Intrinsic value of TransCanada Corporation - TRP

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$63.35

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$63.35

 
Intrinsic value

$7.32

 
Up/down potential

-88%

 
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 55.0

 

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
  26.90
  24.71
  22.74
  20.97
  19.37
  17.93
  16.64
  15.47
  14.43
  13.48
  12.64
  11.87
  11.19
  10.57
  10.01
  9.51
  9.06
  8.65
  8.29
  7.96
  7.66
  7.40
  7.16
  6.94
  6.75
  6.57
  6.41
  6.27
  6.15
  6.03
Revenue, $m
  12,505
  15,869
  19,790
  24,290
  29,383
  35,074
  41,363
  48,245
  55,711
  63,748
  72,344
  81,486
  91,160
  101,357
  112,067
  123,285
  135,008
  147,237
  159,976
  173,234
  187,020
  201,351
  216,243
  231,719
  247,803
  264,522
  281,906
  299,991
  318,811
  338,405
  358,816
Variable operating expenses, $m
 
  15,795
  19,353
  23,436
  28,057
  33,221
  38,928
  45,172
  51,947
  59,240
  67,040
  73,939
  82,717
  91,969
  101,687
  111,866
  122,503
  133,600
  145,159
  157,189
  169,699
  182,702
  196,215
  210,257
  224,851
  240,022
  255,796
  272,206
  289,283
  307,062
  325,583
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
  15,795
  19,353
  23,436
  28,057
  33,221
  38,928
  45,172
  51,947
  59,240
  67,040
  73,939
  82,717
  91,969
  101,687
  111,866
  122,503
  133,600
  145,159
  157,189
  169,699
  182,702
  196,215
  210,257
  224,851
  240,022
  255,796
  272,206
  289,283
  307,062
  325,583
Operating income, $m
  2,517
  74
  437
  854
  1,326
  1,853
  2,435
  3,073
  3,764
  4,509
  5,305
  7,547
  8,443
  9,388
  10,380
  11,419
  12,504
  13,637
  14,817
  16,045
  17,322
  18,649
  20,028
  21,462
  22,951
  24,500
  26,110
  27,785
  29,528
  31,343
  33,233
EBITDA, $m
  4,456
  4,071
  5,077
  6,232
  7,538
  8,998
  10,612
  12,377
  14,293
  16,355
  18,560
  20,905
  23,387
  26,003
  28,751
  31,629
  34,637
  37,774
  41,042
  44,444
  47,981
  51,657
  55,478
  59,448
  63,574
  67,864
  72,324
  76,963
  81,792
  86,819
  92,055
Interest expense (income), $m
  1,721
  1,885
  2,602
  3,446
  4,415
  5,512
  6,737
  8,091
  9,573
  11,180
  12,911
  14,761
  16,729
  18,812
  21,008
  23,313
  25,729
  28,253
  30,886
  33,628
  36,483
  39,451
  42,536
  45,742
  49,074
  52,537
  56,137
  59,880
  63,773
  67,825
  72,044
Earnings before tax, $m
  837
  -1,811
  -2,165
  -2,592
  -3,090
  -3,659
  -4,302
  -5,018
  -5,809
  -6,672
  -7,606
  -7,214
  -8,286
  -9,425
  -10,628
  -11,895
  -13,224
  -14,616
  -16,069
  -17,584
  -19,161
  -20,802
  -22,508
  -24,281
  -26,123
  -28,037
  -30,027
  -32,095
  -34,245
  -36,482
  -38,810
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
  -1,811
  -2,165
  -2,592
  -3,090
  -3,659
  -4,302
  -5,018
  -5,809
  -6,672
  -7,606
  -7,214
  -8,286
  -9,425
  -10,628
  -11,895
  -13,224
  -14,616
  -16,069
  -17,584
  -19,161
  -20,802
  -22,508
  -24,281
  -26,123
  -28,037
  -30,027
  -32,095
  -34,245
  -36,482
  -38,810

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
  110,200
  137,431
  168,681
  204,045
  243,566
  287,242
  335,035
  386,880
  442,696
  502,392
  565,874
  633,057
  703,866
  778,241
  856,144
  937,554
  1,022,479
  1,110,947
  1,203,012
  1,298,752
  1,398,270
  1,501,689
  1,609,160
  1,720,852
  1,836,955
  1,957,684
  2,083,269
  2,213,962
  2,350,035
  2,491,778
Adjusted assets (=assets-cash), $m
  87,035
  110,200
  137,431
  168,681
  204,045
  243,566
  287,242
  335,035
  386,880
  442,696
  502,392
  565,874
  633,057
  703,866
  778,241
  856,144
  937,554
  1,022,479
  1,110,947
  1,203,012
  1,298,752
  1,398,270
  1,501,689
  1,609,160
  1,720,852
  1,836,955
  1,957,684
  2,083,269
  2,213,962
  2,350,035
  2,491,778
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
  78,043
  97,327
  119,459
  144,503
  172,492
  203,422
  237,269
  273,985
  313,514
  355,790
  400,748
  448,326
  498,472
  551,144
  606,314
  663,969
  724,112
  786,764
  851,964
  919,766
  990,243
  1,063,484
  1,139,594
  1,218,693
  1,300,917
  1,386,416
  1,475,354
  1,567,910
  1,664,276
  1,764,657
Working capital, $m
  404
  2,539
  3,166
  3,886
  4,701
  5,612
  6,618
  7,719
  8,914
  10,200
  11,575
  13,038
  14,586
  16,217
  17,931
  19,726
  21,601
  23,558
  25,596
  27,717
  29,923
  32,216
  34,599
  37,075
  39,648
  42,323
  45,105
  47,999
  51,010
  54,145
  57,411
Total debt, $m
  44,855
  60,515
  80,149
  102,680
  128,178
  156,672
  188,162
  222,621
  260,002
  300,245
  343,285
  389,056
  437,495
  488,549
  542,173
  598,341
  657,038
  718,268
  782,054
  848,433
  917,461
  989,213
  1,063,779
  1,141,265
  1,221,795
  1,305,506
  1,392,551
  1,483,098
  1,577,328
  1,675,436
  1,777,633
Total liabilities, $m
  63,794
  79,454
  99,088
  121,619
  147,117
  175,611
  207,101
  241,560
  278,941
  319,184
  362,224
  407,995
  456,434
  507,488
  561,112
  617,280
  675,977
  737,207
  800,993
  867,372
  936,400
  1,008,152
  1,082,718
  1,160,204
  1,240,734
  1,324,445
  1,411,490
  1,502,037
  1,596,267
  1,694,375
  1,796,572
Total equity, $m
  24,257
  30,746
  38,343
  47,062
  56,929
  67,955
  80,140
  93,475
  107,940
  123,512
  140,167
  157,879
  176,623
  196,379
  217,129
  238,864
  261,578
  285,272
  309,954
  335,640
  362,352
  390,117
  418,971
  448,956
  480,118
  512,511
  546,194
  581,232
  617,695
  655,660
  695,206
Total liabilities and equity, $m
  88,051
  110,200
  137,431
  168,681
  204,046
  243,566
  287,241
  335,035
  386,881
  442,696
  502,391
  565,874
  633,057
  703,867
  778,241
  856,144
  937,555
  1,022,479
  1,110,947
  1,203,012
  1,298,752
  1,398,269
  1,501,689
  1,609,160
  1,720,852
  1,836,956
  1,957,684
  2,083,269
  2,213,962
  2,350,035
  2,491,778
Debt-to-equity ratio
  1.849
  1.970
  2.090
  2.180
  2.250
  2.310
  2.350
  2.380
  2.410
  2.430
  2.450
  2.460
  2.480
  2.490
  2.500
  2.500
  2.510
  2.520
  2.520
  2.530
  2.530
  2.540
  2.540
  2.540
  2.540
  2.550
  2.550
  2.550
  2.550
  2.560
  2.560
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
  -1,811
  -2,165
  -2,592
  -3,090
  -3,659
  -4,302
  -5,018
  -5,809
  -6,672
  -7,606
  -7,214
  -8,286
  -9,425
  -10,628
  -11,895
  -13,224
  -14,616
  -16,069
  -17,584
  -19,161
  -20,802
  -22,508
  -24,281
  -26,123
  -28,037
  -30,027
  -32,095
  -34,245
  -36,482
  -38,810
Depreciation, amort., depletion, $m
  1,939
  3,997
  4,640
  5,378
  6,213
  7,146
  8,177
  9,305
  10,529
  11,846
  13,255
  13,358
  14,944
  16,616
  18,371
  20,210
  22,132
  24,137
  26,225
  28,399
  30,659
  33,008
  35,449
  37,986
  40,623
  43,364
  46,214
  49,178
  52,264
  55,476
  58,822
Funds from operations, $m
  5,317
  2,186
  2,475
  2,785
  3,123
  3,487
  3,875
  4,286
  4,720
  5,175
  5,650
  6,144
  6,658
  7,191
  7,743
  8,316
  8,908
  9,521
  10,157
  10,815
  11,498
  12,206
  12,942
  13,706
  14,500
  15,327
  16,187
  17,084
  18,018
  18,994
  20,011
Change in working capital, $m
  248
  538
  627
  720
  815
  911
  1,006
  1,101
  1,195
  1,286
  1,375
  1,463
  1,548
  1,631
  1,714
  1,795
  1,876
  1,957
  2,038
  2,121
  2,206
  2,293
  2,383
  2,476
  2,573
  2,675
  2,782
  2,893
  3,011
  3,135
  3,266
Cash from operations, $m
  5,069
  15,395
  1,848
  2,065
  2,308
  2,576
  2,869
  3,185
  3,526
  3,889
  4,274
  4,682
  5,110
  5,560
  6,030
  6,521
  7,032
  7,565
  8,119
  8,694
  9,292
  9,913
  10,559
  11,230
  11,927
  12,652
  13,406
  14,190
  15,007
  15,859
  16,746
Maintenance CAPEX, $m
  0
  -2,050
  -2,601
  -3,244
  -3,982
  -4,817
  -5,750
  -6,781
  -7,909
  -9,133
  -10,450
  -11,860
  -13,358
  -14,944
  -16,616
  -18,371
  -20,210
  -22,132
  -24,137
  -26,225
  -28,399
  -30,659
  -33,008
  -35,449
  -37,986
  -40,623
  -43,364
  -46,214
  -49,178
  -52,264
  -55,476
New CAPEX, $m
  -5,302
  -16,545
  -19,284
  -22,131
  -25,045
  -27,988
  -30,931
  -33,847
  -36,717
  -39,529
  -42,276
  -44,958
  -47,579
  -50,146
  -52,672
  -55,170
  -57,654
  -60,143
  -62,652
  -65,200
  -67,802
  -70,477
  -73,241
  -76,110
  -79,099
  -82,224
  -85,499
  -88,938
  -92,556
  -96,366
  -100,381
Cash from investing activities, $m
  -18,783
  -18,595
  -21,885
  -25,375
  -29,027
  -32,805
  -36,681
  -40,628
  -44,626
  -48,662
  -52,726
  -56,818
  -60,937
  -65,090
  -69,288
  -73,541
  -77,864
  -82,275
  -86,789
  -91,425
  -96,201
  -101,136
  -106,249
  -111,559
  -117,085
  -122,847
  -128,863
  -135,152
  -141,734
  -148,630
  -155,857
Free cash flow, $m
  -13,714
  -3,200
  -20,038
  -23,310
  -26,718
  -30,229
  -33,812
  -37,442
  -41,100
  -44,773
  -48,452
  -52,136
  -55,827
  -59,531
  -63,258
  -67,020
  -70,833
  -74,711
  -78,671
  -82,731
  -86,909
  -91,223
  -95,690
  -100,330
  -105,159
  -110,195
  -115,457
  -120,962
  -126,727
  -132,771
  -139,111
Issuance/(repayment) of debt, $m
  6,400
  16,676
  19,633
  22,532
  25,498
  28,494
  31,490
  34,459
  37,381
  40,243
  43,040
  45,771
  48,439
  51,053
  53,625
  56,167
  58,697
  61,231
  63,785
  66,379
  69,029
  71,752
  74,566
  77,486
  80,530
  83,711
  87,045
  90,547
  94,230
  98,109
  102,197
Issuance/(repurchase) of shares, $m
  9,207
  0
  8,002
  9,498
  11,087
  12,761
  14,507
  16,318
  18,184
  20,102
  22,067
  24,077
  26,132
  28,233
  30,384
  32,588
  34,849
  37,174
  39,568
  42,038
  44,592
  47,236
  49,979
  52,828
  55,791
  58,878
  62,095
  65,453
  68,961
  72,627
  76,461
Cash from financing (excl. dividends), $m  
  15,543
  16,676
  27,635
  32,030
  36,585
  41,255
  45,997
  50,777
  55,565
  60,345
  65,107
  69,848
  74,571
  79,286
  84,009
  88,755
  93,546
  98,405
  103,353
  108,417
  113,621
  118,988
  124,545
  130,314
  136,321
  142,589
  149,140
  156,000
  163,191
  170,736
  178,658
Total cash flow (excl. dividends), $m
  1,702
  13,476
  -405
  -779
  -1,221
  -1,735
  -2,322
  -2,983
  -3,719
  -4,529
  -5,412
  -6,365
  -7,388
  -8,478
  -9,633
  -10,853
  -12,135
  -13,480
  -14,885
  -16,352
  -17,880
  -19,471
  -21,125
  -22,843
  -24,629
  -26,485
  -28,412
  -30,415
  -32,497
  -34,662
  -36,915
Retained Cash Flow (-), $m
  -7,819
  -6,489
  -7,597
  -8,719
  -9,867
  -11,026
  -12,185
  -13,334
  -14,465
  -15,573
  -16,655
  -17,712
  -18,744
  -19,756
  -20,751
  -21,735
  -22,714
  -23,694
  -24,683
  -25,686
  -26,711
  -27,765
  -28,854
  -29,984
  -31,162
  -32,393
  -33,683
  -35,038
  -36,463
  -37,964
  -39,546
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
 
  6,988
  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
 
  6,347
  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
  89.7
  80.9
  73.2
  66.6
  60.9
  55.9
  51.5
  47.6
  44.1
  41.0
  38.2
  35.7
  33.4
  31.3
  29.4
  27.7
  26.1
  24.6
  23.2
  22.0
  20.8
  19.7
  18.7
  17.7
  16.8
  16.0
  15.2
  14.4
  13.7

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 234.9
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 -234.9
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 26.9% 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 867.427 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 $55.0 billion.


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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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