Is intel current stock price reasonable

Problem: Intel Corporation is a leading manufacturer of semiconductor chips. The firm was incorporated in 1968 in Santa Clara, California, and represents one of the greatest success stories of the computer age.

Although Intel continues to grow, the industry in which it operates has matured so there in some question whether the firm should be evaluated as a high-growth company or stable-growth company from now on. For example, in December of 2007 the firm's shares were trading for $20.88, which represented a price-earnings ratio of only 17.61. Compared to Google, Inc.'s price-earnings ratio of 53.71 on the same date, it would appear that the decision has already been made by the market.

Intel's expected earnings for 2007 are $1.13 per share, and its payout ratio is 48%. Furthermore, selected financial data for the sector, industry, and seven of the largest firms (including Intel)are found in Exhibit (below)

Description     Market Cap P/E Return on Equity % Dividend Yield % Long-term Debt to Equity Price to Book Value Net Profit Margin Price to Free Cash Flow
Sector: Technology

5344.81B 27.716 14.77% 1.90% 0.691 5.588 10.39% 55.435
Industry: Semiconductor-Broad line 252.89B 19.9 16.20% 1.30% 0.096 3.42 15.50% 193.3
Intel Corp.

120.51B 17.622 19.63% 1.90% 0.064 3.437 18.72% 121.039
Texas Instruments Inc.
44.62B 11.08 22.94% 0.50% 0.004 3.71 18.67% -55.7755
STMicroelectronics NV
16.35B 24.959 7.81% 0.70% 0.209 1.764 8.24% -11.219
Advanced Micro Devices Inc.
11.79B 21.152 12.61% 0.00% 0.138 2.088 10.13% -58.916
Analog Devices Inc.

11.48B 22.667 15.42% 1.90% NA 3.342 21.48% 311.392
Maxim Integrated Products Inc. 10.28B 23.025 16.93% 1.90% NA 3.681 21.39% NA
National Semiconductor Corp.
8.04B 18.49 25.67% 0.60% 0.012 4.481 22.18% 154.483

Q1. Is Intel's current stock price of $20.88 reasonable in light of its sector, industry, and comparison firms?

Q2. Intel has a beta coefficient equal to 1.66. If we assume a risk-free rate of 5.02% and a market risk premium of 5%, what is your estimate of the required rate of return for Intel's stock using the CAPM?

What rate of growth in earnings is consistent with Intel's policy of paying out 48% of earnings in dividends and the firm's historical return on equity? Using your estimated growth rate, what is the value of Intel's shares using the Gordon (single-stage) growth model? Analyze the reasonableness of your estimated value per share using the Gordon model.

Q3. Using your analysis in part b above, what growth rate is consistent with Intel's current share price of $20.88?

Q4. Analysts expect Intel's earnings to grow at a rate of 12% per year over the next five years. What rate of growth from Year 6 forward (forever) is needed to warrant Intel's current stock price (use your CAPM estimate of the required rate of return on equity)? (Hint: Use a two-stage growth model where Intel's earnings grow for five years at 12% and from Year 6 forward at a constant rate.)

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