Intrinsic value of Reynolds American - RAI

Previous Close

$63.67

  Intrinsic Value

$46.06

stock screener

  Rating & Target

sell

-28%

  Value-price divergence*

-375%

Previous close

$63.67

 
Intrinsic value

$46.06

 
Up/down potential

-28%

 
Rating

sell

 
Value-price divergence*

-375%

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

We calculate the intrinsic value of RAI 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 91.1

 

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, %
  17.12
  4.30
  4.37
  4.43
  4.49
  4.54
  4.59
  4.63
  4.67
  4.70
  4.73
  4.76
  4.78
  4.80
  4.82
  4.84
  4.86
  4.87
  4.88
  4.89
  4.91
  4.91
  4.92
  4.93
  4.94
  4.94
  4.95
  4.95
  4.96
  4.96
  4.97
Revenue, $m
  12,503
  13,041
  13,611
  14,214
  14,852
  15,526
  16,239
  16,990
  17,783
  18,618
  19,499
  20,426
  21,402
  22,430
  23,512
  24,650
  25,847
  27,106
  28,429
  29,821
  31,284
  32,821
  34,437
  36,135
  37,920
  39,794
  41,764
  43,833
  46,007
  48,291
  50,689
Variable operating expenses, $m
 
  4,482
  4,608
  4,742
  4,883
  5,032
  5,189
  5,356
  5,531
  5,716
  5,910
  4,516
  4,732
  4,959
  5,198
  5,450
  5,715
  5,993
  6,286
  6,593
  6,917
  7,257
  7,614
  7,989
  8,384
  8,798
  9,234
  9,691
  10,172
  10,677
  11,207
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
  1,934
  4,482
  4,608
  4,742
  4,883
  5,032
  5,189
  5,356
  5,531
  5,716
  5,910
  4,516
  4,732
  4,959
  5,198
  5,450
  5,715
  5,993
  6,286
  6,593
  6,917
  7,257
  7,614
  7,989
  8,384
  8,798
  9,234
  9,691
  10,172
  10,677
  11,207
Operating income, $m
  10,569
  8,558
  9,002
  9,472
  9,969
  10,494
  11,049
  11,634
  12,252
  12,903
  13,588
  15,910
  16,670
  17,471
  18,313
  19,200
  20,132
  21,113
  22,144
  23,228
  24,367
  25,565
  26,823
  28,146
  29,536
  30,996
  32,530
  34,142
  35,835
  37,614
  39,482
EBITDA, $m
  10,692
  11,227
  11,717
  12,237
  12,786
  13,367
  13,980
  14,627
  15,309
  16,029
  16,786
  17,585
  18,425
  19,310
  20,241
  21,221
  22,252
  23,335
  24,475
  25,673
  26,932
  28,256
  29,647
  31,109
  32,645
  34,259
  35,955
  37,736
  39,608
  41,574
  43,639
Interest expense (income), $m
  712
  595
  653
  715
  781
  850
  923
  1,001
  1,082
  1,168
  1,259
  1,354
  1,455
  1,561
  1,673
  1,790
  1,914
  2,044
  2,180
  2,324
  2,475
  2,634
  2,801
  2,976
  3,161
  3,354
  3,558
  3,772
  3,996
  4,232
  4,480
Earnings before tax, $m
  9,691
  7,963
  8,349
  8,757
  9,188
  9,644
  10,126
  10,634
  11,170
  11,734
  12,329
  14,555
  15,215
  15,910
  16,641
  17,410
  18,218
  19,069
  19,963
  20,904
  21,892
  22,931
  24,022
  25,170
  26,375
  27,642
  28,972
  30,370
  31,839
  33,382
  35,002
Tax expense, $m
  3,618
  2,150
  2,254
  2,364
  2,481
  2,604
  2,734
  2,871
  3,016
  3,168
  3,329
  3,930
  4,108
  4,296
  4,493
  4,701
  4,919
  5,149
  5,390
  5,644
  5,911
  6,191
  6,486
  6,796
  7,121
  7,463
  7,823
  8,200
  8,597
  9,013
  9,451
Net income, $m
  6,073
  5,813
  6,095
  6,392
  6,707
  7,040
  7,392
  7,763
  8,154
  8,566
  9,001
  10,625
  11,107
  11,614
  12,148
  12,709
  13,299
  13,920
  14,573
  15,260
  15,981
  16,739
  17,536
  18,374
  19,254
  20,178
  21,150
  22,170
  23,242
  24,369
  25,551

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  2,051
  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
  51,095
  51,140
  53,375
  55,741
  58,243
  60,888
  63,681
  66,628
  69,736
  73,013
  76,465
  80,102
  83,931
  87,962
  92,203
  96,666
  101,360
  106,296
  111,487
  116,944
  122,681
  128,711
  135,047
  141,707
  148,704
  156,056
  163,781
  171,896
  180,421
  189,375
  198,782
Adjusted assets (=assets-cash), $m
  49,044
  51,140
  53,375
  55,741
  58,243
  60,888
  63,681
  66,628
  69,736
  73,013
  76,465
  80,102
  83,931
  87,962
  92,203
  96,666
  101,360
  106,296
  111,487
  116,944
  122,681
  128,711
  135,047
  141,707
  148,704
  156,056
  163,781
  171,896
  180,421
  189,375
  198,782
Revenue / Adjusted assets
  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
  0.255
Average production assets, $m
  30,757
  32,080
  33,482
  34,966
  36,536
  38,195
  39,947
  41,796
  43,745
  45,801
  47,967
  50,248
  52,650
  55,178
  57,839
  60,638
  63,583
  66,680
  69,936
  73,359
  76,958
  80,740
  84,715
  88,893
  93,282
  97,894
  102,740
  107,830
  113,178
  118,795
  124,696
Working capital, $m
  -747
  -2,399
  -2,504
  -2,615
  -2,733
  -2,857
  -2,988
  -3,126
  -3,272
  -3,426
  -3,588
  -3,758
  -3,938
  -4,127
  -4,326
  -4,536
  -4,756
  -4,987
  -5,231
  -5,487
  -5,756
  -6,039
  -6,336
  -6,649
  -6,977
  -7,322
  -7,685
  -8,065
  -8,465
  -8,885
  -9,327
Total debt, $m
  13,165
  13,902
  15,219
  16,612
  18,086
  19,644
  21,289
  23,025
  24,856
  26,785
  28,819
  30,961
  33,216
  35,590
  38,089
  40,717
  43,482
  46,390
  49,447
  52,661
  56,040
  59,591
  63,324
  67,246
  71,368
  75,698
  80,248
  85,028
  90,049
  95,323
  100,863
Total liabilities, $m
  29,384
  30,121
  31,438
  32,831
  34,305
  35,863
  37,508
  39,244
  41,075
  43,004
  45,038
  47,180
  49,435
  51,809
  54,308
  56,936
  59,701
  62,609
  65,666
  68,880
  72,259
  75,810
  79,543
  83,465
  87,587
  91,917
  96,467
  101,247
  106,268
  111,542
  117,082
Total equity, $m
  21,711
  21,018
  21,937
  22,909
  23,938
  25,025
  26,173
  27,384
  28,662
  30,008
  31,427
  32,922
  34,496
  36,152
  37,896
  39,730
  41,659
  43,688
  45,821
  48,064
  50,422
  52,900
  55,505
  58,241
  61,117
  64,139
  67,314
  70,649
  74,153
  77,833
  81,699
Total liabilities and equity, $m
  51,095
  51,139
  53,375
  55,740
  58,243
  60,888
  63,681
  66,628
  69,737
  73,012
  76,465
  80,102
  83,931
  87,961
  92,204
  96,666
  101,360
  106,297
  111,487
  116,944
  122,681
  128,710
  135,048
  141,706
  148,704
  156,056
  163,781
  171,896
  180,421
  189,375
  198,781
Debt-to-equity ratio
  0.606
  0.660
  0.690
  0.730
  0.760
  0.780
  0.810
  0.840
  0.870
  0.890
  0.920
  0.940
  0.960
  0.980
  1.010
  1.020
  1.040
  1.060
  1.080
  1.100
  1.110
  1.130
  1.140
  1.150
  1.170
  1.180
  1.190
  1.200
  1.210
  1.220
  1.230
Adjusted equity ratio
  0.401
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  6,073
  5,813
  6,095
  6,392
  6,707
  7,040
  7,392
  7,763
  8,154
  8,566
  9,001
  10,625
  11,107
  11,614
  12,148
  12,709
  13,299
  13,920
  14,573
  15,260
  15,981
  16,739
  17,536
  18,374
  19,254
  20,178
  21,150
  22,170
  23,242
  24,369
  25,551
Depreciation, amort., depletion, $m
  123
  2,669
  2,715
  2,765
  2,817
  2,872
  2,931
  2,992
  3,057
  3,126
  3,198
  1,675
  1,755
  1,839
  1,928
  2,021
  2,119
  2,223
  2,331
  2,445
  2,565
  2,691
  2,824
  2,963
  3,109
  3,263
  3,425
  3,594
  3,773
  3,960
  4,157
Funds from operations, $m
  1,014
  8,482
  8,810
  9,157
  9,525
  9,913
  10,323
  10,755
  11,211
  11,692
  12,199
  12,300
  12,862
  13,453
  14,076
  14,730
  15,419
  16,143
  16,904
  17,705
  18,546
  19,431
  20,360
  21,337
  22,363
  23,442
  24,575
  25,765
  27,015
  28,328
  29,708
Change in working capital, $m
  -266
  -99
  -105
  -111
  -117
  -124
  -131
  -138
  -146
  -154
  -162
  -171
  -180
  -189
  -199
  -209
  -220
  -232
  -244
  -256
  -269
  -283
  -297
  -312
  -328
  -345
  -362
  -381
  -400
  -420
  -441
Cash from operations, $m
  1,280
  8,615
  8,915
  9,268
  9,642
  10,037
  10,454
  10,893
  11,357
  11,846
  12,361
  12,471
  13,042
  13,643
  14,275
  14,940
  15,639
  16,375
  17,148
  17,961
  18,816
  19,714
  20,658
  21,649
  22,692
  23,787
  24,937
  26,145
  27,415
  28,749
  30,149
Maintenance CAPEX, $m
  0
  -1,025
  -1,069
  -1,116
  -1,166
  -1,218
  -1,273
  -1,332
  -1,393
  -1,458
  -1,527
  -1,599
  -1,675
  -1,755
  -1,839
  -1,928
  -2,021
  -2,119
  -2,223
  -2,331
  -2,445
  -2,565
  -2,691
  -2,824
  -2,963
  -3,109
  -3,263
  -3,425
  -3,594
  -3,773
  -3,960
New CAPEX, $m
  -206
  -1,323
  -1,402
  -1,484
  -1,570
  -1,659
  -1,752
  -1,849
  -1,950
  -2,055
  -2,166
  -2,281
  -2,402
  -2,528
  -2,661
  -2,799
  -2,945
  -3,097
  -3,256
  -3,423
  -3,599
  -3,782
  -3,975
  -4,177
  -4,389
  -4,612
  -4,846
  -5,091
  -5,348
  -5,617
  -5,901
Cash from investing activities, $m
  5,078
  -2,348
  -2,471
  -2,600
  -2,736
  -2,877
  -3,025
  -3,181
  -3,343
  -3,513
  -3,693
  -3,880
  -4,077
  -4,283
  -4,500
  -4,727
  -4,966
  -5,216
  -5,479
  -5,754
  -6,044
  -6,347
  -6,666
  -7,001
  -7,352
  -7,721
  -8,109
  -8,516
  -8,942
  -9,390
  -9,861
Free cash flow, $m
  6,358
  6,267
  6,443
  6,668
  6,907
  7,160
  7,429
  7,713
  8,014
  8,332
  8,668
  8,591
  8,965
  9,359
  9,775
  10,212
  10,673
  11,159
  11,669
  12,206
  12,772
  13,366
  13,991
  14,648
  15,339
  16,065
  16,828
  17,630
  18,473
  19,359
  20,289
Issuance/(repayment) of debt, $m
  -500
  1,238
  1,316
  1,394
  1,474
  1,558
  1,645
  1,736
  1,831
  1,930
  2,034
  2,142
  2,255
  2,374
  2,498
  2,628
  2,765
  2,908
  3,057
  3,214
  3,379
  3,551
  3,732
  3,922
  4,121
  4,330
  4,550
  4,780
  5,021
  5,274
  5,540
Issuance/(repurchase) of shares, $m
  -226
  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  
  -4,497
  1,238
  1,316
  1,394
  1,474
  1,558
  1,645
  1,736
  1,831
  1,930
  2,034
  2,142
  2,255
  2,374
  2,498
  2,628
  2,765
  2,908
  3,057
  3,214
  3,379
  3,551
  3,732
  3,922
  4,121
  4,330
  4,550
  4,780
  5,021
  5,274
  5,540
Total cash flow (excl. dividends), $m
  1,853
  7,506
  7,760
  8,062
  8,381
  8,718
  9,074
  9,449
  9,845
  10,262
  10,702
  10,733
  11,220
  11,733
  12,273
  12,841
  13,438
  14,066
  14,727
  15,421
  16,150
  16,917
  17,724
  18,571
  19,461
  20,396
  21,378
  22,410
  23,494
  24,633
  25,829
Retained Cash Flow (-), $m
  -3,459
  -857
  -919
  -972
  -1,029
  -1,087
  -1,148
  -1,211
  -1,278
  -1,347
  -1,419
  -1,495
  -1,574
  -1,657
  -1,743
  -1,834
  -1,929
  -2,029
  -2,133
  -2,243
  -2,358
  -2,478
  -2,604
  -2,737
  -2,876
  -3,022
  -3,175
  -3,335
  -3,504
  -3,680
  -3,866
Prev. year cash balance distribution, $m
 
  1,550
  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
 
  8,198
  6,841
  7,089
  7,352
  7,631
  7,926
  8,238
  8,567
  8,915
  9,283
  9,238
  9,646
  10,077
  10,530
  11,007
  11,509
  12,037
  12,593
  13,178
  13,793
  14,439
  15,119
  15,834
  16,585
  17,374
  18,203
  19,075
  19,990
  20,953
  21,963
Discount rate, %
 
  7.10
  7.46
  7.83
  8.22
  8.63
  9.06
  9.51
  9.99
  10.49
  11.01
  11.57
  12.14
  12.75
  13.39
  14.06
  14.76
  15.50
  16.27
  17.09
  17.94
  18.84
  19.78
  20.77
  21.81
  22.90
  24.04
  25.25
  26.51
  27.83
  29.22
PV of cash for distribution, $m
 
  7,655
  5,925
  5,655
  5,360
  5,044
  4,710
  4,360
  4,000
  3,633
  3,265
  2,772
  2,438
  2,117
  1,813
  1,530
  1,272
  1,039
  835
  658
  509
  385
  285
  206
  146
  100
  67
  44
  28
  17
  10
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

Reynolds American Inc., through its subsidiaries, manufactures, and sells cigarettes and other tobacco products in the United States. It operates through RJR Tobacco, Santa Fe, and American Snuff segments. The RJR Tobacco segment offers cigarettes under the NEWPORT, CAMEL, PALL MALL, DORAL, MISTY, and CAPRI brands; and CAMEL Snus, a smoke-free tobacco product, as well as manages various licensed brands, including DUNHILL and STATE EXPRESS 555. The Santa Fe segment manufactures and markets cigarettes and other tobacco products under the NATURAL AMERICAN SPIRIT brand. The American Snuff segment provides smokeless tobacco products, such as moist snuff under GRIZZLY and KODIAK brand names. The company also manufactures and markets digital vapor cigarettes under the VUSE brand name; and markets nicotine replacement therapy products under the ZONNIC brand. It distributes its products primarily through direct wholesale deliveries from a local distribution center and public warehouses. Reynolds American Inc. was founded in 2004 and is headquartered in Winston-Salem, North Carolina.

FINANCIAL RATIOS  of  Reynolds American (RAI)

Valuation Ratios
P/E Ratio 14.9
Price to Sales 7.3
Price to Book 4.2
Price to Tangible Book
Price to Cash Flow 70.9
Price to Free Cash Flow 84.5
Growth Rates
Sales Growth Rate 17.1%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 18.4%
Cap. Spend. - 3 Yr. Gr. Rate 6.1%
Financial Strength
Quick Ratio 4
Current Ratio 0.1
LT Debt to Equity 58.3%
Total Debt to Equity 60.6%
Interest Coverage 15
Management Effectiveness
Return On Assets 12.6%
Ret/ On Assets - 3 Yr. Avg. 11.2%
Return On Total Capital 17.2%
Ret/ On T. Cap. - 3 Yr. Avg. 15.5%
Return On Equity 30.4%
Return On Equity - 3 Yr. Avg. 29.8%
Asset Turnover 0.2
Profitability Ratios
Gross Margin 61.3%
Gross Margin - 3 Yr. Avg. 56.5%
EBITDA Margin 84.2%
EBITDA Margin - 3 Yr. Avg. 60.3%
Operating Margin 84.5%
Oper. Margin - 3 Yr. Avg. 59.8%
Pre-Tax Margin 77.5%
Pre-Tax Margin - 3 Yr. Avg. 54.7%
Net Profit Margin 48.6%
Net Profit Margin - 3 Yr. Avg. 32.1%
Effective Tax Rate 37.3%
Eff/ Tax Rate - 3 Yr. Avg. 40.8%
Payout Ratio 39%

RAI stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the RAI stock intrinsic value calculation we used $12503 million for the last fiscal year's total revenue generated by Reynolds American. The default revenue input number comes from 2016 income statement of Reynolds American. 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 RAI stock valuation model: a) initial revenue growth rate of 4.3% 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 7.1%, whose default value for RAI is calculated based on our internal credit rating of Reynolds American, 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 Reynolds American.
    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 RAI stock the variable cost ratio is equal to 34.9%.

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 RAI 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 4.7% for Reynolds American.

Corporate tax rate of 27% is the nominal tax rate for Reynolds American. 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 RAI 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 RAI are equal to 246%.

Life of production assets of 380.1 years is the average useful life of capital assets used in Reynolds American 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 RAI is equal to -18.4%. 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 - $21711 million for Reynolds American - 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 1430.5 million for Reynolds American 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 Reynolds American at the current share price and the inputted number of shares is $91.1 billion.

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COMPANY NEWS

▶ RAI to release 1Q17 results on May 3   [Apr-19-17 08:30AM  PR Newswire]
▶ Reynolds finalizes Whitaker Park plant donation to local redevelopment group   [Apr-13-17 02:55PM  American City Business Journals]
▶ 10 Best Selling Cigarette Brands In India   [Apr-11-17 09:00AM  Insider Monkey]
▶ British American-Reynolds American Deal Approved in Japan   [Apr-06-17 12:03PM  GuruFocus.com]
▶ MO, PM, and RAI: Comparing Valuation Multiples   [Mar-31-17 07:36AM  Market Realist]
▶ The 3 Best E-Cigarette Stocks to Buy in 2017   [Mar-30-17 04:23PM  Motley Fool]
▶ Reynolds American Expanded Its EBITDA Margin   [11:26AM  Market Realist]
▶ 4 Top Dividend Stocks in Tobacco   [Mar-27-17 01:00PM  at Motley Fool]
▶ 5 Best Selling Ultra-Light Cigarettes in the World   [01:44PM  at Insider Monkey]
▶ Trump's Tax Plan May Still Impact Mega Tobacco Merger   [Mar-18-17 12:05PM  at Motley Fool]
▶ Better Buy: The Coca-Cola Co vs. Reynolds American, Inc.   [Mar-14-17 06:50PM  at Motley Fool]
▶ 10 Countries With The Highest Percentage of Smokers   [Mar-13-17 01:13PM  at Insider Monkey]
▶ Reynolds Must Alter Its Cigarette Labels   [09:35AM  at Investopedia]
▶ Better Buy: Philip Morris International vs. Altria   [Feb-22-17 10:49AM  at Motley Fool]
▶ Fir Trees Big Tobacco Buy And Other Major Moves Heading Into 2017   [Feb-17-17 09:55AM  at Insider Monkey]
▶ Will Philip Morris International Inc. Sink or Swim?   [Feb-16-17 01:19PM  at Motley Fool]
▶ [$$] Reynolds American Profit and Revenue Climb   [08:54AM  at The Wall Street Journal]
▶ 5 Things Altria Management Wants You to Know   [Feb-03-17 09:52AM  at Motley Fool]
▶ [$$] Altria Profit Lifted on Anheuser-Busch InBev Stake   [Feb-01-17 07:46AM  at The Wall Street Journal]
▶ Will "Heat-Not-Burn" E-Cigs Kill Off Vaping?   [09:28AM  at Motley Fool]
▶ Can Altria Group Keep Up Its Growth in 2017?   [10:25AM  at Motley Fool]
▶ [$$] Week in Review, January 21   [Jan-20-17 05:10PM  at Financial Times]
Stock chart of RAI Financial statements of RAI
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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