Intrinsic value of Korea Electric Power ADR - KEP

Previous Close

$19.43

  Intrinsic Value

$32.50

stock screener

  Rating & Target

str. buy

+67%

  Value-price divergence*

+5000%

Previous close

$19.43

 
Intrinsic value

$32.50

 
Up/down potential

+67%

 
Rating

str. buy

 
Value-price divergence*

+5000%

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

We calculate the intrinsic value of KEP 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 24.9

 

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, %
  2.09
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  47,788
  52,978
  54,196
  55,589
  57,153
  58,886
  60,787
  62,857
  65,098
  67,512
  70,103
  72,875
  75,832
  78,982
  82,328
  85,880
  89,643
  93,627
  97,840
  102,291
  106,992
  111,951
  117,181
  122,694
  128,502
  134,620
  141,061
  147,841
  154,975
  162,480
  170,374
Variable operating expenses, $m
 
  31,204
  31,922
  32,742
  33,663
  34,684
  35,803
  37,023
  38,343
  39,765
  41,291
  42,923
  44,665
  46,520
  48,491
  50,583
  52,800
  55,146
  57,627
  60,249
  63,018
  65,939
  69,019
  72,266
  75,687
  79,291
  83,084
  87,078
  91,279
  95,700
  100,350
Fixed operating expenses, $m
 
  11,643
  11,934
  12,232
  12,538
  12,852
  13,173
  13,502
  13,840
  14,186
  14,540
  14,904
  15,277
  15,659
  16,050
  16,451
  16,862
  17,284
  17,716
  18,159
  18,613
  19,078
  19,555
  20,044
  20,545
  21,059
  21,585
  22,125
  22,678
  23,245
  23,826
Total operating expenses, $m
  41,669
  42,847
  43,856
  44,974
  46,201
  47,536
  48,976
  50,525
  52,183
  53,951
  55,831
  57,827
  59,942
  62,179
  64,541
  67,034
  69,662
  72,430
  75,343
  78,408
  81,631
  85,017
  88,574
  92,310
  96,232
  100,350
  104,669
  109,203
  113,957
  118,945
  124,176
Operating income, $m
  10,271
  10,131
  10,341
  10,615
  10,952
  11,350
  11,810
  12,332
  12,915
  13,562
  14,272
  15,048
  15,891
  16,803
  17,787
  18,846
  19,981
  21,197
  22,496
  23,883
  25,361
  26,934
  28,606
  30,383
  32,270
  34,270
  36,391
  38,638
  41,017
  43,535
  46,198
EBITDA, $m
  18,004
  17,996
  18,387
  18,868
  19,437
  20,092
  20,835
  21,664
  22,580
  23,584
  24,679
  25,867
  27,149
  28,529
  30,010
  31,595
  33,289
  35,097
  37,021
  39,069
  41,244
  43,554
  46,003
  48,598
  51,347
  54,256
  57,333
  60,586
  64,024
  67,656
  71,492
Interest expense (income), $m
  1,762
  1,505
  1,564
  1,637
  1,720
  1,814
  1,918
  2,032
  2,156
  2,290
  2,435
  2,590
  2,757
  2,934
  3,123
  3,324
  3,537
  3,762
  4,001
  4,254
  4,521
  4,803
  5,100
  5,414
  5,744
  6,092
  6,459
  6,846
  7,252
  7,680
  8,130
Earnings before tax, $m
  9,072
  8,626
  8,777
  8,978
  9,231
  9,536
  9,893
  10,300
  10,759
  11,271
  11,837
  12,457
  13,134
  13,869
  14,664
  15,522
  16,445
  17,435
  18,495
  19,629
  20,840
  22,131
  23,507
  24,970
  26,525
  28,178
  29,932
  31,792
  33,765
  35,855
  38,068
Tax expense, $m
  2,904
  2,329
  2,370
  2,424
  2,493
  2,575
  2,671
  2,781
  2,905
  3,043
  3,196
  3,363
  3,546
  3,745
  3,959
  4,191
  4,440
  4,707
  4,994
  5,300
  5,627
  5,975
  6,347
  6,742
  7,162
  7,608
  8,082
  8,584
  9,117
  9,681
  10,278
Net income, $m
  6,082
  6,297
  6,407
  6,554
  6,739
  6,962
  7,222
  7,519
  7,854
  8,228
  8,641
  9,094
  9,588
  10,124
  10,705
  11,331
  12,005
  12,727
  13,502
  14,329
  15,213
  16,156
  17,160
  18,228
  19,364
  20,570
  21,850
  23,208
  24,648
  26,174
  27,790

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  4,939
  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
  153,459
  151,365
  154,846
  158,826
  163,294
  168,244
  173,676
  179,591
  185,994
  192,891
  200,294
  208,214
  216,664
  225,662
  235,224
  245,371
  256,124
  267,506
  279,543
  292,261
  305,690
  319,860
  334,803
  350,554
  367,149
  384,628
  403,031
  422,402
  442,785
  464,229
  486,784
Adjusted assets (=assets-cash), $m
  148,520
  151,365
  154,846
  158,826
  163,294
  168,244
  173,676
  179,591
  185,994
  192,891
  200,294
  208,214
  216,664
  225,662
  235,224
  245,371
  256,124
  267,506
  279,543
  292,261
  305,690
  319,860
  334,803
  350,554
  367,149
  384,628
  403,031
  422,402
  442,785
  464,229
  486,784
Revenue / Adjusted assets
  0.322
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
  0.350
Average production assets, $m
  124,936
  127,412
  130,342
  133,692
  137,453
  141,620
  146,192
  151,171
  156,560
  162,366
  168,598
  175,264
  182,377
  189,951
  198,000
  206,541
  215,592
  225,173
  235,305
  246,011
  257,315
  269,242
  281,820
  295,079
  309,048
  323,761
  339,251
  355,556
  372,714
  390,765
  409,751
Working capital, $m
  -4,341
  -1,483
  -1,517
  -1,556
  -1,600
  -1,649
  -1,702
  -1,760
  -1,823
  -1,890
  -1,963
  -2,040
  -2,123
  -2,211
  -2,305
  -2,405
  -2,510
  -2,622
  -2,740
  -2,864
  -2,996
  -3,135
  -3,281
  -3,435
  -3,598
  -3,769
  -3,950
  -4,140
  -4,339
  -4,549
  -4,770
Total debt, $m
  46,753
  43,432
  45,461
  47,782
  50,386
  53,272
  56,439
  59,888
  63,620
  67,642
  71,957
  76,575
  81,501
  86,747
  92,322
  98,237
  104,506
  111,142
  118,160
  125,574
  133,403
  141,664
  150,376
  159,559
  169,234
  179,424
  190,153
  201,446
  213,329
  225,831
  238,981
Total liabilities, $m
  91,567
  88,246
  90,275
  92,596
  95,200
  98,086
  101,253
  104,702
  108,434
  112,456
  116,771
  121,389
  126,315
  131,561
  137,136
  143,051
  149,320
  155,956
  162,974
  170,388
  178,217
  186,478
  195,190
  204,373
  214,048
  224,238
  234,967
  246,260
  258,143
  270,645
  283,795
Total equity, $m
  61,892
  63,119
  64,571
  66,230
  68,094
  70,158
  72,423
  74,889
  77,559
  80,436
  83,523
  86,825
  90,349
  94,101
  98,088
  102,320
  106,804
  111,550
  116,569
  121,873
  127,473
  133,381
  139,613
  146,181
  153,101
  160,390
  168,064
  176,141
  184,641
  193,583
  202,989
Total liabilities and equity, $m
  153,459
  151,365
  154,846
  158,826
  163,294
  168,244
  173,676
  179,591
  185,993
  192,892
  200,294
  208,214
  216,664
  225,662
  235,224
  245,371
  256,124
  267,506
  279,543
  292,261
  305,690
  319,859
  334,803
  350,554
  367,149
  384,628
  403,031
  422,401
  442,784
  464,228
  486,784
Debt-to-equity ratio
  0.755
  0.690
  0.700
  0.720
  0.740
  0.760
  0.780
  0.800
  0.820
  0.840
  0.860
  0.880
  0.900
  0.920
  0.940
  0.960
  0.980
  1.000
  1.010
  1.030
  1.050
  1.060
  1.080
  1.090
  1.110
  1.120
  1.130
  1.140
  1.160
  1.170
  1.180
Adjusted equity ratio
  0.388
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417
  0.417

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  6,082
  6,297
  6,407
  6,554
  6,739
  6,962
  7,222
  7,519
  7,854
  8,228
  8,641
  9,094
  9,588
  10,124
  10,705
  11,331
  12,005
  12,727
  13,502
  14,329
  15,213
  16,156
  17,160
  18,228
  19,364
  20,570
  21,850
  23,208
  24,648
  26,174
  27,790
Depreciation, amort., depletion, $m
  7,733
  7,865
  8,046
  8,253
  8,485
  8,742
  9,024
  9,332
  9,664
  10,023
  10,407
  10,819
  11,258
  11,725
  12,222
  12,749
  13,308
  13,900
  14,525
  15,186
  15,884
  16,620
  17,396
  18,215
  19,077
  19,985
  20,941
  21,948
  23,007
  24,121
  25,293
Funds from operations, $m
  7,926
  14,162
  14,453
  14,807
  15,224
  15,704
  16,246
  16,851
  17,519
  18,251
  19,048
  19,913
  20,846
  21,850
  22,927
  24,081
  25,313
  26,627
  28,027
  29,515
  31,097
  32,776
  34,556
  36,443
  38,441
  40,555
  42,792
  45,156
  47,655
  50,295
  53,083
Change in working capital, $m
  -6,357
  -29
  -34
  -39
  -44
  -49
  -53
  -58
  -63
  -68
  -73
  -78
  -83
  -88
  -94
  -99
  -105
  -112
  -118
  -125
  -132
  -139
  -146
  -154
  -163
  -171
  -180
  -190
  -200
  -210
  -221
Cash from operations, $m
  14,283
  14,191
  14,487
  14,846
  15,268
  15,752
  16,299
  16,909
  17,582
  18,318
  19,121
  19,990
  20,929
  21,938
  23,021
  24,180
  25,418
  26,739
  28,145
  29,640
  31,229
  32,915
  34,703
  36,597
  38,603
  40,726
  42,972
  45,346
  47,855
  50,506
  53,304
Maintenance CAPEX, $m
  0
  -7,712
  -7,865
  -8,046
  -8,253
  -8,485
  -8,742
  -9,024
  -9,332
  -9,664
  -10,023
  -10,407
  -10,819
  -11,258
  -11,725
  -12,222
  -12,749
  -13,308
  -13,900
  -14,525
  -15,186
  -15,884
  -16,620
  -17,396
  -18,215
  -19,077
  -19,985
  -20,941
  -21,948
  -23,007
  -24,121
New CAPEX, $m
  -10,487
  -2,476
  -2,930
  -3,350
  -3,761
  -4,167
  -4,572
  -4,979
  -5,389
  -5,806
  -6,231
  -6,666
  -7,113
  -7,574
  -8,049
  -8,541
  -9,051
  -9,581
  -10,132
  -10,706
  -11,304
  -11,927
  -12,578
  -13,258
  -13,969
  -14,713
  -15,491
  -16,305
  -17,158
  -18,051
  -18,986
Cash from investing activities, $m
  -8,324
  -10,188
  -10,795
  -11,396
  -12,014
  -12,652
  -13,314
  -14,003
  -14,721
  -15,470
  -16,254
  -17,073
  -17,932
  -18,832
  -19,774
  -20,763
  -21,800
  -22,889
  -24,032
  -25,231
  -26,490
  -27,811
  -29,198
  -30,654
  -32,184
  -33,790
  -35,476
  -37,246
  -39,106
  -41,058
  -43,107
Free cash flow, $m
  5,959
  4,003
  3,692
  3,450
  3,254
  3,100
  2,985
  2,906
  2,861
  2,848
  2,867
  2,917
  2,997
  3,107
  3,247
  3,417
  3,617
  3,849
  4,113
  4,409
  4,739
  5,104
  5,504
  5,942
  6,419
  6,937
  7,496
  8,100
  8,750
  9,448
  10,197
Issuance/(repayment) of debt, $m
  -4,846
  1,618
  2,030
  2,320
  2,605
  2,886
  3,167
  3,448
  3,733
  4,021
  4,316
  4,617
  4,927
  5,246
  5,575
  5,916
  6,269
  6,636
  7,018
  7,415
  7,829
  8,261
  8,712
  9,183
  9,675
  10,190
  10,729
  11,293
  11,883
  12,502
  13,150
Issuance/(repurchase) of shares, $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
  0
Cash from financing (excl. dividends), $m  
  -4,775
  1,618
  2,030
  2,320
  2,605
  2,886
  3,167
  3,448
  3,733
  4,021
  4,316
  4,617
  4,927
  5,246
  5,575
  5,916
  6,269
  6,636
  7,018
  7,415
  7,829
  8,261
  8,712
  9,183
  9,675
  10,190
  10,729
  11,293
  11,883
  12,502
  13,150
Total cash flow (excl. dividends), $m
  1,185
  5,621
  5,722
  5,770
  5,859
  5,987
  6,152
  6,354
  6,593
  6,869
  7,183
  7,534
  7,923
  8,352
  8,821
  9,332
  9,886
  10,485
  11,130
  11,824
  12,568
  13,365
  14,216
  15,125
  16,094
  17,127
  18,225
  19,393
  20,633
  21,950
  23,347
Retained Cash Flow (-), $m
  -4,392
  -1,227
  -1,452
  -1,659
  -1,863
  -2,064
  -2,265
  -2,466
  -2,670
  -2,876
  -3,087
  -3,302
  -3,524
  -3,752
  -3,987
  -4,231
  -4,484
  -4,746
  -5,019
  -5,304
  -5,600
  -5,909
  -6,231
  -6,568
  -6,920
  -7,289
  -7,674
  -8,077
  -8,500
  -8,942
  -9,406
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
 
  4,393
  4,270
  4,111
  3,996
  3,922
  3,887
  3,888
  3,923
  3,993
  4,096
  4,231
  4,399
  4,600
  4,834
  5,101
  5,402
  5,739
  6,111
  6,520
  6,968
  7,456
  7,985
  8,557
  9,174
  9,838
  10,551
  11,315
  12,133
  13,008
  13,941
Discount rate, %
 
  5.30
  5.57
  5.84
  6.14
  6.44
  6.76
  7.10
  7.46
  7.83
  8.22
  8.63
  9.06
  9.52
  9.99
  10.49
  11.02
  11.57
  12.15
  12.76
  13.39
  14.06
  14.77
  15.50
  16.28
  17.09
  17.95
  18.85
  19.79
  20.78
  21.82
PV of cash for distribution, $m
 
  4,172
  3,832
  3,467
  3,149
  2,871
  2,624
  2,405
  2,207
  2,026
  1,859
  1,702
  1,553
  1,411
  1,274
  1,142
  1,015
  892
  776
  666
  564
  470
  386
  311
  246
  190
  144
  107
  77
  55
  37
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

Korea Electric Power Corporation, an integrated electric utility company, generates, transmits, and distributes electricity in Korea and internationally. The company operates through Transmission and Distribution, Electric Power Generation (Nuclear), Electric Power Generation (Non-Nuclear), Plant Maintenance & Engineering Service, and Others segments. It generates power from nuclear, coal, oil, liquefied natural gas, internal combustion, hydro, wind, solar, and biomass sources. As of December 31, 2015, the company had a total of 618 generation units, including nuclear, thermal, hydroelectric, and internal combustion units with an installed generation capacity of 73,282 megawatts. Its transmission system consisted of 33,316 circuit kilometers of lines of 765 kilovolts and others, including high-voltage direct current lines, as well as 822 substations with an installed transformer capacity of 298,294 megavolt-amperes; and distribution system consisted of 110,082 megavolt-amperes of transformer capacity and 8,960,818 units of support with a total line length of 465,278 circuit kilometers. The company provides electricity to residential, commercial, educational, industrial, agricultural, street lighting, and overnight power usage. It is also involved in providing plant maintenance and engineering services, and information services; selling nuclear fuel; and communication line leasing activities, as well as developing uranium mine. Korea Electric Power Corporation was founded in 1961 and is headquartered in Naju, South Korea.

FINANCIAL RATIOS  of  Korea Electric Power ADR (KEP)

Valuation Ratios
P/E Ratio 2.1
Price to Sales 0.2
Price to Book 0.2
Price to Tangible Book
Price to Cash Flow 0.9
Price to Free Cash Flow 3.3
Growth Rates
Sales Growth Rate 2.1%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -14%
Cap. Spend. - 3 Yr. Gr. Rate -3.2%
Financial Strength
Quick Ratio 1
Current Ratio 0
LT Debt to Equity 62.9%
Total Debt to Equity 75.5%
Interest Coverage 6
Management Effectiveness
Return On Assets 4.8%
Ret/ On Assets - 3 Yr. Avg. 5.4%
Return On Total Capital 5.6%
Ret/ On T. Cap. - 3 Yr. Avg. 6.3%
Return On Equity 10.2%
Return On Equity - 3 Yr. Avg. 12.5%
Asset Turnover 0.3
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 35.7%
EBITDA Margin - 3 Yr. Avg. 36.9%
Operating Margin 19.8%
Oper. Margin - 3 Yr. Avg. 16.6%
Pre-Tax Margin 17.5%
Pre-Tax Margin - 3 Yr. Avg. 18.8%
Net Profit Margin 11.7%
Net Profit Margin - 3 Yr. Avg. 13%
Effective Tax Rate 32%
Eff/ Tax Rate - 3 Yr. Avg. 31.3%
Payout Ratio 29.9%

KEP stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the KEP stock intrinsic value calculation we used $51939 million for the last fiscal year's total revenue generated by Korea Electric Power ADR. The default revenue input number comes from 2016 income statement of Korea Electric Power 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 KEP stock valuation model: a) initial revenue growth rate of 2% 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 5.3%, whose default value for KEP is calculated based on our internal credit rating of Korea Electric Power 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 Korea Electric Power 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 KEP stock the variable cost ratio is equal to 58.9%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $11359 million in the base year in the intrinsic value calculation for KEP 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 3.6% for Korea Electric Power ADR.

Corporate tax rate of 27% is the nominal tax rate for Korea Electric Power 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 KEP 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 KEP are equal to 240.5%.

Life of production assets of 16.2 years is the average useful life of capital assets used in Korea Electric Power 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 KEP is equal to -2.8%. 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 - $61892 million for Korea Electric Power 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 1282.91 million for Korea Electric Power 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 Korea Electric Power ADR at the current share price and the inputted number of shares is $24.9 billion.

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Stock chart of KEP Financial statements of KEP
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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