Intrinsic value of BT Group ADR - BT

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$20.05

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$20.05

 
Intrinsic value

$185.17

 
Up/down potential

+824%

 
Rating

str. buy

 
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 BT 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 40.1

 

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, %
  5.93
  33.60
  30.74
  28.17
  25.85
  23.76
  21.89
  20.20
  18.68
  17.31
  16.08
  14.97
  13.97
  13.08
  12.27
  11.54
  10.89
  10.30
  9.77
  9.29
  8.86
  8.48
  8.13
  7.82
  7.53
  7.28
  7.05
  6.85
  6.66
  6.50
  6.35
Revenue, $m
  22,988
  30,712
  40,153
  51,462
  64,765
  80,156
  97,701
  117,435
  139,371
  163,498
  189,789
  218,205
  248,699
  281,223
  315,728
  352,172
  390,518
  430,740
  472,822
  516,760
  562,562
  610,251
  659,861
  711,439
  765,044
  820,749
  878,638
  938,807
  1,001,360
  1,066,416
  1,134,103
Variable operating expenses, $m
 
  21,253
  27,786
  35,612
  44,817
  55,468
  67,609
  81,265
  96,445
  113,141
  131,334
  150,998
  172,100
  194,606
  218,484
  243,703
  270,238
  298,072
  327,193
  357,598
  389,293
  422,294
  456,624
  492,316
  529,411
  567,959
  608,018
  649,654
  692,941
  737,960
  784,799
Fixed operating expenses, $m
 
  2,952
  3,026
  3,101
  3,179
  3,258
  3,340
  3,423
  3,509
  3,597
  3,687
  3,779
  3,873
  3,970
  4,069
  4,171
  4,275
  4,382
  4,492
  4,604
  4,719
  4,837
  4,958
  5,082
  5,209
  5,339
  5,473
  5,610
  5,750
  5,894
  6,041
Total operating expenses, $m
  18,725
  24,205
  30,812
  38,713
  47,996
  58,726
  70,949
  84,688
  99,954
  116,738
  135,021
  154,777
  175,973
  198,576
  222,553
  247,874
  274,513
  302,454
  331,685
  362,202
  394,012
  427,131
  461,582
  497,398
  534,620
  573,298
  613,491
  655,264
  698,691
  743,854
  790,840
Operating income, $m
  4,262
  6,507
  9,341
  12,749
  16,769
  21,430
  26,752
  32,747
  39,417
  46,761
  54,768
  63,428
  72,726
  82,647
  93,175
  104,298
  116,004
  128,286
  141,137
  154,558
  168,550
  183,120
  198,279
  214,041
  230,424
  247,451
  265,148
  283,543
  302,669
  322,562
  343,263
EBITDA, $m
  7,459
  10,596
  14,686
  19,599
  25,390
  32,100
  39,757
  48,379
  57,970
  68,525
  80,032
  92,475
  105,832
  120,081
  135,203
  151,177
  167,988
  185,623
  204,077
  223,346
  243,435
  264,354
  286,116
  308,744
  332,263
  356,705
  382,108
  408,512
  435,965
  464,518
  494,228
Interest expense (income), $m
  678
  603
  1,139
  1,793
  2,576
  3,497
  4,563
  5,779
  7,146
  8,665
  10,336
  12,157
  14,126
  16,238
  18,491
  20,881
  23,405
  26,061
  28,847
  31,762
  34,805
  37,978
  41,281
  44,718
  48,290
  52,003
  55,862
  59,872
  64,039
  68,372
  72,878
Earnings before tax, $m
  3,682
  5,904
  8,203
  10,956
  14,193
  17,932
  22,188
  26,968
  32,272
  38,096
  44,432
  51,271
  58,600
  66,409
  74,684
  83,417
  92,599
  102,225
  112,290
  122,796
  133,745
  145,142
  156,998
  169,323
  182,134
  195,448
  209,286
  223,671
  238,630
  254,190
  270,384
Tax expense, $m
  536
  1,594
  2,215
  2,958
  3,832
  4,842
  5,991
  7,281
  8,713
  10,286
  11,997
  13,843
  15,822
  17,930
  20,165
  22,523
  25,002
  27,601
  30,318
  33,155
  36,111
  39,188
  42,389
  45,717
  49,176
  52,771
  56,507
  60,391
  64,430
  68,631
  73,004
Net income, $m
  3,146
  4,310
  5,988
  7,998
  10,361
  13,091
  16,198
  19,687
  23,558
  27,810
  32,436
  37,428
  42,778
  48,478
  54,520
  60,895
  67,597
  74,624
  81,972
  89,641
  97,634
  105,954
  114,608
  123,606
  132,958
  142,677
  152,779
  163,280
  174,200
  185,559
  197,381

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  4,758
  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
  52,209
  63,454
  82,960
  106,327
  133,812
  165,612
  201,861
  242,635
  287,957
  337,807
  392,127
  450,837
  513,841
  581,039
  652,331
  727,628
  806,855
  889,959
  976,905
  1,067,685
  1,162,319
  1,260,850
  1,363,349
  1,469,915
  1,580,670
  1,695,763
  1,815,369
  1,939,683
  2,068,926
  2,203,339
  2,343,187
Adjusted assets (=assets-cash), $m
  47,451
  63,454
  82,960
  106,327
  133,812
  165,612
  201,861
  242,635
  287,957
  337,807
  392,127
  450,837
  513,841
  581,039
  652,331
  727,628
  806,855
  889,959
  976,905
  1,067,685
  1,162,319
  1,260,850
  1,363,349
  1,469,915
  1,580,670
  1,695,763
  1,815,369
  1,939,683
  2,068,926
  2,203,339
  2,343,187
Revenue / Adjusted assets
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
  0.484
Average production assets, $m
  18,671
  24,938
  32,604
  41,787
  52,589
  65,087
  79,333
  95,357
  113,170
  132,761
  154,109
  177,183
  201,944
  228,353
  256,371
  285,964
  317,101
  349,761
  383,931
  419,609
  456,801
  495,524
  535,807
  577,688
  621,216
  666,449
  713,454
  762,311
  813,104
  865,930
  920,891
Working capital, $m
  -3,771
  -5,313
  -6,946
  -8,903
  -11,204
  -13,867
  -16,902
  -20,316
  -24,111
  -28,285
  -32,834
  -37,749
  -43,025
  -48,652
  -54,621
  -60,926
  -67,560
  -74,518
  -81,798
  -89,399
  -97,323
  -105,573
  -114,156
  -123,079
  -132,353
  -141,990
  -152,004
  -162,414
  -173,235
  -184,490
  -196,200
Total debt, $m
  17,945
  25,303
  39,834
  57,243
  77,719
  101,410
  128,415
  158,792
  192,557
  229,695
  270,164
  313,902
  360,841
  410,903
  464,015
  520,112
  579,136
  641,048
  705,823
  773,455
  843,957
  917,362
  993,724
  1,073,115
  1,155,628
  1,241,373
  1,330,479
  1,423,093
  1,519,379
  1,619,517
  1,723,703
Total liabilities, $m
  39,916
  47,274
  61,805
  79,214
  99,690
  123,381
  150,386
  180,763
  214,528
  251,666
  292,135
  335,873
  382,812
  432,874
  485,986
  542,083
  601,107
  663,019
  727,794
  795,426
  865,928
  939,333
  1,015,695
  1,095,086
  1,177,599
  1,263,344
  1,352,450
  1,445,064
  1,541,350
  1,641,488
  1,745,674
Total equity, $m
  12,293
  16,181
  21,155
  27,113
  34,122
  42,231
  51,474
  61,872
  73,429
  86,141
  99,992
  114,963
  131,030
  148,165
  166,344
  185,545
  205,748
  226,939
  249,111
  272,260
  296,391
  321,517
  347,654
  374,828
  403,071
  432,420
  462,919
  494,619
  527,576
  561,851
  597,513
Total liabilities and equity, $m
  52,209
  63,455
  82,960
  106,327
  133,812
  165,612
  201,860
  242,635
  287,957
  337,807
  392,127
  450,836
  513,842
  581,039
  652,330
  727,628
  806,855
  889,958
  976,905
  1,067,686
  1,162,319
  1,260,850
  1,363,349
  1,469,914
  1,580,670
  1,695,764
  1,815,369
  1,939,683
  2,068,926
  2,203,339
  2,343,187
Debt-to-equity ratio
  1.460
  1.560
  1.880
  2.110
  2.280
  2.400
  2.490
  2.570
  2.620
  2.670
  2.700
  2.730
  2.750
  2.770
  2.790
  2.800
  2.810
  2.820
  2.830
  2.840
  2.850
  2.850
  2.860
  2.860
  2.870
  2.870
  2.870
  2.880
  2.880
  2.880
  2.880
Adjusted equity ratio
  0.159
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  3,146
  4,310
  5,988
  7,998
  10,361
  13,091
  16,198
  19,687
  23,558
  27,810
  32,436
  37,428
  42,778
  48,478
  54,520
  60,895
  67,597
  74,624
  81,972
  89,641
  97,634
  105,954
  114,608
  123,606
  132,958
  142,677
  152,779
  163,280
  174,200
  185,559
  197,381
Depreciation, amort., depletion, $m
  3,197
  4,088
  5,345
  6,850
  8,621
  10,670
  13,005
  15,632
  18,552
  21,764
  25,264
  29,046
  33,106
  37,435
  42,028
  46,879
  51,984
  57,338
  62,940
  68,788
  74,885
  81,233
  87,837
  94,703
  101,839
  109,254
  116,960
  124,969
  133,296
  141,956
  150,966
Funds from operations, $m
  4,859
  8,398
  11,333
  14,849
  18,982
  23,760
  29,203
  35,319
  42,111
  49,574
  57,699
  66,474
  75,884
  85,913
  96,548
  107,774
  119,581
  131,962
  144,911
  158,429
  172,519
  187,187
  202,446
  218,309
  234,797
  251,931
  269,739
  288,249
  307,496
  327,515
  348,346
Change in working capital, $m
  -1,437
  -1,336
  -1,633
  -1,957
  -2,301
  -2,663
  -3,035
  -3,414
  -3,795
  -4,174
  -4,548
  -4,916
  -5,275
  -5,627
  -5,969
  -6,305
  -6,634
  -6,958
  -7,280
  -7,601
  -7,924
  -8,250
  -8,582
  -8,923
  -9,274
  -9,637
  -10,015
  -10,409
  -10,822
  -11,255
  -11,710
Cash from operations, $m
  6,296
  9,830
  12,966
  16,805
  21,283
  26,423
  32,238
  38,733
  45,906
  53,748
  62,248
  71,390
  81,159
  91,540
  102,517
  114,079
  126,215
  138,920
  152,192
  166,031
  180,443
  195,437
  211,028
  227,232
  244,070
  261,568
  279,753
  298,658
  318,317
  338,769
  360,056
Maintenance CAPEX, $m
  0
  -3,061
  -4,088
  -5,345
  -6,850
  -8,621
  -10,670
  -13,005
  -15,632
  -18,552
  -21,764
  -25,264
  -29,046
  -33,106
  -37,435
  -42,028
  -46,879
  -51,984
  -57,338
  -62,940
  -68,788
  -74,885
  -81,233
  -87,837
  -94,703
  -101,839
  -109,254
  -116,960
  -124,969
  -133,296
  -141,956
New CAPEX, $m
  -2,998
  -6,268
  -7,666
  -9,183
  -10,802
  -12,498
  -14,246
  -16,025
  -17,812
  -19,591
  -21,348
  -23,074
  -24,761
  -26,409
  -28,018
  -29,592
  -31,137
  -32,660
  -34,170
  -35,678
  -37,192
  -38,723
  -40,283
  -41,881
  -43,528
  -45,233
  -47,006
  -48,856
  -50,793
  -52,826
  -54,961
Cash from investing activities, $m
  -6,255
  -9,329
  -11,754
  -14,528
  -17,652
  -21,119
  -24,916
  -29,030
  -33,444
  -38,143
  -43,112
  -48,338
  -53,807
  -59,515
  -65,453
  -71,620
  -78,016
  -84,644
  -91,508
  -98,618
  -105,980
  -113,608
  -121,516
  -129,718
  -138,231
  -147,072
  -156,260
  -165,816
  -175,762
  -186,122
  -196,917
Free cash flow, $m
  41
  502
  1,212
  2,277
  3,631
  5,304
  7,322
  9,703
  12,461
  15,604
  19,135
  23,053
  27,352
  32,025
  37,064
  42,458
  48,199
  54,276
  60,683
  67,413
  74,463
  81,829
  89,512
  97,514
  105,840
  114,497
  123,494
  132,842
  142,555
  152,648
  163,139
Issuance/(repayment) of debt, $m
  2,214
  11,900
  14,532
  17,408
  20,476
  23,691
  27,006
  30,377
  33,765
  37,138
  40,468
  43,739
  46,938
  50,062
  53,112
  56,096
  59,025
  61,912
  64,775
  67,632
  70,502
  73,405
  76,362
  79,391
  82,513
  85,745
  89,106
  92,614
  96,286
  100,138
  104,187
Issuance/(repurchase) of shares, $m
  -274
  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 from financing (excl. dividends), $m  
  1,358
  11,900
  14,532
  17,408
  20,476
  23,691
  27,006
  30,377
  33,765
  37,138
  40,468
  43,739
  46,938
  50,062
  53,112
  56,096
  59,025
  61,912
  64,775
  67,632
  70,502
  73,405
  76,362
  79,391
  82,513
  85,745
  89,106
  92,614
  96,286
  100,138
  104,187
Total cash flow (excl. dividends), $m
  1,370
  12,401
  15,744
  19,685
  24,107
  28,995
  34,328
  40,080
  46,226
  52,742
  59,604
  66,792
  74,290
  82,087
  90,176
  98,554
  107,223
  116,188
  125,458
  135,045
  144,965
  155,234
  165,874
  176,905
  188,352
  200,241
  212,600
  225,456
  238,841
  252,786
  267,326
Retained Cash Flow (-), $m
  -11,311
  -4,104
  -4,974
  -5,958
  -7,009
  -8,109
  -9,244
  -10,397
  -11,557
  -12,712
  -13,852
  -14,971
  -16,066
  -17,135
  -18,179
  -19,201
  -20,203
  -21,191
  -22,171
  -23,149
  -24,132
  -25,125
  -26,137
  -27,174
  -28,243
  -29,349
  -30,499
  -31,700
  -32,957
  -34,275
  -35,661
Prev. year cash balance distribution, $m
 
  216
  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
 
  8,513
  10,770
  13,727
  17,099
  20,886
  25,084
  29,682
  34,669
  40,031
  45,752
  51,821
  58,224
  64,952
  71,997
  79,354
  87,020
  94,997
  103,287
  111,896
  120,833
  130,109
  139,736
  149,731
  160,110
  170,893
  182,100
  193,756
  205,884
  218,511
  231,665
Discount rate, %
 
  5.10
  5.36
  5.62
  5.90
  6.20
  6.51
  6.83
  7.18
  7.54
  7.91
  8.31
  8.72
  9.16
  9.62
  10.10
  10.60
  11.13
  11.69
  12.27
  12.89
  13.53
  14.21
  14.92
  15.66
  16.45
  17.27
  18.13
  19.04
  19.99
  20.99
PV of cash for distribution, $m
 
  8,100
  9,703
  11,649
  13,593
  15,462
  17,182
  18,686
  19,914
  20,818
  21,366
  21,541
  21,343
  20,789
  19,908
  18,745
  17,353
  15,791
  14,120
  12,403
  10,697
  9,054
  7,515
  6,114
  4,871
  3,797
  2,893
  2,153
  1,564
  1,107
  762
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

BT Group plc provides communications services worldwide. The company’s BT Global Services segment offers managed networked IT services to corporate and public sector customers, such as Internet protocol, Ethernet, and Internet virtual private network services; firewalls, Web security, intrusion prevention, and threat monitoring services; collaboration services; contact center services; telehousing and colocation services; and advising, integration, and managed services. Its BT Business segment provides fixed-voice, broadband, mobility, networking, and IT services; fire and security alarm signaling services, surveillance networks, and control room services; directory enquiries, phone book, Website services, operator services, and call handling services; and public, private, and managed payphone services. The company’s BT Consumer segment offers home phone, broadband, TV, mobile, and sports channel services, as well as Wi-Fi services. Its EE segment offers postpaid and prepaid mobile devices, as well as 2G,3G, and 4G mobile services to business customers, MVNO customers, and machine-to-machine devices; sells 4G mobile phones, tablets, and mobile broadband devices; and provides fixed-voice, broadband, and TV services. The company’s BT Wholesale segment provides broadband, Ethernet, media, voice calls, hosted communications, and managed solutions. Its Openreach segment offers fiber-to-the-cabinet, fiber-to-the-premises, wholesale line rental, local loop unbundling, Ethernet access direct, optical spectrum access, flexible co-mingling, passive infrastructure access, and mobile infill infrastructure solutions. BT Group plc retails technology equipment; and provides systems integration, fleet management, payment, audio, video, and Web collaboration services. The company was formerly known as Newgate Telecommunications Limited and changed its name to BT Group plc in September 2001. BT Group plc was incorporated in 2001 and is headquartered in London, the United Kingdom.

FINANCIAL RATIOS  of  BT Group ADR (BT)

Valuation Ratios
P/E Ratio 63.5
Price to Sales 8.7
Price to Book 16.2
Price to Tangible Book
Price to Cash Flow 31.7
Price to Free Cash Flow 60.6
Growth Rates
Sales Growth Rate 5.9%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 2%
Cap. Spend. - 3 Yr. Gr. Rate -0.1%
Financial Strength
Quick Ratio 1
Current Ratio 0
LT Debt to Equity 109%
Total Debt to Equity 146%
Interest Coverage 6
Management Effectiveness
Return On Assets 8.7%
Ret/ On Assets - 3 Yr. Avg. 9.7%
Return On Total Capital 14.6%
Ret/ On T. Cap. - 3 Yr. Avg. 19.1%
Return On Equity 47.4%
Return On Equity - 3 Yr. Avg. 519%
Asset Turnover 0.5
Profitability Ratios
Gross Margin 76.8%
Gross Margin - 3 Yr. Avg. 77%
EBITDA Margin 32.9%
EBITDA Margin - 3 Yr. Avg. 32%
Operating Margin 18.5%
Oper. Margin - 3 Yr. Avg. 17.4%
Pre-Tax Margin 16%
Pre-Tax Margin - 3 Yr. Avg. 14.5%
Net Profit Margin 13.7%
Net Profit Margin - 3 Yr. Avg. 12.2%
Effective Tax Rate 14.6%
Eff/ Tax Rate - 3 Yr. Avg. 15.5%
Payout Ratio 41.5%

BT stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the BT stock intrinsic value calculation we used $22988 million for the last fiscal year's total revenue generated by BT Group ADR. The default revenue input number comes from 2016 income statement of BT Group ADR. 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 BT stock valuation model: a) initial revenue growth rate of 33.6% 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 5.1%, whose default value for BT is calculated based on our internal credit rating of BT Group ADR, 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 BT Group ADR.
    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 BT stock the variable cost ratio is equal to 69.2%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $2880 million in the base year in the intrinsic value calculation for BT 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 4.5% for BT Group ADR.

Corporate tax rate of 27% is the nominal tax rate for BT Group ADR. 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 BT 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 BT are equal to 81.2%.

Life of production assets of 6.1 years is the average useful life of capital assets used in BT Group ADR 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 BT is equal to -17.3%. 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 - $12293 million for BT Group ADR - 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 2000 million for BT Group ADR 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 BT Group ADR at the current share price and the inputted number of shares is $40.1 billion.


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