Intrinsic value of TransCanada Corporation - TRP

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$63.28

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$63.28

 
Intrinsic value

$5.35

 
Up/down potential

-92%

 
Rating

str. sell

 
Value-price divergence* premium content

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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of TRP stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 54.9

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  10.66
  35.50
  32.45
  29.71
  27.23
  25.01
  23.01
  21.21
  19.59
  18.13
  16.82
  15.63
  14.57
  13.61
  12.75
  11.98
  11.28
  10.65
  10.09
  9.58
  9.12
  8.71
  8.34
  8.00
  7.70
  7.43
  7.19
  6.97
  6.77
  6.60
  6.44
Revenue, $m
  12,505
  16,944
  22,443
  29,109
  37,037
  46,300
  56,954
  69,033
  82,556
  97,523
  113,922
  131,734
  150,929
  171,476
  193,344
  216,502
  240,923
  266,585
  293,474
  321,583
  350,912
  381,469
  413,274
  446,350
  480,733
  516,466
  553,597
  592,187
  632,299
  674,007
  717,390
Variable operating expenses, $m
 
  16,771
  21,760
  27,809
  35,003
  43,408
  53,075
  64,035
  76,305
  89,886
  104,767
  119,533
  136,950
  155,594
  175,437
  196,450
  218,609
  241,894
  266,293
  291,798
  318,411
  346,138
  374,996
  405,009
  436,208
  468,631
  502,324
  537,339
  573,736
  611,581
  650,945
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  9,988
  16,771
  21,760
  27,809
  35,003
  43,408
  53,075
  64,035
  76,305
  89,886
  104,767
  119,533
  136,950
  155,594
  175,437
  196,450
  218,609
  241,894
  266,293
  291,798
  318,411
  346,138
  374,996
  405,009
  436,208
  468,631
  502,324
  537,339
  573,736
  611,581
  650,945
Operating income, $m
  2,517
  174
  683
  1,300
  2,035
  2,893
  3,879
  4,998
  6,250
  7,637
  9,156
  12,201
  13,979
  15,882
  17,907
  20,052
  22,314
  24,691
  27,181
  29,785
  32,501
  35,331
  38,277
  41,341
  44,525
  47,835
  51,274
  54,848
  58,563
  62,426
  66,444
EBITDA, $m
  4,456
  4,347
  5,758
  7,468
  9,502
  11,878
  14,612
  17,711
  21,180
  25,020
  29,227
  33,797
  38,721
  43,993
  49,603
  55,544
  61,809
  68,393
  75,292
  82,503
  90,027
  97,867
  106,026
  114,512
  123,333
  132,501
  142,027
  151,927
  162,218
  172,918
  184,048
Interest expense (income), $m
  1,721
  1,885
  2,834
  4,018
  5,453
  7,160
  9,154
  11,448
  14,048
  16,960
  20,182
  23,713
  27,548
  31,680
  36,104
  40,812
  45,798
  51,056
  56,581
  62,370
  68,422
  74,736
  81,315
  88,163
  95,284
  102,687
  110,380
  118,374
  126,683
  135,319
  144,298
Earnings before tax, $m
  837
  -1,712
  -2,151
  -2,717
  -3,418
  -4,267
  -5,275
  -6,450
  -7,798
  -9,323
  -11,026
  -11,512
  -13,569
  -15,798
  -18,197
  -20,760
  -23,484
  -26,365
  -29,400
  -32,585
  -35,921
  -39,405
  -43,038
  -46,822
  -50,759
  -54,852
  -59,106
  -63,526
  -68,119
  -72,893
  -77,854
Tax expense, $m
  352
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Net income, $m
  233
  -1,712
  -2,151
  -2,717
  -3,418
  -4,267
  -5,275
  -6,450
  -7,798
  -9,323
  -11,026
  -11,512
  -13,569
  -15,798
  -18,197
  -20,760
  -23,484
  -26,365
  -29,400
  -32,585
  -35,921
  -39,405
  -43,038
  -46,822
  -50,759
  -54,852
  -59,106
  -63,526
  -68,119
  -72,893
  -77,854

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  1,016
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  88,051
  117,669
  155,852
  202,148
  257,202
  321,531
  395,515
  479,399
  573,304
  677,240
  791,127
  914,817
  1,048,117
  1,190,809
  1,342,669
  1,503,486
  1,673,075
  1,851,286
  2,038,017
  2,233,216
  2,436,887
  2,649,093
  2,869,955
  3,099,654
  3,338,426
  3,586,567
  3,844,427
  4,112,408
  4,390,964
  4,680,602
  4,981,873
Adjusted assets (=assets-cash), $m
  87,035
  117,669
  155,852
  202,148
  257,202
  321,531
  395,515
  479,399
  573,304
  677,240
  791,127
  914,817
  1,048,117
  1,190,809
  1,342,669
  1,503,486
  1,673,075
  1,851,286
  2,038,017
  2,233,216
  2,436,887
  2,649,093
  2,869,955
  3,099,654
  3,338,426
  3,586,567
  3,844,427
  4,112,408
  4,390,964
  4,680,602
  4,981,873
Revenue / Adjusted assets
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
  0.144
Average production assets, $m
  61,498
  83,332
  110,373
  143,160
  182,148
  227,705
  280,100
  339,507
  406,010
  479,616
  560,270
  647,866
  742,268
  843,321
  950,868
  1,064,757
  1,184,858
  1,311,066
  1,443,307
  1,581,545
  1,725,784
  1,876,067
  2,032,480
  2,195,150
  2,364,247
  2,539,978
  2,722,592
  2,912,374
  3,109,646
  3,314,765
  3,528,122
Working capital, $m
  404
  2,711
  3,591
  4,657
  5,926
  7,408
  9,113
  11,045
  13,209
  15,604
  18,228
  21,077
  24,149
  27,436
  30,935
  34,640
  38,548
  42,654
  46,956
  51,453
  56,146
  61,035
  66,124
  71,416
  76,917
  82,635
  88,576
  94,750
  101,168
  107,841
  114,782
Total debt, $m
  44,855
  65,900
  93,430
  126,810
  166,504
  212,885
  266,227
  326,708
  394,413
  469,351
  551,464
  640,644
  736,754
  839,634
  949,125
  1,065,075
  1,187,348
  1,315,838
  1,450,471
  1,591,209
  1,738,056
  1,891,057
  2,050,299
  2,215,911
  2,388,066
  2,566,976
  2,752,893
  2,946,107
  3,146,946
  3,355,775
  3,572,991
Total liabilities, $m
  63,794
  84,839
  112,369
  145,749
  185,443
  231,824
  285,166
  345,647
  413,352
  488,290
  570,403
  659,583
  755,693
  858,573
  968,064
  1,084,014
  1,206,287
  1,334,777
  1,469,410
  1,610,148
  1,756,995
  1,909,996
  2,069,238
  2,234,850
  2,407,005
  2,585,915
  2,771,832
  2,965,046
  3,165,885
  3,374,714
  3,591,930
Total equity, $m
  24,257
  32,830
  43,483
  56,399
  71,759
  89,707
  110,349
  133,752
  159,952
  188,950
  220,724
  255,234
  292,425
  332,236
  374,605
  419,473
  466,788
  516,509
  568,607
  623,067
  679,891
  739,097
  800,718
  864,803
  931,421
  1,000,652
  1,072,595
  1,147,362
  1,225,079
  1,305,888
  1,389,942
Total liabilities and equity, $m
  88,051
  117,669
  155,852
  202,148
  257,202
  321,531
  395,515
  479,399
  573,304
  677,240
  791,127
  914,817
  1,048,118
  1,190,809
  1,342,669
  1,503,487
  1,673,075
  1,851,286
  2,038,017
  2,233,215
  2,436,886
  2,649,093
  2,869,956
  3,099,653
  3,338,426
  3,586,567
  3,844,427
  4,112,408
  4,390,964
  4,680,602
  4,981,872
Debt-to-equity ratio
  1.849
  2.010
  2.150
  2.250
  2.320
  2.370
  2.410
  2.440
  2.470
  2.480
  2.500
  2.510
  2.520
  2.530
  2.530
  2.540
  2.540
  2.550
  2.550
  2.550
  2.560
  2.560
  2.560
  2.560
  2.560
  2.570
  2.570
  2.570
  2.570
  2.570
  2.570
Adjusted equity ratio
  0.276
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279
  0.279

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  233
  -1,712
  -2,151
  -2,717
  -3,418
  -4,267
  -5,275
  -6,450
  -7,798
  -9,323
  -11,026
  -11,512
  -13,569
  -15,798
  -18,197
  -20,760
  -23,484
  -26,365
  -29,400
  -32,585
  -35,921
  -39,405
  -43,038
  -46,822
  -50,759
  -54,852
  -59,106
  -63,526
  -68,119
  -72,893
  -77,854
Depreciation, amort., depletion, $m
  1,939
  4,174
  5,075
  6,168
  7,467
  8,986
  10,732
  12,713
  14,929
  17,383
  20,071
  21,596
  24,742
  28,111
  31,696
  35,492
  39,495
  43,702
  48,110
  52,718
  57,526
  62,536
  67,749
  73,172
  78,808
  84,666
  90,753
  97,079
  103,655
  110,492
  117,604
Funds from operations, $m
  5,317
  2,462
  2,924
  3,451
  4,049
  4,719
  5,458
  6,263
  7,131
  8,060
  9,045
  10,084
  11,174
  12,312
  13,499
  14,732
  16,011
  17,337
  18,711
  20,133
  21,605
  23,131
  24,711
  26,349
  28,049
  29,814
  31,647
  33,553
  35,535
  37,600
  39,750
Change in working capital, $m
  248
  710
  880
  1,067
  1,268
  1,482
  1,705
  1,933
  2,164
  2,395
  2,624
  2,850
  3,071
  3,288
  3,499
  3,705
  3,907
  4,106
  4,302
  4,497
  4,693
  4,889
  5,089
  5,292
  5,501
  5,717
  5,941
  6,174
  6,418
  6,673
  6,941
Cash from operations, $m
  5,069
  15,499
  2,044
  2,384
  2,781
  3,237
  3,753
  4,330
  4,968
  5,665
  6,421
  7,234
  8,102
  9,025
  10,000
  11,027
  12,104
  13,231
  14,408
  15,635
  16,913
  18,241
  19,622
  21,057
  22,548
  24,097
  25,706
  27,378
  29,117
  30,926
  32,809
Maintenance CAPEX, $m
  0
  -2,050
  -2,778
  -3,679
  -4,772
  -6,072
  -7,590
  -9,337
  -11,317
  -13,534
  -15,987
  -18,676
  -21,596
  -24,742
  -28,111
  -31,696
  -35,492
  -39,495
  -43,702
  -48,110
  -52,718
  -57,526
  -62,536
  -67,749
  -73,172
  -78,808
  -84,666
  -90,753
  -97,079
  -103,655
  -110,492
New CAPEX, $m
  -5,302
  -21,834
  -27,041
  -32,786
  -38,989
  -45,557
  -52,395
  -59,406
  -66,503
  -73,606
  -80,654
  -87,596
  -94,402
  -101,053
  -107,546
  -113,889
  -120,101
  -126,208
  -132,241
  -138,238
  -144,238
  -150,283
  -156,413
  -162,671
  -169,097
  -175,732
  -182,614
  -189,782
  -197,272
  -205,119
  -213,358
Cash from investing activities, $m
  -18,783
  -23,884
  -29,819
  -36,465
  -43,761
  -51,629
  -59,985
  -68,743
  -77,820
  -87,140
  -96,641
  -106,272
  -115,998
  -125,795
  -135,657
  -145,585
  -155,593
  -165,703
  -175,943
  -186,348
  -196,956
  -207,809
  -218,949
  -230,420
  -242,269
  -254,540
  -267,280
  -280,535
  -294,351
  -308,774
  -323,850
Free cash flow, $m
  -13,714
  -8,385
  -27,775
  -34,082
  -40,980
  -48,392
  -56,232
  -64,413
  -72,852
  -81,475
  -90,220
  -99,038
  -107,895
  -116,771
  -125,657
  -134,558
  -143,489
  -152,472
  -161,535
  -170,713
  -180,044
  -189,568
  -199,326
  -209,363
  -219,720
  -230,443
  -241,574
  -253,156
  -265,233
  -277,847
  -291,041
Issuance/(repayment) of debt, $m
  6,400
  22,061
  27,530
  33,379
  39,694
  46,381
  53,342
  60,481
  67,706
  74,938
  82,112
  89,181
  96,109
  102,881
  109,491
  115,949
  122,273
  128,490
  134,633
  140,738
  146,847
  153,001
  159,242
  165,613
  172,155
  178,910
  185,917
  193,214
  200,839
  208,828
  217,216
Issuance/(repurchase) of shares, $m
  9,207
  0
  10,898
  13,619
  16,646
  19,959
  23,531
  27,336
  31,346
  35,535
  39,882
  44,367
  48,977
  53,701
  58,535
  63,477
  68,531
  73,702
  79,000
  84,435
  90,021
  95,772
  101,705
  107,836
  114,183
  120,765
  127,600
  134,709
  142,111
  149,828
  157,879
Cash from financing (excl. dividends), $m  
  15,543
  22,061
  38,428
  46,998
  56,340
  66,340
  76,873
  87,817
  99,052
  110,473
  121,994
  133,548
  145,086
  156,582
  168,026
  179,426
  190,804
  202,192
  213,633
  225,173
  236,868
  248,773
  260,947
  273,449
  286,338
  299,675
  313,517
  327,923
  342,950
  358,656
  375,095
Total cash flow (excl. dividends), $m
  1,702
  13,676
  -244
  -702
  -1,286
  -2,011
  -2,889
  -3,932
  -5,146
  -6,537
  -8,108
  -9,858
  -11,786
  -13,890
  -16,166
  -18,609
  -21,216
  -23,982
  -26,902
  -29,975
  -33,197
  -36,567
  -40,084
  -43,750
  -47,566
  -51,533
  -55,657
  -59,942
  -64,394
  -69,019
  -73,825
Retained Cash Flow (-), $m
  -7,819
  -8,573
  -10,653
  -12,917
  -15,360
  -17,948
  -20,642
  -23,404
  -26,199
  -28,998
  -31,774
  -34,510
  -37,191
  -39,811
  -42,369
  -44,868
  -47,315
  -49,721
  -52,098
  -54,460
  -56,824
  -59,206
  -61,621
  -64,086
  -66,618
  -69,231
  -71,943
  -74,767
  -77,717
  -80,809
  -84,055
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  5,103
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Discount rate, %
 
  10.10
  10.61
  11.14
  11.69
  12.28
  12.89
  13.53
  14.21
  14.92
  15.67
  16.45
  17.27
  18.14
  19.05
  20.00
  21.00
  22.05
  23.15
  24.31
  25.52
  26.80
  28.14
  29.55
  31.02
  32.57
  34.20
  35.91
  37.71
  39.59
  41.57
PV of cash for distribution, $m
 
  4,635
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  100.0
  87.2
  76.6
  67.8
  60.3
  54.1
  48.7
  44.2
  40.2
  36.8
  33.8
  31.1
  28.8
  26.7
  24.9
  23.2
  21.7
  20.3
  19.0
  17.9
  16.9
  15.9
  15.0
  14.2
  13.4
  12.7
  12.0
  11.4
  10.8
  10.3

TransCanada Corporation operates as an energy infrastructure company in North America. The company operates through three segments: Natural Gas Pipelines, Liquids Pipelines, and Energy. The Natural Gas Pipelines segment transports natural gas to local distribution companies, power generation facilities, and other businesses through a network of regulated natural gas pipelines and storage facilities. It owns and operates a network of 67,300 kilometers (km) of regulated natural gas pipelines; and regulated natural gas storage facilities with a total capacity of 250 billion cubic feet (Bcf). The Liquids Pipelines segment owns and operates Keystone pipeline system of 4,247 km for the transportation of crude oil from Hardisty, Alberta to Wood River and Patoka in Illinois; Cushing, Oklahoma; and Port Arthur, Texas. This segment also operates Cushing Marketlink and Terminal facilities to transport crude oil from the market hub at Cushing, Oklahoma to the Port Arthur, Texas refining market. The Energy segment owns, controls, or develops approximately 13,100 MW of generation capacity powered by natural gas, nuclear, coal, hydro, wind, and solar assets; wholesales and retails electricity; and owns or controls regulated and unregulated natural gas storage facilities. It operates 19 electrical power generation plants and 2 non-regulated natural gas storage facilities in Alberta, Ontario, Qu├ębec, and New Brunswick in Canada; and New York, New England, and Arizona in the United States. TransCanada Corporation was founded in 1951 and is headquartered in Calgary, Canada.

FINANCIAL RATIOS  of  TransCanada Corporation (TRP)

Valuation Ratios
P/E Ratio 234.7
Price to Sales 4.4
Price to Book 2.3
Price to Tangible Book
Price to Cash Flow 10.8
Price to Free Cash Flow -234.7
Growth Rates
Sales Growth Rate 10.7%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 19.7%
Cap. Spend. - 3 Yr. Gr. Rate 3.5%
Financial Strength
Quick Ratio 0
Current Ratio 0.6
LT Debt to Equity 174.1%
Total Debt to Equity 184.9%
Interest Coverage 1
Management Effectiveness
Return On Assets 1.6%
Ret/ On Assets - 3 Yr. Avg. 2.2%
Return On Total Capital 0.4%
Ret/ On T. Cap. - 3 Yr. Avg. 0.7%
Return On Equity 1.1%
Return On Equity - 3 Yr. Avg. 1.5%
Asset Turnover 0.2
Profitability Ratios
Gross Margin 52.1%
Gross Margin - 3 Yr. Avg. 52.1%
EBITDA Margin 36%
EBITDA Margin - 3 Yr. Avg. 35.9%
Operating Margin 20.1%
Oper. Margin - 3 Yr. Avg. 16.9%
Pre-Tax Margin 6.7%
Pre-Tax Margin - 3 Yr. Avg. 8.2%
Net Profit Margin 1.9%
Net Profit Margin - 3 Yr. Avg. 3.3%
Effective Tax Rate 42.1%
Eff/ Tax Rate - 3 Yr. Avg. 22.8%
Payout Ratio 659.2%

TRP stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the TRP stock intrinsic value calculation we used $12505 million for the last fiscal year's total revenue generated by TransCanada Corporation. The default revenue input number comes from 2016 income statement of TransCanada Corporation. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our TRP stock valuation model: a) initial revenue growth rate of 35.5% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 10.1%, whose default value for TRP is calculated based on our internal credit rating of TransCanada Corporation, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of TransCanada Corporation.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of TRP stock the variable cost ratio is equal to 101.9%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for TRP stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 4.3% for TransCanada Corporation.

Corporate tax rate of 27% is the nominal tax rate for TransCanada Corporation. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the TRP stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for TRP are equal to 491.8%.

Life of production assets of 36.6 years is the average useful life of capital assets used in TransCanada Corporation operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for TRP is equal to 16%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $24257 million for TransCanada Corporation - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 867.158 million for TransCanada Corporation is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of TransCanada Corporation at the current share price and the inputted number of shares is $54.9 billion.


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Stock chart of TRP Financial statements of TRP
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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