Intrinsic value of Dow Chemical - DOW

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$62.16

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$62.16

 
Intrinsic value

$136.21

 
Up/down potential

+119%

 
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 DOW 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 74.7

 

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, %
  -1.27
  13.60
  12.74
  11.97
  11.27
  10.64
  10.08
  9.57
  9.11
  8.70
  8.33
  8.00
  7.70
  7.43
  7.19
  6.97
  6.77
  6.59
  6.43
  6.29
  6.16
  6.05
  5.94
  5.85
  5.76
  5.69
  5.62
  5.56
  5.50
  5.45
  5.41
Revenue, $m
  48,158
  54,707
  61,677
  69,058
  76,840
  85,018
  93,586
  102,542
  111,887
  121,624
  131,757
  142,296
  153,251
  164,636
  176,467
  188,762
  201,542
  214,831
  228,654
  243,038
  258,014
  273,612
  289,867
  306,815
  324,495
  342,946
  362,210
  382,333
  403,362
  425,345
  448,336
Variable operating expenses, $m
 
  42,683
  47,926
  53,478
  59,333
  65,485
  71,931
  78,669
  85,699
  93,023
  100,647
  107,048
  115,289
  123,854
  132,754
  142,003
  151,618
  161,615
  172,014
  182,835
  194,100
  205,835
  218,064
  230,813
  244,113
  257,994
  272,486
  287,625
  303,444
  319,982
  337,277
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
  42,984
  42,683
  47,926
  53,478
  59,333
  65,485
  71,931
  78,669
  85,699
  93,023
  100,647
  107,048
  115,289
  123,854
  132,754
  142,003
  151,618
  161,615
  172,014
  182,835
  194,100
  205,835
  218,064
  230,813
  244,113
  257,994
  272,486
  287,625
  303,444
  319,982
  337,277
Operating income, $m
  5,174
  12,025
  13,751
  15,579
  17,507
  19,533
  21,655
  23,874
  26,189
  28,601
  31,111
  35,248
  37,962
  40,782
  43,713
  46,759
  49,925
  53,216
  56,640
  60,204
  63,913
  67,777
  71,804
  76,002
  80,381
  84,952
  89,724
  94,709
  99,918
  105,363
  111,058
EBITDA, $m
  8,036
  15,664
  17,660
  19,773
  22,001
  24,343
  26,796
  29,360
  32,036
  34,824
  37,725
  40,743
  43,880
  47,139
  50,527
  54,047
  57,707
  61,512
  65,469
  69,588
  73,876
  78,342
  82,996
  87,849
  92,911
  98,194
  103,710
  109,472
  115,493
  121,787
  128,370
Interest expense (income), $m
  1,192
  1,268
  1,711
  2,183
  2,683
  3,210
  3,764
  4,344
  4,950
  5,583
  6,243
  6,929
  7,643
  8,384
  9,155
  9,957
  10,789
  11,655
  12,555
  13,491
  14,465
  15,479
  16,535
  17,636
  18,784
  19,981
  21,231
  22,535
  23,898
  25,322
  26,811
Earnings before tax, $m
  4,413
  10,756
  12,040
  13,396
  14,824
  16,323
  17,892
  19,530
  21,238
  23,017
  24,868
  28,320
  30,320
  32,398
  34,558
  36,802
  39,135
  41,562
  44,086
  46,713
  49,448
  52,298
  55,268
  58,366
  61,597
  64,970
  68,493
  72,173
  76,019
  80,041
  84,247
Tax expense, $m
  9
  2,904
  3,251
  3,617
  4,003
  4,407
  4,831
  5,273
  5,734
  6,215
  6,714
  7,646
  8,186
  8,747
  9,331
  9,937
  10,567
  11,222
  11,903
  12,612
  13,351
  14,120
  14,922
  15,759
  16,631
  17,542
  18,493
  19,487
  20,525
  21,611
  22,747
Net income, $m
  4,318
  7,852
  8,789
  9,779
  10,822
  11,916
  13,061
  14,257
  15,504
  16,803
  18,154
  20,673
  22,133
  23,650
  25,227
  26,865
  28,569
  30,340
  32,183
  34,100
  36,097
  38,177
  40,346
  42,607
  44,966
  47,428
  50,000
  52,686
  55,494
  58,430
  61,500

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  6,607
  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
  79,511
  82,765
  93,309
  104,474
  116,248
  128,620
  141,582
  155,132
  169,270
  184,000
  199,330
  215,274
  231,847
  249,071
  266,969
  285,570
  304,905
  325,009
  345,921
  367,683
  390,338
  413,936
  438,528
  464,169
  490,915
  518,828
  547,973
  578,416
  610,230
  643,488
  678,269
Adjusted assets (=assets-cash), $m
  72,904
  82,765
  93,309
  104,474
  116,248
  128,620
  141,582
  155,132
  169,270
  184,000
  199,330
  215,274
  231,847
  249,071
  266,969
  285,570
  304,905
  325,009
  345,921
  367,683
  390,338
  413,936
  438,528
  464,169
  490,915
  518,828
  547,973
  578,416
  610,230
  643,488
  678,269
Revenue / Adjusted assets
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
  0.661
Average production assets, $m
  25,492
  28,940
  32,627
  36,531
  40,648
  44,974
  49,507
  54,245
  59,188
  64,339
  69,700
  75,275
  81,070
  87,092
  93,351
  99,855
  106,616
  113,646
  120,958
  128,567
  136,489
  144,741
  153,340
  162,305
  171,658
  181,418
  191,609
  202,254
  213,378
  225,008
  237,170
Working capital, $m
  11,055
  6,073
  6,846
  7,665
  8,529
  9,437
  10,388
  11,382
  12,419
  13,500
  14,625
  15,795
  17,011
  18,275
  19,588
  20,953
  22,371
  23,846
  25,381
  26,977
  28,640
  30,371
  32,175
  34,057
  36,019
  38,067
  40,205
  42,439
  44,773
  47,213
  49,765
Total debt, $m
  21,363
  27,595
  35,208
  43,269
  51,770
  60,702
  70,061
  79,844
  90,052
  100,687
  111,755
  123,267
  135,233
  147,668
  160,591
  174,021
  187,981
  202,496
  217,594
  233,306
  249,663
  266,701
  284,456
  302,969
  322,280
  342,433
  363,475
  385,456
  408,425
  432,437
  457,549
Total liabilities, $m
  53,524
  59,756
  67,369
  75,430
  83,931
  92,863
  102,222
  112,005
  122,213
  132,848
  143,916
  155,428
  167,394
  179,829
  192,752
  206,182
  220,142
  234,657
  249,755
  265,467
  281,824
  298,862
  316,617
  335,130
  354,441
  374,594
  395,636
  417,617
  440,586
  464,598
  489,710
Total equity, $m
  25,987
  23,009
  25,940
  29,044
  32,317
  35,756
  39,360
  43,127
  47,057
  51,152
  55,414
  59,846
  64,454
  69,242
  74,217
  79,389
  84,764
  90,353
  96,166
  102,216
  108,514
  115,074
  121,911
  129,039
  136,474
  144,234
  152,336
  160,800
  169,644
  178,890
  188,559
Total liabilities and equity, $m
  79,511
  82,765
  93,309
  104,474
  116,248
  128,619
  141,582
  155,132
  169,270
  184,000
  199,330
  215,274
  231,848
  249,071
  266,969
  285,571
  304,906
  325,010
  345,921
  367,683
  390,338
  413,936
  438,528
  464,169
  490,915
  518,828
  547,972
  578,417
  610,230
  643,488
  678,269
Debt-to-equity ratio
  0.822
  1.200
  1.360
  1.490
  1.600
  1.700
  1.780
  1.850
  1.910
  1.970
  2.020
  2.060
  2.100
  2.130
  2.160
  2.190
  2.220
  2.240
  2.260
  2.280
  2.300
  2.320
  2.330
  2.350
  2.360
  2.370
  2.390
  2.400
  2.410
  2.420
  2.430
Adjusted equity ratio
  0.270
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278
  0.278

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  4,318
  7,852
  8,789
  9,779
  10,822
  11,916
  13,061
  14,257
  15,504
  16,803
  18,154
  20,673
  22,133
  23,650
  25,227
  26,865
  28,569
  30,340
  32,183
  34,100
  36,097
  38,177
  40,346
  42,607
  44,966
  47,428
  50,000
  52,686
  55,494
  58,430
  61,500
Depreciation, amort., depletion, $m
  2,862
  3,640
  3,909
  4,194
  4,494
  4,810
  5,141
  5,487
  5,848
  6,223
  6,615
  5,494
  5,918
  6,357
  6,814
  7,289
  7,782
  8,295
  8,829
  9,384
  9,963
  10,565
  11,193
  11,847
  12,530
  13,242
  13,986
  14,763
  15,575
  16,424
  17,312
Funds from operations, $m
  6,230
  11,492
  12,698
  13,973
  15,316
  16,726
  18,202
  19,744
  21,351
  23,026
  24,768
  26,168
  28,051
  30,008
  32,041
  34,154
  36,351
  38,635
  41,012
  43,485
  46,060
  48,742
  51,538
  54,454
  57,496
  60,671
  63,986
  67,449
  71,069
  74,854
  78,812
Change in working capital, $m
  752
  727
  774
  819
  864
  908
  951
  994
  1,037
  1,081
  1,125
  1,170
  1,216
  1,264
  1,313
  1,365
  1,419
  1,475
  1,534
  1,597
  1,662
  1,731
  1,804
  1,881
  1,962
  2,048
  2,138
  2,234
  2,334
  2,440
  2,552
Cash from operations, $m
  5,478
  14,785
  11,924
  13,154
  14,452
  15,818
  17,251
  18,749
  20,314
  21,945
  23,644
  24,998
  26,835
  28,744
  30,728
  32,789
  34,932
  37,160
  39,477
  41,888
  44,398
  47,011
  49,734
  52,573
  55,533
  58,623
  61,848
  65,216
  68,735
  72,414
  76,260
Maintenance CAPEX, $m
  0
  -1,861
  -2,112
  -2,382
  -2,667
  -2,967
  -3,283
  -3,614
  -3,959
  -4,320
  -4,696
  -5,088
  -5,494
  -5,918
  -6,357
  -6,814
  -7,289
  -7,782
  -8,295
  -8,829
  -9,384
  -9,963
  -10,565
  -11,193
  -11,847
  -12,530
  -13,242
  -13,986
  -14,763
  -15,575
  -16,424
New CAPEX, $m
  -3,917
  -3,449
  -3,687
  -3,904
  -4,117
  -4,326
  -4,533
  -4,738
  -4,944
  -5,151
  -5,361
  -5,575
  -5,795
  -6,023
  -6,258
  -6,504
  -6,761
  -7,030
  -7,312
  -7,609
  -7,922
  -8,252
  -8,599
  -8,966
  -9,352
  -9,760
  -10,191
  -10,645
  -11,124
  -11,629
  -12,162
Cash from investing activities, $m
  -3,479
  -5,310
  -5,799
  -6,286
  -6,784
  -7,293
  -7,816
  -8,352
  -8,903
  -9,471
  -10,057
  -10,663
  -11,289
  -11,941
  -12,615
  -13,318
  -14,050
  -14,812
  -15,607
  -16,438
  -17,306
  -18,215
  -19,164
  -20,159
  -21,199
  -22,290
  -23,433
  -24,631
  -25,887
  -27,204
  -28,586
Free cash flow, $m
  1,999
  9,476
  6,125
  6,868
  7,669
  8,525
  9,435
  10,398
  11,411
  12,474
  13,587
  14,335
  15,545
  16,804
  18,112
  19,471
  20,883
  22,348
  23,870
  25,450
  27,091
  28,797
  30,570
  32,414
  34,334
  36,332
  38,414
  40,585
  42,848
  45,209
  47,674
Issuance/(repayment) of debt, $m
  -589
  7,139
  7,613
  8,061
  8,501
  8,932
  9,359
  9,783
  10,207
  10,635
  11,069
  11,511
  11,966
  12,436
  12,923
  13,430
  13,960
  14,515
  15,098
  15,712
  16,357
  17,038
  17,755
  18,512
  19,311
  20,153
  21,042
  21,980
  22,969
  24,012
  25,112
Issuance/(repurchase) of shares, $m
  -518
  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  
  -1,430
  7,139
  7,613
  8,061
  8,501
  8,932
  9,359
  9,783
  10,207
  10,635
  11,069
  11,511
  11,966
  12,436
  12,923
  13,430
  13,960
  14,515
  15,098
  15,712
  16,357
  17,038
  17,755
  18,512
  19,311
  20,153
  21,042
  21,980
  22,969
  24,012
  25,112
Total cash flow (excl. dividends), $m
  492
  16,615
  13,738
  14,929
  16,169
  17,457
  18,794
  20,181
  21,619
  23,109
  24,655
  25,847
  27,511
  29,239
  31,035
  32,901
  34,843
  36,863
  38,968
  41,161
  43,449
  45,835
  48,325
  50,927
  53,645
  56,486
  59,457
  62,565
  65,817
  69,222
  72,786
Retained Cash Flow (-), $m
  -613
  -2,722
  -2,931
  -3,104
  -3,273
  -3,439
  -3,604
  -3,767
  -3,930
  -4,095
  -4,262
  -4,432
  -4,607
  -4,788
  -4,976
  -5,171
  -5,375
  -5,589
  -5,814
  -6,050
  -6,298
  -6,560
  -6,837
  -7,128
  -7,435
  -7,760
  -8,102
  -8,463
  -8,844
  -9,246
  -9,669
Prev. year cash balance distribution, $m
 
  5,700
  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
 
  19,593
  10,807
  11,825
  12,896
  14,018
  15,191
  16,414
  17,688
  19,015
  20,394
  21,414
  22,904
  24,451
  26,059
  27,730
  29,467
  31,274
  33,155
  35,112
  37,150
  39,274
  41,489
  43,799
  46,209
  48,726
  51,355
  54,102
  56,973
  59,976
  63,117
Discount rate, %
 
  5.80
  6.09
  6.39
  6.71
  7.05
  7.40
  7.77
  8.16
  8.57
  9.00
  9.45
  9.92
  10.42
  10.94
  11.48
  12.06
  12.66
  13.29
  13.96
  14.66
  15.39
  16.16
  16.97
  17.81
  18.71
  19.64
  20.62
  21.65
  22.74
  23.87
PV of cash for distribution, $m
 
  18,519
  9,602
  9,819
  9,944
  9,971
  9,897
  9,720
  9,443
  9,072
  8,616
  7,933
  7,362
  6,743
  6,094
  5,430
  4,767
  4,122
  3,506
  2,933
  2,410
  1,944
  1,537
  1,191
  904
  670
  485
  342
  236
  158
  103
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

The Dow Chemical Company manufactures and supplies products that are used primarily as raw materials in the manufacture of customer products and services worldwide. It operates through five segments: Agricultural Sciences, Consumer Solutions, Infrastructure Solutions, Performance Materials & Chemicals, and Performance Plastics segments. The Agricultural Sciences segment provides crop protection and seed/plant biotechnology products and technologies, urban pest management solutions, and healthy oils. The Consumer Solutions segment offers semiconductors and organic light-emitting diodes, adhesives, and foams for use in the transportation industry; cellulosics and other polymers for pharmaceutical formulations and food solutions; and silicone solutions used in consumer goods and automotive applications. The Infrastructure Solutions segment provides architectural and industrial coatings, construction material ingredients, building insulation products, adhesives, and microbial protection products for the oil and gas industry, telecommunications, and light and water technologies. The Performance Materials & Chemicals segment offers chlorine and caustic soda; industrial solutions; and propylene oxides, propylene glycols, polyether polyols, and aromatic isocyanates. The Performance Plastics segment provides elastomers, polyolefin plastomers, and ethylene propylene diene monomer elastomers; wire and cable insulation, semiconductive, and jacketing compound solutions, as well as bio-based plasticizers; acrylics, polyethylene, and polyolefin plastomers; and ethylene, propylene, benzene, butadiene, octene, aromatics co-products, and crude c4. The company was founded in 1897 and is based in Midland, Michigan.

FINANCIAL RATIOS  of  Dow Chemical (DOW)

Valuation Ratios
P/E Ratio 17.4
Price to Sales 1.6
Price to Book 2.9
Price to Tangible Book
Price to Cash Flow 13.7
Price to Free Cash Flow 48.2
Growth Rates
Sales Growth Rate -1.3%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 4.5%
Cap. Spend. - 3 Yr. Gr. Rate 11.2%
Financial Strength
Quick Ratio 7
Current Ratio 0.1
LT Debt to Equity 78.7%
Total Debt to Equity 82.2%
Interest Coverage 5
Management Effectiveness
Return On Assets 7.5%
Ret/ On Assets - 3 Yr. Avg. 8.9%
Return On Total Capital 9.6%
Ret/ On T. Cap. - 3 Yr. Avg. 12.1%
Return On Equity 16.8%
Return On Equity - 3 Yr. Avg. 21.4%
Asset Turnover 0.7
Profitability Ratios
Gross Margin 21.8%
Gross Margin - 3 Yr. Avg. 21%
EBITDA Margin 17.6%
EBITDA Margin - 3 Yr. Avg. 20.3%
Operating Margin 10.7%
Oper. Margin - 3 Yr. Avg. 13.9%
Pre-Tax Margin 9.2%
Pre-Tax Margin - 3 Yr. Avg. 12.9%
Net Profit Margin 9%
Net Profit Margin - 3 Yr. Avg. 10.4%
Effective Tax Rate 0.2%
Eff/ Tax Rate - 3 Yr. Avg. 16.3%
Payout Ratio 57%

DOW stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the DOW stock intrinsic value calculation we used $48158 million for the last fiscal year's total revenue generated by Dow Chemical. The default revenue input number comes from 2016 income statement of Dow Chemical. 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 DOW stock valuation model: a) initial revenue growth rate of 13.6% 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 5.8%, whose default value for DOW is calculated based on our internal credit rating of Dow Chemical, 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 Dow Chemical.
    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 DOW stock the variable cost ratio is equal to 78.4%.

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 DOW 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 6.2% for Dow Chemical.

Corporate tax rate of 27% is the nominal tax rate for Dow Chemical. 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 DOW 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 DOW are equal to 52.9%.

Life of production assets of 13.7 years is the average useful life of capital assets used in Dow Chemical 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 DOW is equal to 11.1%. 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 - $25987 million for Dow Chemical - 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 1201.29 million for Dow Chemical 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 Dow Chemical at the current share price and the inputted number of shares is $74.7 billion.


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COMPANY NEWS

▶ Business Highlights   [Apr-20-17 06:19PM  Associated Press]
▶ Dow Chemical Wants to Ignore Risk Study   [11:15AM  TheStreet.com]
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▶ How DuPont Stock Has Performed since 4Q Earnings   [Apr-19-17 10:35AM  Market Realist]
▶ Dow ETF Falls On A Big Earnings Day For Blue-Chip Stocks   [Apr-18-17 11:01AM  Investor's Business Daily]
▶ Behind Monsantos Margin Growth in Fiscal 2Q17   [Apr-06-17 04:05PM  Market Realist]
▶ Asian stocks mostly lower as region awaits Trump-Xi meeting   [Apr-05-17 11:07PM  Associated Press]
▶ Cramer: Breen Is Getting It Done for DuPont   [07:01PM  TheStreet.com]
▶ [$$] Dow, DuPont Push Back Merger Date   [10:21AM  The Wall Street Journal]
▶ Chemicals Industry Stock Outlook - March 2017   [Mar-29-17 03:46PM  at Investopedia]
▶ Dow Chemical Stock Trades Ex-Dividend Wednesday   [08:52AM  at Investopedia]
▶ EU Approves Dows Merger with DuPont   [08:22AM  at Investopedia]
▶ [$$] EU Clears Dow-DuPont Deal With Conditions   [12:07AM  at The Wall Street Journal]
▶ [$$] EU Clears Dow-DuPont Deal With Conditions   [11:21AM  at The Wall Street Journal]
▶ Why Jim Cramer Is Bullish on Dow Chemical   [11:09AM  at TheStreet]
▶ Stocks to Watch: Snap, Sealed Air, G-III, Dow Chemical   [09:24AM  at The Wall Street Journal]
Stock chart of DOW Financial statements of DOW
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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