ACT5725 The following table provides summary data for Applied Materials Inc. and

Question

ACT5725

The following table provides summary data for Applied Materials Inc. and its competitors, KLA Tencor Corporation and Lam Research Corporation.

(in millions)

a. Compute the price to net income ratio for both KLA Tencor Corporation and Lam Research Corporation.

Round answers to two decimal places, when applicable.

b. Use KLA Tencor Corporation and Lam Research Corporation as comparables, along with the price to net income ratios from part a, and then estimate for Applied Materials Inc. its equity intrinsic value and its equity intrinsic value per share.

Round equity intrinsic value to the nearest million.

Round equity intrinsic value per share to two decimal places.

(in millions)

Applied Materials KLA Tencor Lam Research Company assumed value - $9,790 $11,529 Equity assumed value - $8,987 $13,244 NOPAT $1,444 $440 $674 Net income $1,377 $421 $711 Net nonoperating obligations (assets) $(1,369) $803 $(1,715) Common shares outstanding 1,160.0 157.9 158.5

Explanation / Answer

1. Price to net income ratio is also known as the price earning ratio of the company and is calculated by dividing the Market value per share by Earnings per share

Price to net income ratio = Market value of share / EPS

KLA Tenor :

Market Value per share = Company Assumed Value / Number of outstanding shares

= $9,790 / 157.9 = $62 per share

EPS = Net Income for shareholders / NUmber of outstanding shares = $421 / 157.90 = $2.666 per share

Price to net income ratio of KLA Tenor = $62 / $2.666= 23.25 times.

Lam Research:

Market Value per share = Company Assumed Value / Number of outstanding shares

= $11,529 / 158.50= $72.738 per share

EPS = Net Income / NUmber of outstanding shares = $711 / 158.5 = $4.486 per share

Price to net income ratio of Lam Research = $72.738 / $4.486 = 16.214 times.

2. a. Calculation of Intrinsic value per share of Appied Materials taking P/E ratio of KLA Tenor

Earnings per share of Applied Mat = $1,377 / 1,160 =$1.187 per share

P/E Multiple applicable = 23.25 times

Current market value of Applied = $1.187 x 23.25 = $27.59 per share

Intrinsic Value per share = $27.59 per share

Total Intrinsic value = $27.59 x 1,160 = $32,004.4 Millions

b.  Calculation of Intrinsic value per share of Appied Materials taking P/E ratio of Lam Research

Earnings per share of Applied Mat = $1,377 / 1,160 =$1.187 per share

P/E Multiple applicable = 16.214 times

Current market value of Applied = $1.187 x 16.214 = $ 19.25 per share

Intrinsic Value per share = $19.25 per share

Total Intrinsic value = $19.25 x 1,160 = $22,330 Millions

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