,829,865,887 $68,012,852,476 $74,814,137,724Property, plant and equipment: Land and buildings $7,416,000,000 $10,709,000,000 $11,374,000,000 $0 $0 $7,904,384,169 $9,090,041,795 $10,453,548,064 $11,707,973,831 $13,112,930,691 $14,686,482,374 $16,155,130,612 $17,770,643,673 $19,547,708,040 $21,502,478,844 Machinery and equipment $15,994,000,000 $21,605,000,000 $22,800,000,000 $0 $0 $16,171,910,031 $18,597,696,535 $21,387,351,016 $23,953,833,138 $26,828,293,114 $30,047,688,288 $33,052,457,117 $36,357,702,828 $39,993,473,111 $43,992,820,422 Construction in progress $4,843,000,000 $2,042,000,000 $2,738,000,000 $0 $0 $2,529,887,123 $2,909,370,192 $3,345,775,720 $3,747,268,807 $4,196,941,064 $4,700,573,991 $5,170,631,390 $5,687,694,529 $6,256,463,982 $6,882,110,380total ppe (gross) $28,253,000,000 $34,356,000,000 $36,912,000,000 $0 $0 $26,606,181,323 $30,597,108,522 $35,186,674,800 $39,409,075,776 $44,138,164,869 $49,434,744,653 $54,378,219,118 $59,816,041,030 $65,797,645,133 $72,377,409,647 Less accumulated depreciation $13,240,000,000 $16,235,000,000 $19,065,000,000 $0 $0 $12,988,367,862 $14,936,623,041 $17,177,116,497 $19,238,370,477 $21,546,974,934 $24,132,611,926 $26,545,873,118 $29,200,460,430 $32,120,506,473 $35,332,557,120Property, plant and equipment, net $15,013,000,000 $18,121,000,000 $17,847,000,000 $16,661,000,000 $15,768,000,000 $21,861,129,877 $25,140,299,358 $28,911,344,262 $32,380,705,574 $36,266,390,243 $40,618,357,072 $44,680,192,779 $49,148,212,057 $54,063,033,262 $59,469,336,589Marketable strategic equity securities $1,915,000,000 $1,474,000,000 $1,234,000,000 $514,000,000 $656,000,000 $907,854,231 $1,044,032,365 $800,424,813 $896,475,791 $1,004,052,886 $1,124,539,232 $1,236,993,156 $1,360,692,471 $1,496,761,718 $1,646,437,890Other long-term investments $1,797,000,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0Goodwill and other acquisition-related intangibles, $5,941,000,000 $4,330,000,000 $4,330,000,000 $3,705,000,000 $3,719,000,000 $4,841,889,231 $5,568,172,615 $6,403,398,508 $6,723,568,433 $7,530,396,645 $8,434,044,242 $8,658,952,089 $9,524,847,298 $10,477,332,028 $11,525,065,230Other assets $2,129,000,000 $2,837,000,000 $1,888,000,000 $1,515,000,000 $1,379,000,000 $1,815,708,462 $2,088,064,731 $2,401,274,440 $2,465,308,425 $2,761,145,437 $3,092,482,889 $3,092,482,889 $3,401,731,178 $3,741,904,296 $4,116,094,725Total non-current assets $26,795,000,000 $26,762,000,000 $25,299,000,000 $22,395,000,000 $21,522,000,000 $27,235,626,923 $31,320,970,962 $36,019,116,606 $40,341,410,598 $45,182,379,870 $47,230,647,758 $51,953,712,534 $57,149,083,787 $62,863,992,166 $69,150,391,382 Total assets $47,945,000,000 $44,395,000,000 $44,224,000,000 $47,143,000,000 $48,143,000,000 $60,523,615,385 $69,602,157,692 $80,042,481,346 $89,647,579,108 $100,405,288,601 $112,453,923,233 $123,699,315,556 $136,069,247,112 $149,676,171,823 $164,643,789,005Liabilities and stockholders' equityCurrent liabilities: Short-term debt $378,000,000 $409,000,000 $436,000,000 $224,000,000 $201,000,000 $262,951,992 $302,394,791 $331,947,009 $371,780,650 $416,394,328 $444,153,950 $488,569,345 $537,426,280 $591,168,908 $650,285,799 Accounts payable $2,387,000,000 $1,769,000,000 $1,543,000,000 $1,660,000,000 $1,943,000,000 $2,407,629,420 $2,768,773,833 $3,184,089,908 $3,566,180,697 $3,994,122,381 $4,473,417,066 $4,920,758,773 $5,412,834,650 $5,954,118,115 $6,549,529,927 Accrued compensation and benefits $1,696,000,000 $1,179,000,000 $1,287,000,000 $1,559,000,000 $1,858,000,000 $2,270,949,023 $2,611,591,377 $3,161,400,088 $3,540,768,098 $3,965,660,270 $4,663,616,478 $5,129,978,126 $5,642,975,938 $6,207,273,532 $6,828,000,885 Deferred income on shipments to distributors $674,000,000 $418,000,000 $475,000,000 $633,000,000 $592,000,000 $717,141,797 $824,713,066 $948,420,026 $1,062,230,430 $1,189,698,081 $1,332,461,851 $1,465,708,036 $1,612,278,839 $1,773,506,723 $1,950,857,396 Accrued advertising $782,000,000 $560,000,000 $622,000,000 $716,000,000 $894,000,000 $1,075,712,695 $1,237,069,600 $1,422,630,040 $1,593,345,644 $1,982,830,135 $2,220,769,751 $2,442,846,726 $2,687,131,399 $2,955,844,539 $3,251,428,993 Other accrued liabilities $1,440,000,000 $1,247,000,000 $1,075,000,000 $1,302,000,000 $1,355,000,000 $1,673,330,859 $1,924,330,488 $2,212,980,062 $2,478,537,669 $2,775,962,189 $3,109,077,652 $3,419,985,417 $3,761,983,959 $4,138,182,355 $4,552,000,590 Income taxes payable $1,293,000,000 $988,000,000 $1,157,000,000 $785,000,000 $1,163,000,000 $1,434,283,594 $1,649,426,133 $1,896,840,053 $2,124,460,859 $2,379,396,162 $2,664,923,702 $2,931,416,072 $3,224,557,679 $3,547,013,447 $3,901,714,792Total current liabilities $8,650,000,000 $6,570,000,000 $6,595,000,000 $6,873,000,000 $8,006,000,000 $9,350,333,795 $10,752,883,864 $12,365,816,444 $13,849,714,417 $15,511,680,147 $17,373,081,765 $19,110,389,941 $21,021,428,935 $23,123,571,829 $25,435,929,012Long-term debt $707,000,000 $1,050,000,000 $929,000,000 $936,000,000 $703,000,000 $956,189,063 $1,099,617,422 $1,185,525,033 $1,327,788,037 $1,487,122,601 $1,554,538,826 $1,709,992,709 $1,880,991,979 $2,069,091,177 $2,276,000,295Deferred tax liabilities $1,266,000,000 $945,000,000 $1,232,000,000 $1,482,000,000 $855,000,000 $1,479,702,574 $1,701,657,960 $1,956,906,654 $2,191,735,453 $2,454,743,707 $2,749,312,952 $3,024,244,247 $3,326,668,672 $3,659,335,539 $4,025,269,093Product Warranties $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0Commitments and contingencies $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Total non-current liabilities $1,973,000,000 $1,995,000,000 $2,161,000,000 $2,418,000,000 $1,558,000,000 $2,602,029,486 $2,992,333,909 $3,441,183,996 $3,854,126,075 $4,316,621,204 $4,834,615,749 $5,318,077,324 $5,849,885,056 $6,434,873,561 $7,078,360,918Total Liabilities $10,623,000,000 $8,565,000,000 $8,756,000,000 $9,291,000,000 $9,564,000,000 $11,952,363,281 $13,745,217,773 $15,807,000,439 $17,703,840,492 $19,828,301,351 $22,207,697,513 $24,428,467,265 $26,871,313,991 $29,558,445,390 $32,514,289,929

Stockholders' equity: Preferred stock, $0.001 par value $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Common stock, $0.001 par value $8,486,000,000 $8,833,000,000 $7,641,000,000 $6,754,000,000 $6,143,000,000 $7,649,512,500 $8,796,939,375 $10,116,480,281 $10,976,381,105 $12,293,546,838 $13,768,772,458 $14,657,080,359 $16,122,788,395 $17,735,067,234 $19,508,573,958 Acquisition-related unearned stock ($97,000,000) ($178,000,000) ($63,000,000) ($20,000,000) ($4,000,000) $4,780,945 $5,498,087 $6,322,800 $7,081,536 $7,931,321 $8,883,079 $9,771,387 $10,748,526 $11,823,378 $13,005,716 Accumulated other comprehensive income $195,000,000 $25,000,000 $43,000,000 $96,000,000 $152,000,000 $191,237,813 $219,923,484 $252,912,007 $318,669,129 $356,909,424 $399,738,555 $488,569,345 $537,426,280 $591,168,908 $650,285,799 Retained earnings $28,738,000,000 $27,150,000,000 $27,847,000,000 $31,016,000,000 $32,288,000,000 $39,963,921,867 $45,958,510,147 $52,852,286,669 $59,513,230,199 $66,654,817,822 $74,653,395,961 $82,558,447,968 $90,814,292,765 $99,895,722,041 $109,885,294,245Total Stockholders' equity $37,322,000,000 $35,830,000,000 $35,468,000,000 $37,846,000,000 $38,579,000,000 $47,809,453,125 $54,980,871,094 $63,228,001,758 $70,815,361,969 $79,313,205,405 $88,830,790,054 $97,713,869,059 $107,485,255,965 $118,233,781,561 $130,057,159,717 Total liabilities and stockholders' equity $47,945,000,000 $44,395,000,000 $44,224,000,000 $47,143,000,000 $48,143,000,000 $59,761,816,406.25 $68,726,088,867.19 $79,035,002,197.27 $88,519,202,460.94 $99,141,506,756.25 $111,038,487,567.00 $122,142,336,323.70 $134,356,569,956.07 $147,792,226,951.68 $162,571,449,646.85

49

INTEL CORP 10-K Pro-Forma Balance SheetFORECASTS

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Assets:Current assets: Cash and cash equivalents 6.21% 17.95% 16.74% 16.91% 17.46% 17.27% 17.27% 17.27% 17.27% 17.27% 17.27% 17.27% 17.27% 17.27% 17.27% Short-term investments 21.89% 5.31% 7.65% 11.81% 11.74% 11.68% 11.68% 11.68% 11.68% 11.68% 11.68% 11.68% 11.68% 11.68% 11.68% Trading assets 0.73% 2.76% 4.07% 5.57% 6.46% 6.50% 6.50% 6.50% 6.50% 6.50% 7.00% 7.00% 7.00% 7.00% 7.00% Accounts receivable, net of allowance 8.61% 5.87% 5.82% 6.28% 6.23% 6.56% 6.56% 6.56% 6.56% 6.56% 6.56% 6.56% 6.56% 6.56% 6.56% Inventories 4.67% 5.07% 5.15% 5.34% 5.44% 5.50% 5.50% 5.60% 5.60% 5.60% 5.60% 5.70% 5.70% 5.70% 5.70% Deferred tax assets 1.50% 2.16% 2.57% 2.06% 2.03% 2.06% 2.06% 2.06% 2.06% 2.06% 2.06% 2.06% 2.06% 2.06% 2.06% Other current assets 0.49% 0.60% 0.80% 0.57% 0.60% 61.00% 61.00% 61.00% 61.00% 61.00% 61.00% 61.00% 61.00% 61.00% 61.00%Total current assets 44.11% 39.72% 42.79% 48.54% 52.03% 45.44% 45.44% 45.44% 45.44% 45.44% 45.44% 45.44% 45.44% 45.44% 45.44%Property, plant and equipment: Land and buildings 15.47% 24.12% 25.72% 0.00% 0.00% 13.06% 13.06% 13.06% 13.06% 13.06% 13.06% 13.06% 13.06% 13.06% 13.06% Machinery and equipment 33.36% 48.67% 51.56% 0.00% 0.00% 26.72% 26.72% 26.72% 26.72% 26.72% 26.72% 26.72% 26.72% 26.72% 26.72% Construction in progress 10.10% 4.60% 6.19% 0.00% 0.00% 4.18% 4.18% 4.18% 4.18% 4.18% 4.18% 4.18% 4.18% 4.18% 4.18%total ppe (gross) 58.93% 77.39% 83.47% 0.00% 0.00% 43.96% 43.96% 43.96% 43.96% 43.96% 43.96% 43.96% 43.96% 43.96% 43.96% Less accumulated depreciation 27.61% 36.57% 43.11% 0.00% 0.00% 21.46% 21.46% 21.46% 21.46% 21.46% 21.46% 21.46% 21.46% 21.46% 21.46%Property, plant and equipment, net 31.31% 40.82% 40.36% 35.34% 32.75% 36.12% 36.12% 36.12% 36.12% 36.12% 36.12% 36.12% 36.12% 36.12% 36.12%Marketable strategic equity securities 3.99% 3.32% 2.79% 1.09% 1.36% 1.50% 1.50% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%Other long-term investments 3.75% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Goodwill and other acquisition-related intangibles, 12.39% 9.75% 9.79% 7.86% 7.72% 8.00% 8.00% 8.00% 7.50% 7.50% 7.50% 7.00% 7.00% 7.00% 7.00%Other assets 4.44% 6.39% 4.27% 3.21% 2.86% 3.00% 3.00% 3.00% 2.75% 2.75% 2.75% 2.50% 2.50% 2.50% 2.50%Total non-current assets 55.89% 60.28% 57.21% 47.50% 44.70% 45.00% 45.00% 45.00% 45.00% 45.00% 42.00% 42.00% 42.00% 42.00% 42.00% Total assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Liabilities and Stockholders' equityCurrent liabilities: Short-term debt 3.56% 4.78% 4.98% 2.41% 2.10% 2.20% 2.20% 2.10% 2.10% 2.10% 2.00% 2.00% 2.00% 2.00% 2.00% Accounts payable 22.47% 20.65% 17.62% 17.87% 20.32% 19.79% 19.79% 19.79% 19.79% 19.79% 19.79% 19.79% 19.79% 19.79% 19.79% Accrued compensation and benefits 15.97% 13.77% 14.70% 16.78% 19.43% 19.00% 19.00% 20.00% 20.00% 20.00% 21.00% 21.00% 21.00% 21.00% 21.00% Deferred income on shipments to distributors 6.34% 4.88% 5.42% 6.81% 6.19% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% Accrued advertising 7.36% 6.54% 7.10% 7.71% 9.35% 9.00% 9.00% 9.00% 9.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% Other accrued liabilities 13.56% 14.56% 12.28% 14.01% 14.17% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% Income taxes payable 12.17% 11.54% 13.21% 8.45% 12.16% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00%Total current liabilities 81.43% 76.71% 75.32% 73.97% 83.71% 78.23% 78.23% 78.23% 78.23% 78.23% 78.23% 78.23% 78.23% 78.23% 78.23%Long-term debt 6.66% 12.26% 10.61% 10.07% 7.35% 8.00% 8.00% 7.50% 7.50% 7.50% 7.00% 7.00% 7.00% 7.00% 7.00%Deferred tax liabilities 11.92% 11.03% 14.07% 15.95% 8.94% 12.38% 12.38% 12.38% 12.38% 12.38% 12.38% 12.38% 12.38% 12.38% 12.38%Product Warranties 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Commitments and contingencies 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total non-current liabilities 18.57% 23.29% 24.68% 26.03% 16.29% 21.77% 21.77% 21.77% 21.77% 21.77% 21.77% 21.77% 21.77% 21.77% 21.77%Total Liabilities 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Stockholders' equity: Preferred stock, $0.001 par value 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Common stock, $0.001 par value 22.74% 24.65% 21.54% 17.85% 15.92% 16.00% 16.00% 16.00% 15.50% 15.50% 15.50% 15.00% 15.00% 15.00% 15.00% Acquisition-related unearned stock -0.26% -0.50% -0.18% -0.05% -0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% Accumulated other comprehensive income 0.52% 0.07% 0.12% 0.25% 0.39% 0.40% 0.40% 0.40% 0.45% 0.45% 0.45% 0.50% 0.50% 0.50% 0.50% Retained earnings 77.00% 75.77% 78.51% 81.95% 83.69% 83.59% 83.59% 83.59% 84.04% 84.04% 84.04% 84.49% 84.49% 84.49% 84.49%Total stockholders' equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

50

INTEL CORP 10-K Income StatementFORECASTS

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Net Revenues $33,726,000,000 $26,539,000,000 $26,764,000,000 $30,141,000,000 $34,209,000,000 $39,340,350,000 $45,241,402,500 $52,027,612,875 $58,270,926,420 $65,263,437,590 $73,095,050,101 $80,404,555,111 $88,445,010,623 $97,289,511,685 $107,018,462,853Cost of sales $12,650,000,000 $13,487,000,000 $13,446,000,000 $13,047,000,000 $14,463,000,000 $17,703,157,500 $20,358,631,125 $23,412,425,794 $26,221,916,889 $29,368,546,916 $32,892,772,546 $36,182,049,800 $39,800,254,780 $43,780,280,258 $48,158,308,284Gross margin $21,076,000,000 $13,052,000,000 $13,318,000,000 $17,094,000,000 $19,746,000,000 $21,637,192,500 $24,882,771,375 $28,615,187,081 $32,049,009,531 $35,894,890,675 $40,202,277,556 $44,222,505,311 $48,644,755,842 $53,509,231,427 $58,860,154,569Research and development $3,897,000,000 $3,796,000,000 $4,034,000,000 $4,360,000,000 $4,778,000,000 $5,495,846,895 $6,320,223,929 $7,268,257,519 $8,140,448,421 $9,117,302,231 $10,211,378,499 $11,232,516,349 $12,355,767,984 $13,591,344,782 $14,950,479,261Marketing, general and administrative $5,089,000,000 $4,464,000,000 $4,334,000,000 $4,278,000,000 $4,659,000,000 $5,358,155,670 $6,161,879,021 $7,086,160,874 $7,936,500,178 $8,888,880,200 $9,955,545,824 $10,951,100,406 $12,046,210,447 $13,250,831,491 $14,575,914,641Impairment of goodwill $0 $0 $0 $617,000,000 $0 Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-ForecastableAmortization of goodwill $0 $1,710,000,000 $0 $0 $0 Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-ForecastableAmortization and impairment of acquisition-related $0 $628,000,000 $548,000,000 $301,000,000 $179,000,000 Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-ForecastableTotal Intangible Amortization $1,586,000,000 $2,338,000,000 $548,000,000 $918,000,000 $179,000,000 Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-ForecastablePurchased in-process research and development $109,000,000 $198,000,000 $20,000,000 $5,000,000 $0 Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-ForecastableTotal Operating Expenses $10,681,000,000 $10,796,000,000 $8,936,000,000 $9,561,000,000 $9,616,000,000 $11,605,403,250 $13,346,213,738 $15,348,145,798 $17,189,923,294 $19,252,714,089 $21,563,039,780 $23,719,343,758 $26,091,278,134 $28,700,405,947 $31,570,446,542Operating income $10,395,000,000 $2,256,000,000 $4,382,000,000 $7,533,000,000 $10,130,000,000 $10,031,789,250 $11,536,557,638 $13,267,041,283 $14,859,086,237 $16,642,176,586 $18,639,237,776 $20,503,161,553 $22,553,477,709 $24,808,825,480 $27,289,708,028Gains on investments, net $3,759,000,000 ($466,000,000) ($372,000,000) ($283,000,000) ($2,000,000) $98,000,000 $198,000,000 $298,000,000 $398,000,000 $498,000,000 $598,000,000 $698,000,000 $798,000,000 $898,000,000 $998,000,000Interest and other, net $987,000,000 $393,000,000 $194,000,000 $192,000,000 $289,000,000 $358,278,188 $412,019,916 $473,822,903 $530,681,651 $594,363,449 $665,687,063 $732,255,770 $805,481,347 $886,029,481 $974,632,430Income before taxes $15,141,000,000 $2,183,000,000 $4,204,000,000 $7,442,000,000 $10,417,000,000 $10,488,067,438 $12,146,577,553 $14,038,864,186 $15,787,767,888 $17,734,540,035 $19,902,924,839 $21,933,417,323 $24,156,959,055 $26,592,854,961 $29,262,340,457Provision for taxes $4,606,000,000 $892,000,000 $1,087,000,000 $1,801,000,000 $2,901,000,000 $2,840,332,066 $3,289,482,445 $3,801,943,147 $4,275,573,518 $4,802,789,746 $5,390,022,134 $5,939,911,134 $6,542,080,878 $7,201,759,440 $7,924,697,703Net income $10,535,000,000 $1,291,000,000 $3,117,000,000 $5,641,000,000 $7,516,000,000 $6,884,561,250 $7,917,245,438 $9,104,832,253 $10,197,412,124 $11,421,101,578 $12,791,633,768 $14,070,797,144 $15,477,876,859 $17,025,664,545 $18,728,230,999

INTEL CORP 10-K Pro-Forma Income Statement

FORECASTS2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Net Revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of sales 37.51% 50.82% 50.24% 43.29% 42.28% 45.00% 45.00% 45.00% 45.00% 45.00% 45.00% 45.00% 45.00% 45.00% 45.00%Gross margin 62.49% 49.18% 49.76% 56.71% 57.72% 55.00% 55.00% 55.00% 55.00% 55.00% 55.00% 55.00% 55.00% 55.00% 55.00%Research and development 11.55% 14.30% 15.07% 14.47% 13.97% 13.97% 13.97% 13.97% 13.97% 13.97% 13.97% 13.97% 13.97% 13.97% 13.97%Marketing, general and administrative 15.09% 16.82% 16.19% 14.19% 13.62% 13.62% 13.62% 13.62% 13.62% 13.62% 13.62% 13.62% 13.62% 13.62% 13.62%Impairment of goodwill 0.00% 0.00% 0.00% 2.05% 0.00% Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-ForecastableAmortization of goodwill 0.00% 6.44% 0.00% 0.00% 0.00% Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable

Amortization and impairment of acquisition-related intangibles and costs Purchased in-process research and development 0.00% 2.37% 2.05% 1.00% 0.52%

Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable

Total Intangible Amortization 4.70% 8.81% 2.05% 3.05% 0.52% Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-ForecastablePurchased in-process research and development 0.32% 0.75% 0.07% 0.02% 0.00% Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable

Total Operating Expenses 31.67% 40.68% 33.39% 31.72% 28.11% 29.50% 29.50% 29.50% 29.50% 29.50% 29.50% 29.50% 29.50% 29.50% 29.50%Operating income 30.82% 8.50% 16.37% 24.99% 29.61% 25.50% 25.50% 25.50% 25.50% 25.50% 25.50% 25.50% 25.50% 25.50% 25.50%Gains on investments, net 11.15% -1.76% -1.39% -0.94% -0.01% Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-ForecastableInterest and other, net 2.93% 1.48% 0.72% 0.64% 0.84% 0.91% 0.91% 0.91% 0.91% 0.91% 0.91% 0.91% 0.91% 0.91% 0.91%Income before taxes 44.89% 8.23% 15.71% 24.69% 30.45% 26.66% 26.85% 26.98% 27.09% 27.17% 27.23% 27.28% 27.31% 27.33% 27.34%Provision for taxes 13.66% 3.36% 4.06% 5.98% 8.48% Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-ForecastableNet income 31.24% 4.86% 11.65% 18.72% 21.97% 17.50% 17.50% 17.50% 17.50% 17.50% 17.50% 17.50% 17.50% 17.50% 17.50%

51

INTEL CORP 10-K Statement of Cash FlowsFORECASTS

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Cash flows provided by (used for) operating Net income $10,535,000,000 $1,291,000,000 $3,117,000,000 $5,641,000,000 $7,516,000,000 $6,884,561,250 $7,917,245,438 $9,104,832,253 $10,197,412,124 $11,421,101,578 $12,791,633,768 $14,070,797,144 $15,477,876,859 $17,025,664,545 $18,728,230,999Adjustments to reconcile net income to net cash Depreciation $3,249,000,000 $4,131,000,000 $4,676,000,000 $4,651,000,000 $4,590,000,000 $3,098,052,563 $3,562,760,447 $4,097,174,514 $3,569,094,243 $3,997,385,552 $4,477,071,819 $3,517,699,286 $3,869,469,215 $4,256,416,136 $4,682,057,750 Amortization of goodwill $1,710,000,000 $0 $0 $0 Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-ForecastableImpairment of goodwill $0 $0 $0 $617,000,000 $0 Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Amortization of goodwill and other acquisition- $1,586,000,000 $717,000,000 $668,000,000 $419,000,000 $299,000,000 Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Purchased in-process research and $109,000,000 $198,000,000 $20,000,000 $5,000,000 $0 Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Gains on investments, net ($3,759,000,000) $466,000,000 $372,000,000 $283,000,000 $2,000,000 Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Gain on assets contributed to Conerva ($117,000,000) $196,000,000 $0 $0 $91,000,000 Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Net loss on retirements of property, plant and $139,000,000 $119,000,000 $301,000,000 $217,000,000 $91,000,000 $51,634,209 $59,379,341 $68,286,242 $61,184,473 $68,526,609 $76,749,803 $70,353,986 $77,389,384 $85,128,323 $93,641,155 Deferred taxes ($130,000,000) ($519,000,000) $110,000,000 $391,000,000 ($207,000,000) Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Tax benefit from employee stock plans $0 $435,000,000 $270,000,000 $216,000,000 $344,000,000 $289,151,573 $332,524,308 $382,402,955 $428,291,309 $479,686,266 $537,248,618 $590,973,480 $650,070,828 $715,077,911 $786,585,702 Changes in assets and liabilities: Trading assets $0 $898,000,000 ($444,000,000) ($511,000,000) ($468,000,000) Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Accounts receivable ($384,000,000) $1,561,000,000 $30,000,000 ($430,000,000) ($39,000,000) ($154,902,628) ($178,138,022) ($204,858,726) ($229,441,773) ($256,974,786) ($287,811,760) ($316,592,936) ($348,252,229) ($383,077,452) ($421,385,197) Inventories ($731,000,000) $24,000,000 ($26,000,000) ($245,000,000) ($101,000,000) ($68,845,613) ($79,172,454) ($91,048,323) ($101,974,121) ($114,211,016) ($127,916,338) ($140,707,971) ($154,778,769) ($170,256,645) ($187,282,310) Accounts payable $978,000,000 ($673,000,000) ($226,000,000) $116,000,000 $283,000,000 $137,691,225 $158,344,909 $182,096,645 $203,948,242 $228,422,032 $255,832,675 $281,415,943 $309,557,537 $340,513,291 $374,564,620 Accrued compensation and benefits $231,000,000 ($524,000,000) $107,000,000 $276,000,000 $295,000,000 $192,767,715 $221,682,872 $254,935,303 $285,527,539 $319,790,844 $358,165,745 $393,982,320 $433,380,552 $476,718,607 $524,390,468 Income taxes payable ($362,000,000) ($270,000,000) $175,000,000 ($361,000,000) $378,000,000 Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Tax benefit from employee stock plans $887,000,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Other assets and liabilities $596,000,000 ($971,000,000) ($21,000,000) $230,000,000 $136,000,000 Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Total adjustments $2,292,000,000 $7,498,000,000 $6,012,000,000 $5,874,000,000 $5,603,000,000 $3,442,280,625 $3,958,622,719 $4,552,416,127 $3,569,094,243 $3,997,385,552 $4,477,071,819 $4,924,779,001 $3,095,575,372 $3,405,132,909 $3,745,646,200Net cash provided by operating activities $12,827,000,000 $8,789,000,000 $9,129,000,000 $11,515,000,000 $13,119,000,000 $15,047,683,875 $17,304,836,456 $19,900,561,925 $22,288,629,356 $24,963,264,878 $27,958,856,664 $30,754,742,330 $33,830,216,563 $37,213,238,219 $40,934,562,041

Cash flows provided by (used for) investing Additions to property, plant and equipment ($6,674,000,000) ($7,309,000,000) ($4,703,000,000) ($3,656,000,000) ($3,843,000,000) ($6,191,794,562) ($7,120,563,746) ($8,188,648,308) ($9,171,286,105) ($10,271,840,438) ($11,504,461,290) ($12,654,907,419) ($13,920,398,161) ($15,312,437,977) ($16,843,681,775) Acquisitions, net of cash acquired ($2,317,000,000) ($883,000,000) ($57,000,000) ($61,000,000) ($53,000,000) ($78,153,750) ($89,876,813) ($103,358,335) ($115,761,335) ($129,652,695) ($145,211,018) ($159,732,120) ($175,705,332) ($193,275,865) ($212,603,452) Purchases of available-for-sale investments ($17,188,000,000) ($7,141,000,000) ($6,309,000,000) ($11,662,000,000) ($16,618,000,000) ($15,418,011,980) ($17,730,713,777) ($20,390,320,843) ($22,837,159,345) ($25,577,618,466) ($28,646,932,682) ($31,511,625,950) ($34,662,788,545) ($38,129,067,400) ($41,941,974,140) Maturities and sales of available-for-sale $17,124,000,000 $15,398,000,000 $5,634,000,000 $8,488,000,000 $15,633,000,000 $16,952,327,141 $19,495,176,212 $22,419,452,644 $25,109,786,961 $28,122,961,396 $31,497,716,764 $34,647,488,440 $38,112,237,284 $41,923,461,013 $46,115,807,114 Other investing activities ($980,000,000) ($395,000,000) ($330,000,000) ($199,000,000) ($151,000,000) ($531,716,337) ($611,473,788) ($703,194,856) ($787,578,238) ($882,087,627) ($987,938,142) ($1,086,731,956) ($1,195,405,152) ($1,314,945,667) ($1,446,440,234)Net cash used for investing activities ($10,035,000,000) ($330,000,000) ($5,765,000,000) ($7,090,000,000) ($5,032,000,000) ($9,077,976,455) ($10,439,672,923) ($12,005,623,862) ($13,446,298,725) ($15,059,854,572) ($16,867,037,121) ($18,553,740,833) ($20,409,114,916) ($22,450,026,408) ($24,695,029,049)

Cash flows provided by (used for) financing Increase (decrease) in short-term debt, net $138,000,000 $23,000,000 ($101,000,000) ($152,000,000) $24,000,000 ($27,263,230) ($31,352,714) ($36,055,622) ($40,382,296) ($45,228,172) ($50,655,552) ($55,721,108) ($61,293,218) ($67,422,540) ($74,164,794) Additions to long-term debt $77,000,000 $306,000,000 $55,000,000 $0 $0 $45,247,327 $52,034,427 $59,839,591 $67,020,341 $75,062,782 $84,070,316 $92,477,348 $101,725,083 $111,897,591 $123,087,350 Retirement of long-term debt ($46,000,000) ($10,000,000) ($18,000,000) ($137,000,000) ($31,000,000) ($34,078,093) ($39,189,807) ($45,068,279) ($50,476,472) ($56,533,649) ($63,317,686) ($69,649,455) ($76,614,401) ($84,275,841) ($92,703,425) Proceeds from sales of shares through $797,000,000 $762,000,000 $681,000,000 $967,000,000 $894,000,000 $1,130,243,991 $1,299,780,590 $1,494,747,678 $1,674,117,399 $1,875,011,487 $2,100,012,866 $2,310,014,152 $2,541,015,567 $2,795,117,124 $3,074,628,837 Proceeds from exercise of 1998 step-up $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Proceeds from sales of put warrants $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Repurchase and retirement of common stock ($4,007,000,000) ($4,008,000,000) ($4,014,000,000) ($4,012,000,000) ($7,516,000,000) ($6,408,612,358) ($7,369,904,212) ($8,475,389,844) ($9,492,436,625) ($10,631,529,020) ($11,907,312,503) ($13,098,043,753) ($14,407,848,128) ($15,848,632,941) ($17,433,496,235) Payment of dividends to stockholders ($470,000,000) ($538,000,000) ($533,000,000) ($524,000,000) ($1,022,000,000) ($841,610,475) ($967,852,046) ($1,113,029,853) ($1,246,593,436) ($1,396,184,648) ($1,563,726,806) ($1,720,099,487) ($1,892,109,435) ($2,081,320,379) ($2,289,452,417)Net cash used for financing activities ($3,511,000,000) ($3,465,000,000) ($3,930,000,000) ($3,858,000,000) ($7,651,000,000) ($6,069,331,947) ($6,979,731,739) ($8,026,691,500) ($8,989,894,480) ($10,068,681,817) ($11,276,923,635) ($12,404,615,999) ($13,645,077,599) ($15,009,585,359) ($16,510,543,895)

Supplemental disclosures of cash flow Cash paid during the year for: Interest $43,000,000 $53,000,000 $69,000,000 $59,000,000 $52,000,000 $78,333,330 $90,083,330 $103,595,829 $116,027,329 $129,950,608 $145,544,681 $160,099,149 $176,109,064 $193,719,970 $213,091,967 Income taxes $4,209,000,000 $1,208,000,000 $475,000,000 $1,567,000,000 $2,392,000,000 $2,516,053,466 $2,893,461,486 $3,327,480,708 $3,726,778,393 $4,173,991,801 $4,674,870,817 $5,142,357,898 $5,656,593,688 $6,222,253,057 $6,844,478,363

52

INTEL CORP 10-K ProForma Cash Flow (Percent of Operating Income)FORECASTS

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Cash flows provided by (used for) operating activities:Net income 101.35% 57.23% 71.13% 74.88% 74.20% 68.63% 68.63% 68.63% 68.63% 68.63% 68.63% 68.63% 68.63% 68.63% 68.63%Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation 31.26% 183.11% 106.71% 61.74% 45.31% 45.00% 45.00% 45.00% 35.00% 35.00% 35.00% 25.00% 25.00% 25.00% 25.00% Amortization of goodwill 0.00% 75.80% 0.00% 0.00% 0.00% Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-ForecastableImpairment of goodwill 0.00% 0.00% 0.00% 8.19% 0.00% Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Amortization of goodwill and other acquisition-related intangibles and costs 15.26% 31.78% 15.24% 5.56% 2.95% Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable

Purchased in-process research and development 1.05% 8.78% 0.46% 0.07% 0.00% Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable

Gains on investments, net -36.16% 20.66% 8.49% 3.76% 0.02% Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Gain on assets contributed to Conerva -1.13% 8.69% 0.00% 0.00% 0.90% Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Net loss on retirements of property, plant and equipment 1.34% 5.27% 6.87% 2.88% 0.90% 0.75% 0.75% 0.75% 0.60% 0.60% 0.60% 0.50% 0.50% 0.50% 0.50% Deferred taxes -1.25% -23.01% 2.51% 5.19% -2.04% Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Tax benefit from employee stock plans 0.00% 19.28% 6.16% 2.87% 3.40% 4.20% 4.20% 4.20% 4.20% 4.20% 4.20% 4.20% 4.20% 4.20% 4.20% Changes in assets and liabilities: Trading assets 0.00% 39.80% -10.13% -6.78% -4.62% Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Accounts receivable -3.69% 69.19% 0.68% -5.71% -0.38% -2.25% -2.25% -2.25% -2.25% -2.25% -2.25% -2.25% -2.25% -2.25% -2.25% Inventories -7.03% 1.06% -0.59% -3.25% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00% Accounts payable 9.41% -29.83% -5.16% 1.54% 2.79% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% Accrued compensation and benefits 2.22% -23.23% 2.44% 3.66% 2.91% 2.80% 2.80% 2.80% 2.80% 2.80% 2.80% 2.80% 2.80% 2.80% 2.80% Income taxes payable -3.48% -11.97% 3.99% -4.79% 3.73% Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Tax benefit from employee stock plans 8.53% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other assets and liabilities 5.73% -43.04% -0.48% 3.05% 1.34% Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Non-Forecastable Total adjustments 22.05% 332.36% 137.20% 77.98% 55.31% 50.00% 50.00% 50.00% 35.00% 35.00% 35.00% 35.00% 20.00% 20.00% 20.00%Net cash provided by operating activities 123.40% 389.58% 208.33% 152.86% 129.51% 150.00% 150.00% 150.00% 150.00% 150.00% 150.00% 150.00% 150.00% 150.00% 150.00%

Cash flows provided by (used for) investing activities: Additions to property, plant and equipment -52.03% -83.16% -51.52% -31.75% -29.29% -41.15% -41.15% -41.15% -41.15% -41.15% -41.15% -41.15% -41.15% -41.15% -41.15% Acquisitions, net of cash acquired -18.06% -10.05% -0.62% -0.53% -0.40% -0.52% -0.52% -0.52% -0.52% -0.52% -0.52% -0.52% -0.52% -0.52% -0.52% Purchases of available-for-sale investments -134.00% -81.25% -69.11% -101.28% -126.67% -102.46% -102.46% -102.46% -102.46% -102.46% -102.46% -102.46% -102.46% -102.46% -102.46% Maturities and sales of available-for-sale investments 133.50% 175.20% 61.72% 73.71% 119.16% 112.66% 112.66% 112.66% 112.66% 112.66% 112.66% 112.66% 112.66% 112.66% 112.66% Other investing activities -7.64% -4.49% -3.61% -1.73% -1.15% -3.53% -3.53% -3.53% -3.53% -3.53% -3.53% -3.53% -3.53% -3.53% -3.53%Net cash used for investing activities -78.23% -3.75% -63.15% -61.57% -38.36% -60.33% -60.33% -60.33% -60.33% -60.33% -60.33% -60.33% -60.33% -60.33% -60.33%

Cash flows provided by (used for) financing activities: Increase (decrease) in short-term debt, net 1.08% 0.26% -1.11% -1.32% 0.18% -0.18% -0.18% -0.18% -0.18% -0.18% -0.18% -0.18% -0.18% -0.18% -0.18% Additions to long-term debt 0.60% 3.48% 0.60% 0.00% 0.00% 0.30% 0.30% 0.30% 0.30% 0.30% 0.30% 0.30% 0.30% 0.30% 0.30% Retirement of long-term debt -0.36% -0.11% -0.20% -1.19% -0.24% -0.23% -0.23% -0.23% -0.23% -0.23% -0.23% -0.23% -0.23% -0.23% -0.23% Proceeds from sales of shares through employee stock plans and other 6.21% 8.67% 7.46% 8.40% 6.81% 7.51% 7.51% 7.51% 7.51% 7.51% 7.51% 7.51% 7.51% 7.51% 7.51% Proceeds from exercise of 1998 step-up warrants 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Proceeds from sales of put warrants 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Repurchase and retirement of common stock -31.24% -45.60% -43.97% -34.84% -57.29% -42.59% -42.59% -42.59% -42.59% -42.59% -42.59% -42.59% -42.59% -42.59% -42.59% Payment of dividends to stockholders -3.66% -6.12% -5.84% -4.55% -7.79% -5.59% -5.59% -5.59% -5.59% -5.59% -5.59% -5.59% -5.59% -5.59% -5.59%Net cash used for financing activities -27.37% -39.42% -43.05% -33.50% -58.32% -40.33% -40.33% -40.33% -40.33% -40.33% -40.33% -40.33% -40.33% -40.33% -40.33%

53

Appendix B: Cross Analysis Cross Analysis

INTC AMD TXN

INDUSTRY (5 yr avg) INTC AMD TXN

INDUSTRY (5 yr avg)

INTC AMD TXN

INDUSTRY (5 yr avg)

INT AMD TXN

INDUSTRY (5 yr avg)

INT AMD TXN

INDUSTR

Y (5 yr avg)

Sales Growth -21.31% -16.20% -30.93% 8.67% 0.85% -30.70% 2.22% 8.67% 12.62% 30.48% 17.31% 8.67% 13.50% 42.12% 27.92% 27.88%

Liquidity Analysis Current Ratio 2.45 2.17 2.88 4.02 2.68 1.79 3.66 4.26 2.87 1.68 3.17 4.26 3.33 2.94 3.50 4.26 3.13 1.75 5.29 4.26

Quick Asset Ratio 2.19 1.50 1.05 3.25 2.34 1.16 1.03 3.50 2.52 1.33 1.12 3.50 2.96 1.52 1.49 3.50 2.80 1.04 4.18 3.50Inventory Turnover 5.64 6.13 4.96 5.14 5.99 6.81 7.75 5.04 5.91 4.87 6.73 5.04 5.18 3.34 5.97 5.04 5.52 3.99 5.74 5.04Accounts Receivable Turnover 8.17 4.93 5.38 8.95 10.18 5.90 6.85 8.95 10.40 6.81 6.89 8.95 10.18 5.77 6.78 8.95 11.41 7.17 7.21 8.98Working Capital 2.70 1.88 2.24 2.40 3.75 1.95 2.17 3.17 2.00 1.88 2.43 1.79 2.01 0.91 1.52Days Supply of Inventory 64.72 59.54 73.59 60.93 53.60 47.10 61.76 74.95 54.23 70.46 109.28 61.14 66.12 91.48 63.59Days Supply of Recievables 44.68 74.04 67.84 35.85 61.86 53.28 35.10 53.60 52.98 35.85 63.26 53.83 31.99 50.91 50.62

Profitability Analysis Gross Profit Margin 62.49% 22.00% 48.00% 49.14% 49.18% 33.00% 29.00% 49.14% 49.76% 46.00% 37.00% 49.14% 56.71% 31.00% 40.00% 49.14% 57.72% 39.37% 44.99% 52.99%

Operating Profit Margin 30.82% 55.00% 14.07% 13.01% 8.50% 33.00% 16.60% 13.01% 16.37% 27.00% 13.07% 13.01% 24.99% 41.00% 12.70% 13.01% 29.61% 4.44% 17.54% 22.62%Net Profit Margin 31.24% -48.00% 26.00% 10.56% 4.86% -2.00% -2.50% 9.84% 11.65% 21.00% -4.10% 9.84% 18.72% -3.00% 12.20% 9.84% 21.97% 1.45% 14.79% 17.36%Asset Turnover 0.70 0.47 0.67 0.69 0.60 0.69 0.52 0.72 0.61 0.81 0.57 0.72 0.64 0.40 0.63 0.72 0.71 0.69 0.79 0.72Return on Assets 21.97% -23.00% 17.30% 7.24% 2.91% -1.00% -1.30% 6.75% 7.05% 17.00% -2.30% 6.75% 11.97% -1.00% 7.70% 6.75% 15.61% 1.00% 11.66% 12.13%Return on Equity 28.23% -41.00% 24.30% 9.73% 3.60% -2.00% -1.70% 8.97% 8.79% 40.00% -3.20% 8.97% 14.91% -4.00% 10.10% 8.97% 19.48% 3.51% 14.93% 15.50%

Capital Structure Analysis Total Liabilities/Total Equity 0.28 0.82 0.41 0.10 0.24 0.59 0.32 0.10 0.25 0.67 0.37 0.10 0.25 0.86 0.31 0.10 0.25 1.61 0.03 0.10

Times Interest Earned 15.34 17.17 5.55 0.95 9.54 21.67 -14.80 5.05 38.76 -4.63 24.74 36.04 1.97 105.10Debt Service Margin 5.37 2.53 1.80 4.97 0.55 1.50 5.92 -0.07 2.39 6.94 0.28 5.45 6.75 0.80

Total Current Assets Total Current Assets as % Total Assets 44.11% 46.08% 45.80% 39.72% 41.66% 36.60% 42.79% 36.96% 41.73% 48.54% 40.50% 49.70% 52.03% 41.15% 62.52% Operating Cash Flow as % Op. Inc 123.40% 1.36% 93.41% 389.58% -2.87% -3.13% 208.33% 9.79% 6.92% 152.86% -1.27% 2.23% 129.51% 4.90% 1.43%

2003 20042000 2001 2002

54

Appendix C: CAPM Estimations

Date Open High Low Close VolumeAdj

Close*Dividend

Firm's Return

Federal Funds Rate

(Yearly)

Federal Funds Rate

(Monthly)

SPRTRNMarket

Risk Premium Beta

EstimateR-

Squared

Average Monthly Risk Free

Rate

Expected Market Return

Estimated Ke

1-Apr-05 23.34 23.44 22.9 23.01 136507600 23.01 -0.95% 0.0288 0.0024 -0.0205 -0.020507 5 Year 2.335553 0.504791 0.029 0.04677 0.070501-Mar-05 24.36 25.47 22.96 23.23 63823945 23.23 -2.83% 0.0263 0.0022 -0.019118 -0.019118 3 Year 2.023713 0.482977 0.026 0.04988 0.074331-Feb-05 22.49 24.63 22.17 23.99 78924846 23.99 0.08 7.24% 0.0250 0.0021 0.018903 0.018903 2 Year 1.989984 0.357192 0.027 0.05237 0.077493-Jan-05 23.64 23.79 21.89 22.45 82481585 22.37 -4.03% 0.0228 0.0019 -0.02529 -0.02529 Yahoo 2.352 0.504791 0.029 0.04712 0.071621-Dec-04 22.5 24.5 22.44 23.39 69185754 23.31 4.71% 0.0216 0.0018 0.032458 0.0324581-Nov-04 22.19 24.99 22.15 22.38 72085390 22.3 0.04 0.72% 0.0193 0.0016 0.038595 0.0385951-Oct-04 20.3 22.61 20.22 22.26 75530195 22.14 10.98% 0.0176 0.0015 0.014014 0.0140141-Sep-04 21.1 21.72 19.64 20.06 77974208 19.95 -5.62% 0.0161 0.0013 0.009364 0.0093642-Aug-04 24.04 24.99 20.86 21.29 61273304 21.18 0.04 -12.52% 0.0143 0.0012 0.002287 0.0022871-Jul-04 27.39 27.48 22.46 24.38 84238776 24.21 -11.67% 0.0126 0.0011 -0.034291 -0.0342911-Jun-04 28.37 29.01 27.13 27.6 51221776 27.41 -3.17% 0.0103 0.0009 0.017989 0.0179893-May-04 26.05 28.98 25.61 28.55 62199539 28.35 0.04 11.13% 0.0100 0.0008 0.012083 0.0120831-Apr-04 27.37 28.56 25.72 25.73 68996995 25.51 -5.41% 0.0100 0.0008 -0.016791 -0.0167911-Mar-04 29.04 30.14 26.03 27.2 76426029 26.97 -6.70% 0.0100 0.0008 -0.016359 -0.0163592-Feb-04 30.9 31.43 28.65 29.2 60823984 28.95 0.04 -4.20% 0.0101 0.0008 0.012209 0.0122092-Jan-04 32.36 34.6 30.35 30.52 59486895 30.22 -4.79% 0.0100 0.0008 0.017276 0.0172761-Dec-03 33.82 34.4 29.66 32.05 50668872 31.74 -4.37% 0.0098 0.0008 0.050765 0.0507653-Nov-03 33.33 34.51 31.66 33.54 48305094 33.21 0.02 1.84% 0.0100 0.0008 0.007129 0.0071291-Oct-03 27.82 33.28 27.81 32.95 54786638 32.61 19.71% 0.0101 0.0008 0.054961 0.0549612-Sep-03 28.77 29.38 27.22 27.52 58535385 27.24 -3.67% 0.0101 0.0008 -0.011944 -0.0119441-Aug-03 24.78 29.04 23.33 28.59 56696171 28.3 0.02 14.99% 0.0103 0.0009 0.017873 0.0178731-Jul-03 20.87 25.5 20.51 24.89 68178022 24.61 19.58% 0.0101 0.0008 0.016213 0.0162132-Jun-03 21 22.92 19.99 20.81 67030680 20.58 0.05% 0.0122 0.0010 0.011333 0.0113331-May-03 18.37 21.01 18.3 20.82 64541551 20.59 0.02 13.26% 0.0126 0.0011 0.050899 0.0508991-Apr-03 16.38 19.56 16.28 18.4 61260466 18.18 13.06% 0.0126 0.0011 0.081044 0.0810443-Mar-03 17.13 19.01 15.59 16.28 64721704 16.08 -5.52% 0.0125 0.0010 0.008358 0.0083583-Feb-03 15.65 17.29 14.88 17.25 54643742 17.04 0.02 10.29% 0.0126 0.0011 -0.017004 -0.0170042-Jan-03 16.02 18.01 15.14 15.66 64880928 15.45 0.59% 0.0124 0.0010 -0.027415 -0.0274152-Dec-02 21.88 22.09 15.42 15.57 58389095 15.36 -25.34% 0.0124 0.0010 -0.060333 -0.0603331-Nov-02 17.1 21.3 16.91 20.88 63559699 20.6 0.02 20.82% 0.0134 0.0011 0.057058 0.0570581-Oct-02 14.05 17.51 12.95 17.3 85138574 17.05 24.54% 0.0175 0.0015 0.086448 0.0864483-Sep-02 16.47 17.04 13.67 13.89 66464565 13.69 -16.56% 0.0175 0.0015 -0.110013 -0.1100131-Aug-02 18.72 19.67 15.82 16.67 55220986 16.43 0.02 -11.19% 0.0174 0.0015 0.004881 0.0048811-Jul-02 18.35 19.88 16.26 18.79 70957249 18.5 2.89% 0.0173 0.0014 -0.078995 -0.0789953-Jun-02 27.43 28.2 17.45 18.27 69893439 17.98 -33.80% 0.0175 0.0015 -0.072465 -0.0724651-May-02 28.57 31.36 25.56 27.62 46150504 27.19 0.02 -3.38% 0.0175 0.0015 -0.008824 -0.0088241-Apr-02 30.14 31.45 27.51 28.61 46482072 28.14 -5.92% 0.0175 0.0015 -0.061662 -0.0616621-Mar-02 29.09 34.25 28.99 30.41 47849219 29.91 6.59% 0.0173 0.0014 0.036739 0.0367391-Feb-02 34.82 35.07 28.5 28.55 53846668 28.08 0.02 -18.49% 0.0174 0.0015 -0.020766 -0.0207662-Jan-02 31.9 36.78 31.56 35.04 55613433 34.45 11.42% 0.0173 0.0014 -0.015574 -0.0155743-Dec-01 32.29 34.85 31.41 31.45 43995395 30.92 -3.64% 0.0182 0.0015 0.007574 0.0075741-Nov-01 24.53 32.99 24.25 32.66 55037100 32.11 0.02 33.85% 0.0209 0.0017 0.075958 0.0759581-Oct-01 20.21 26.5 19.08 24.42 56607743 23.99 19.47% 0.0249 0.0021 0.017359 0.0173594-Sep-01 27.56 28.09 18.96 20.44 75960346 20.08 -26.83% 0.0307 0.0026 -0.081723 -0.0817231-Aug-01 30.62 32.23 26.88 27.96 43029891 27.47 0.02 -6.15% 0.0365 0.0030 -0.064108 -0.0641082-Jul-01 29.58 31 27 29.81 48377695 29.27 1.92% 0.0377 0.0031 -0.010772 -0.0107721-Jun-01 27.26 31.93 26.14 29.25 50365990 28.72 8.37% 0.0397 0.0033 -0.025004 -0.0250041-May-01 30.77 32.5 26.4 27.01 45703445 26.52 0.02 -12.56% 0.0421 0.0035 0.00509 0.005092-Apr-01 26.06 32.57 22.25 30.91 63694330 30.33 17.51% 0.0480 0.0040 0.076814 0.0768141-Mar-01 28.25 33.69 24.56 26.31 66766136 25.81 -7.82% 0.0531 0.0044 -0.064205 -0.0642051-Feb-01 37.06 38.23 28 28.56 50424542 28.02 0.02 -22.77% 0.0549 0.0046 -0.092291 -0.0922912-Jan-01 30.69 38.59 30 37 61113566 36.28 23.07% 0.0598 0.0050 0.034637 0.0346371-Dec-00 38.5 38.5 29.81 30.06 58739970 29.48 -20.95% 0.0640 0.0053 0.004053 0.0040531-Nov-00 44.31 47.88 36 38.06 51289952 37.32 0.02 -15.39% 0.0651 0.0054 -0.080069 -0.0800692-Oct-00 42.94 47 35 45 67247740 44.11 8.30% 0.0651 0.0054 -0.004949 -0.0049491-Sep-00 75.62 75.69 41.38 41.56 77052040 40.73 -44.47% 0.0652 0.0054 -0.053483 -0.0534831-Aug-00 67.06 75.83 60.44 74.87 31160747 73.38 0.02 12.20% 0.0650 0.0054 0.060699 0.0606993-Jul-00 134.13 147.5 64.5 66.75 23015915 65.4 -0.15% 0.0654 0.0055 -0.016341 -0.0163411-Jun-00 126.19 140.25 124.12 133.69 20301009 65.5 7.27% 0.0653 0.0054 0.023934 0.0239341-May-00 127.94 131 105.12 124.69 27275181 61.09 0.03 -1.63% 0.0627 0.0052 -0.021915 -0.0219153-Apr-00 131.38 139.06 108.37 126.81 33000952 62.1 1.28% 0.0602 0.0050 -0.030796 -0.030796

Intel Earnings Rate CAPM Estimations

55

Appendix D: Intrinsic Valuations

Intel Discounted Dividends Valuation Model(Amounts in millions of dollars except per share data)

Years from valuation date 1 2 3 4 5 6 7 8 9 102004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Terminal

Dividends per share $0.32 $0.32 $0.40 $0.40 $0.48 $0.48 $0.56 $0.56 $0.64 $0.64 $0.72Present Value Factor 0.934 0.873 0.815 0.762 0.711 0.665 0.621 0.580 0.542 0.506

Present Value of Future Dividends $0.30 $0.28 $0.33 $0.30 $0.34 $0.32 $0.35 $0.32 $0.35 $0.32

Total Present Value of Forecast Future Dividends $3.21Continuing (Terminal) Value (assume no growth) $10.22Present Value of Continuing (Terminal) Value $5.17

Estimated Value Per Share (1/1/05) $8.38Estimated Value Per Share (4/1/05) $8.53

Earnings Per Share $1.08 $1.18 $1.29 $1.38 $1.47 $1.57 $1.64 $1.72 $1.80 $1.89Dividends per share $0.32 $0.32 $0.40 $0.40 $0.48 $0.48 $0.56 $0.56 $0.64 $0.64Book Value Per Share $6.03

Sensitivity AnalysisActual Price per share $23.01 Ke 5.50% 7.05% 8.50% 10.00%Cost of Equity Estimated 7.05% GrowthGrowth Rate 0 0% $11.15 $8.38 $6.73 $5.54

3% $20.35 $12.21 $8.77 $6.735% N/A $20.98 $12.08 $8.32

56

Intel Discounted Free Cash Flows Valuation Model(Amounts in millions of dollars except per share data)

Years from Valuation Date 1 2 3 4 5 6 7 8 9 102004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Cash flow from Operations 15,048 17,305 19,901 22,289 24,963 27,959 30,755 33,830 37,213 40,935Cash Provided (used) by Investing Activities (9,078) (10,440) (12,006) (13,446) (15,060) (16,867) (18,554) (20,409) (22,450) (24,695)Free Cash Flow (to firm) 5,970 6,865 7,895 8,842 9,903 11,092 12,201 13,421 14,763 16,240Discount Rate (5.74% WACC) 0.946 0.894 0.846 0.800 0.756 0.715 0.677 0.640 0.605 0.572Present Value of Free Cash Flows 5646 6140 6678 7073 7492 7935 8255 8588 8934Total Present Value of Annual Cash Flows 66,740Continuing (terminal) Value $282,919Present Value of Continuing (terminal) Value 171,202Value of Firm 237,942Book Value of Debt & Preferred Stock $904Value of Equity 237,038Estimated Value Per Share (1/1/05) $37.04Estimated Value Per Share (4/1/05) $37.42

Earnings Per Share $1.08 $1.18 $1.29 $1.38 $1.47 $1.57 $1.64 $1.72 $1.80 $1.89Dividends per share $0.32 $0.32 $0.40 $0.40 $0.48 $0.48 $0.56 $0.56 $0.64 $0.64Book Value Per Share $6.03

Sensitivity AnalysisActual Price per share $23.01 WACC 4.50% 5.74% 8.00% 9.50%

Growth0% $48.92 $37.04 $25.05 $20.343% $124.80 $66.33 $34.57 $25.795% N/A $217.78 $51.49 $33.45

57

Discounted Residual Income Valuation Model(Amounts in millions of dollars except per share data)

1 2 3 4 5 6 7 8 9 102004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Beginning BE (per share) $6.03 $6.78 $7.64 $8.53 $9.51 $10.50 $11.58 $12.66 $13.82 $14.98Earnings Per Share $1.08 $1.18 $1.29 $1.38 $1.47 $1.57 $1.64 $1.72 $1.80 $1.89Dividends per share $0.32 $0.32 $0.40 $0.40 $0.48 $0.48 $0.56 $0.56 $0.64 $0.64Ending BE (per share) $6.03 6.78 7.64 8.53 9.51 10.50 11.58 12.66 13.82 14.98 16.23Ke 7.05%"Normal" Income 0.42 0.48 0.54 0.60 0.67 0.74 0.82 0.89 0.97 1.06Residual Income (RI) 0.65 0.70 0.75 0.78 0.80 0.83 0.82 0.83 0.83 0.83

Present Value of RI 0.61 0.61 0.61 0.59 0.57 0.55 0.51 0.48 0.45 0.42

BV Equity (per share) 2004 $6.03Total PV of RI (end 2004) $4.98Continuation (Terminal) Value 11.78PV of Terminal Value (end 2004) $5.96Estimated Value Per Share (1/1/05) $16.97Estimated Value Per Share (4/1/05) $17.26

Sensitivity AnalysisKe 5.50% 7.05% 8.50% 10.00%

GrowthActual Price per share 23.01$ 0% $22.31 $16.96 $14.19 $12.50Growth 0 3% $35.88 $21.38 $15.93 $13.14

5% N/A $31.49 $18.75 $14.00

58

Intel Abnormal Earnings Growth Valuation Model(Amounts in millions of dollars except per share data)

1 2 3 4 5 6 7 8 92004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Perpetuity

EPS $1.08 $1.18 $1.29 $1.38 $1.47 $1.57 $1.64 $1.72 $1.80 $1.89DPS $0.32 $0.32 $0.40 $0.40 $0.48 $0.48 $0.56 $0.56 $0.64 $0.64DPS invested at 7.05% $0.02 $0.02 $0.03 $0.03 $0.03 $0.03 $0.04 $0.04 $0.05Cumulative Dividend Earnings $1.20 $1.31 $1.40 $1.50 $1.60 $1.67 $1.76 $1.84 $1.93Normal Earnings $1.15 $1.26 $1.38 $1.47 $1.57 $1.68 $1.76 $1.84 $1.93Abnormal Earning Growth (AEG) $0.05 $0.05 $0.02 $0.02 $0.03 ($0.00) $0.00 $0.00 $0.00 $0.00

PV Factor 0.934 0.873 0.815 0.762 0.711 0.665 0.621 0.580 0.542

PV of AEG $0.05 $0.05 $0.02 $0.02 $0.02 ($0.00) $0.00 $0.00 $0.00Core EPS $1.08Total PV of AEG $0.15Continuing (Terminal) Value $0.00PV of Terminal Value $0.00Total PV of AEG $1.23Capitalization Rate (perpetuity) 7.05%

Estimated Value Per Share (1/1/05) $17.39Estimated Value Per Share (4/1/05) $17.69Ke 7.05% Sensitivity AnalysisGrowth 0 Ke 5.50% 7.05% 8.50% 10.00%

GrowthActual Price per share $23.01 0% $22.28 $17.38 $14.42 $12.25

3% $35.76 $23.07 $17.50 $14.075% N/A $36.12 $22.48 $16.50