Intrinsic value of Charles Schwab - SCHW

Previous Close

$42.15

  Intrinsic Value

$106.51

stock screener

  Rating & Target

str. buy

+153%

  Value-price divergence*

+406%

Previous close

$42.15

 
Intrinsic value

$106.51

 
Up/down potential

+153%

 
Rating

str. buy

 
Value-price divergence*

+406%

Our model is not good at valuating stocks of financial companies, such as SCHW.

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

We calculate the intrinsic value of SCHW 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 54.5

 

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, %
  17.58
  18.40
  17.06
  15.85
  14.77
  13.79
  12.91
  12.12
  11.41
  10.77
  10.19
  9.67
  9.21
  8.78
  8.41
  8.07
  7.76
  7.48
  7.23
  7.01
  6.81
  6.63
  6.47
  6.32
  6.19
  6.07
  5.96
  5.87
  5.78
  5.70
  5.63
Revenue, $m
  7,644
  9,050
  10,595
  12,274
  14,087
  16,030
  18,100
  20,293
  22,609
  25,043
  27,596
  30,265
  33,051
  35,954
  38,976
  42,120
  45,388
  48,784
  52,314
  55,982
  59,794
  63,758
  67,881
  72,171
  76,636
  81,287
  86,133
  91,186
  96,456
  101,955
  107,696
Variable operating expenses, $m
 
  3,371
  3,926
  4,528
  5,179
  5,877
  6,620
  7,407
  8,238
  9,112
  10,028
  10,863
  11,863
  12,906
  13,990
  15,119
  16,292
  17,511
  18,778
  20,095
  21,463
  22,886
  24,366
  25,905
  27,508
  29,178
  30,917
  32,731
  34,623
  36,597
  38,657
Fixed operating expenses, $m
 
  1,873
  1,919
  1,967
  2,017
  2,067
  2,119
  2,172
  2,226
  2,282
  2,339
  2,397
  2,457
  2,519
  2,582
  2,646
  2,712
  2,780
  2,849
  2,921
  2,994
  3,069
  3,145
  3,224
  3,305
  3,387
  3,472
  3,559
  3,648
  3,739
  3,832
Total operating expenses, $m
  4,651
  5,244
  5,845
  6,495
  7,196
  7,944
  8,739
  9,579
  10,464
  11,394
  12,367
  13,260
  14,320
  15,425
  16,572
  17,765
  19,004
  20,291
  21,627
  23,016
  24,457
  25,955
  27,511
  29,129
  30,813
  32,565
  34,389
  36,290
  38,271
  40,336
  42,489
Operating income, $m
  2,993
  3,806
  4,749
  5,778
  6,891
  8,086
  9,361
  10,715
  12,145
  13,650
  15,229
  17,004
  18,730
  20,530
  22,404
  24,355
  26,384
  28,493
  30,686
  32,966
  35,337
  37,804
  40,370
  43,041
  45,823
  48,722
  51,744
  54,896
  58,185
  61,620
  65,207
EBITDA, $m
  3,227
  4,025
  4,984
  6,031
  7,163
  8,379
  9,676
  11,053
  12,507
  14,038
  15,644
  17,325
  19,080
  20,911
  22,817
  24,802
  26,865
  29,010
  31,241
  33,560
  35,971
  38,479
  41,089
  43,806
  46,636
  49,584
  52,657
  55,863
  59,208
  62,700
  66,348
Interest expense (income), $m
  160
  5,777
  6,963
  8,393
  9,950
  11,629
  13,429
  15,347
  17,379
  19,524
  21,780
  24,144
  26,617
  29,198
  31,888
  34,688
  37,601
  40,629
  43,775
  47,045
  50,443
  53,975
  57,648
  61,467
  65,442
  69,579
  73,888
  78,378
  83,059
  87,941
  93,036
Earnings before tax, $m
  2,993
  -1,970
  -2,213
  -2,615
  -3,058
  -3,543
  -4,068
  -4,632
  -5,234
  -5,875
  -6,551
  -7,140
  -7,887
  -8,668
  -9,484
  -10,333
  -11,217
  -12,135
  -13,089
  -14,079
  -15,106
  -16,172
  -17,278
  -18,426
  -19,619
  -20,857
  -22,144
  -23,482
  -24,873
  -26,322
  -27,830
Tax expense, $m
  1,104
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Net income, $m
  1,889
  -1,970
  -2,213
  -2,615
  -3,058
  -3,543
  -4,068
  -4,632
  -5,234
  -5,875
  -6,551
  -7,140
  -7,887
  -8,668
  -9,484
  -10,333
  -11,217
  -12,135
  -13,089
  -14,079
  -15,106
  -16,172
  -17,278
  -18,426
  -19,619
  -20,857
  -22,144
  -23,482
  -24,873
  -26,322
  -27,830

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  10,828
  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
  223,383
  266,191
  311,603
  361,005
  414,320
  471,462
  532,340
  596,867
  664,964
  736,569
  811,636
  890,140
  972,078
  1,057,471
  1,146,363
  1,238,823
  1,334,942
  1,434,836
  1,538,643
  1,646,522
  1,758,652
  1,875,235
  1,996,492
  2,122,662
  2,254,005
  2,390,797
  2,533,336
  2,681,936
  2,836,931
  2,998,672
  3,167,532
Adjusted assets (=assets-cash), $m
  212,555
  266,191
  311,603
  361,005
  414,320
  471,462
  532,340
  596,867
  664,964
  736,569
  811,636
  890,140
  972,078
  1,057,471
  1,146,363
  1,238,823
  1,334,942
  1,434,836
  1,538,643
  1,646,522
  1,758,652
  1,875,235
  1,996,492
  2,122,662
  2,254,005
  2,390,797
  2,533,336
  2,681,936
  2,836,931
  2,998,672
  3,167,532
Revenue / Adjusted assets
  0.036
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
  0.034
Average production assets, $m
  812
  959
  1,123
  1,301
  1,493
  1,699
  1,919
  2,151
  2,397
  2,655
  2,925
  3,208
  3,503
  3,811
  4,131
  4,465
  4,811
  5,171
  5,545
  5,934
  6,338
  6,758
  7,195
  7,650
  8,123
  8,616
  9,130
  9,666
  10,224
  10,807
  11,416
Working capital, $m
  0
  4,525
  5,297
  6,137
  7,043
  8,015
  9,050
  10,147
  11,304
  12,522
  13,798
  15,132
  16,525
  17,977
  19,488
  21,060
  22,694
  24,392
  26,157
  27,991
  29,897
  31,879
  33,940
  36,085
  38,318
  40,644
  43,067
  45,593
  48,228
  50,977
  53,848
Total debt, $m
  166,330
  198,940
  239,811
  284,272
  332,256
  383,684
  438,474
  496,548
  557,836
  622,280
  689,841
  760,494
  834,238
  911,092
  991,094
  1,074,308
  1,160,816
  1,250,721
  1,344,147
  1,441,237
  1,542,155
  1,647,080
  1,756,211
  1,869,764
  1,987,972
  2,111,086
  2,239,371
  2,373,111
  2,512,606
  2,658,173
  2,810,147
Total liabilities, $m
  206,962
  239,572
  280,443
  324,904
  372,888
  424,316
  479,106
  537,180
  598,468
  662,912
  730,473
  801,126
  874,870
  951,724
  1,031,726
  1,114,940
  1,201,448
  1,291,353
  1,384,779
  1,481,869
  1,582,787
  1,687,712
  1,796,843
  1,910,396
  2,028,604
  2,151,718
  2,280,003
  2,413,743
  2,553,238
  2,698,805
  2,850,779
Total equity, $m
  16,421
  26,619
  31,160
  36,100
  41,432
  47,146
  53,234
  59,687
  66,496
  73,657
  81,164
  89,014
  97,208
  105,747
  114,636
  123,882
  133,494
  143,484
  153,864
  164,652
  175,865
  187,524
  199,649
  212,266
  225,400
  239,080
  253,334
  268,194
  283,693
  299,867
  316,753
Total liabilities and equity, $m
  223,383
  266,191
  311,603
  361,004
  414,320
  471,462
  532,340
  596,867
  664,964
  736,569
  811,637
  890,140
  972,078
  1,057,471
  1,146,362
  1,238,822
  1,334,942
  1,434,837
  1,538,643
  1,646,521
  1,758,652
  1,875,236
  1,996,492
  2,122,662
  2,254,004
  2,390,798
  2,533,337
  2,681,937
  2,836,931
  2,998,672
  3,167,532
Debt-to-equity ratio
  10.129
  7.470
  7.700
  7.870
  8.020
  8.140
  8.240
  8.320
  8.390
  8.450
  8.500
  8.540
  8.580
  8.620
  8.650
  8.670
  8.700
  8.720
  8.740
  8.750
  8.770
  8.780
  8.800
  8.810
  8.820
  8.830
  8.840
  8.850
  8.860
  8.860
  8.870
Adjusted equity ratio
  0.077
  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
  0.100

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  1,889
  -1,970
  -2,213
  -2,615
  -3,058
  -3,543
  -4,068
  -4,632
  -5,234
  -5,875
  -6,551
  -7,140
  -7,887
  -8,668
  -9,484
  -10,333
  -11,217
  -12,135
  -13,089
  -14,079
  -15,106
  -16,172
  -17,278
  -18,426
  -19,619
  -20,857
  -22,144
  -23,482
  -24,873
  -26,322
  -27,830
Depreciation, amort., depletion, $m
  234
  219
  235
  253
  272
  293
  315
  338
  362
  388
  415
  321
  350
  381
  413
  446
  481
  517
  555
  593
  634
  676
  720
  765
  812
  862
  913
  967
  1,022
  1,081
  1,142
Funds from operations, $m
  2,775
  -1,751
  -1,978
  -2,362
  -2,786
  -3,250
  -3,753
  -4,294
  -4,872
  -5,486
  -6,136
  -6,820
  -7,537
  -8,287
  -9,071
  -9,887
  -10,736
  -11,618
  -12,534
  -13,485
  -14,472
  -15,496
  -16,559
  -17,661
  -18,806
  -19,995
  -21,231
  -22,515
  -23,851
  -25,241
  -26,688
Change in working capital, $m
  113
  703
  772
  840
  906
  971
  1,035
  1,097
  1,158
  1,217
  1,276
  1,335
  1,393
  1,452
  1,511
  1,572
  1,634
  1,698
  1,765
  1,834
  1,906
  1,982
  2,061
  2,145
  2,233
  2,325
  2,423
  2,526
  2,635
  2,750
  2,871
Cash from operations, $m
  2,662
  -2,455
  -2,750
  -3,202
  -3,693
  -4,222
  -4,788
  -5,391
  -6,030
  -6,704
  -7,412
  -8,154
  -8,930
  -9,739
  -10,582
  -11,459
  -12,370
  -13,316
  -14,299
  -15,319
  -16,378
  -17,478
  -18,620
  -19,806
  -21,039
  -22,321
  -23,654
  -25,041
  -26,486
  -27,991
  -29,559
Maintenance CAPEX, $m
  0
  -81
  -96
  -112
  -130
  -149
  -170
  -192
  -215
  -240
  -265
  -293
  -321
  -350
  -381
  -413
  -446
  -481
  -517
  -555
  -593
  -634
  -676
  -720
  -765
  -812
  -862
  -913
  -967
  -1,022
  -1,081
New CAPEX, $m
  -346
  -147
  -164
  -178
  -192
  -206
  -219
  -233
  -245
  -258
  -271
  -283
  -295
  -308
  -320
  -333
  -346
  -360
  -374
  -389
  -404
  -420
  -437
  -455
  -473
  -493
  -514
  -536
  -559
  -583
  -609
Cash from investing activities, $m
  -38,775
  -228
  -260
  -290
  -322
  -355
  -389
  -425
  -460
  -498
  -536
  -576
  -616
  -658
  -701
  -746
  -792
  -841
  -891
  -944
  -997
  -1,054
  -1,113
  -1,175
  -1,238
  -1,305
  -1,376
  -1,449
  -1,526
  -1,605
  -1,690
Free cash flow, $m
  -36,113
  -2,683
  -3,010
  -3,493
  -4,015
  -4,577
  -5,177
  -5,815
  -6,490
  -7,201
  -7,948
  -8,730
  -9,546
  -10,397
  -11,283
  -12,205
  -13,163
  -14,157
  -15,190
  -16,263
  -17,376
  -18,532
  -19,733
  -20,980
  -22,277
  -23,626
  -25,029
  -26,490
  -28,011
  -29,596
  -31,248
Issuance/(repayment) of debt, $m
  -7
  33,896
  40,871
  44,461
  47,984
  51,428
  54,790
  58,074
  61,288
  64,445
  67,560
  70,653
  73,744
  76,853
  80,003
  83,214
  86,508
  89,905
  93,426
  97,091
  100,917
  104,925
  109,131
  113,553
  118,208
  123,113
  128,285
  133,740
  139,495
  145,567
  151,974
Issuance/(repurchase) of shares, $m
  1,460
  12,168
  6,755
  7,555
  8,390
  9,257
  10,155
  11,085
  12,044
  13,035
  14,058
  14,991
  16,081
  17,208
  18,373
  19,579
  20,829
  22,125
  23,469
  24,867
  26,319
  27,830
  29,404
  31,043
  32,753
  34,536
  36,398
  38,342
  40,373
  42,496
  44,716
Cash from financing (excl. dividends), $m  
  35,449
  46,064
  47,626
  52,016
  56,374
  60,685
  64,945
  69,159
  73,332
  77,480
  81,618
  85,644
  89,825
  94,061
  98,376
  102,793
  107,337
  112,030
  116,895
  121,958
  127,236
  132,755
  138,535
  144,596
  150,961
  157,649
  164,683
  172,082
  179,868
  188,063
  196,690
Total cash flow (excl. dividends), $m
  -664
  43,381
  44,616
  48,524
  52,359
  56,108
  59,768
  63,343
  66,842
  70,278
  73,670
  76,915
  80,279
  83,664
  87,093
  90,588
  94,174
  97,872
  101,705
  105,695
  109,861
  114,223
  118,802
  123,616
  128,684
  134,023
  139,653
  145,592
  151,857
  158,467
  165,442
Retained Cash Flow (-), $m
  -3,019
  -12,168
  -6,755
  -7,555
  -8,390
  -9,257
  -10,155
  -11,085
  -12,044
  -13,035
  -14,058
  -14,991
  -16,081
  -17,208
  -18,373
  -19,579
  -20,829
  -22,125
  -23,469
  -24,867
  -26,319
  -27,830
  -29,404
  -31,043
  -32,753
  -34,536
  -36,398
  -38,342
  -40,373
  -42,496
  -44,716
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
 
  31,213
  37,861
  40,969
  43,969
  46,851
  49,613
  52,259
  54,797
  57,243
  59,612
  61,924
  64,198
  66,456
  68,719
  71,009
  73,345
  75,747
  78,236
  80,828
  83,542
  86,393
  89,398
  92,573
  95,931
  99,487
  103,256
  107,250
  111,484
  115,972
  120,726
Discount rate, %
 
  13.80
  14.49
  15.21
  15.98
  16.77
  17.61
  18.49
  19.42
  20.39
  21.41
  22.48
  23.60
  24.78
  26.02
  27.32
  28.69
  30.12
  31.63
  33.21
  34.87
  36.62
  38.45
  40.37
  42.39
  44.51
  46.73
  49.07
  51.52
  54.10
  56.80
PV of cash for distribution, $m
 
  27,428
  28,884
  26,788
  24,304
  21,577
  18,744
  15,933
  13,250
  10,776
  8,567
  6,656
  5,049
  3,737
  2,697
  1,895
  1,296
  862
  556
  348
  211
  123
  70
  38
  20
  10
  5
  2
  1
  0
  0
Current shareholders' claim on cash, %
  100
  81.7
  75.9
  70.8
  66.1
  62.0
  58.2
  54.7
  51.6
  48.7
  46.1
  43.6
  41.4
  39.3
  37.3
  35.5
  33.8
  32.2
  30.7
  29.3
  27.9
  26.6
  25.4
  24.3
  23.2
  22.2
  21.2
  20.3
  19.4
  18.6
  17.8

The Charles Schwab Corporation, through its subsidiaries, provides wealth management, securities brokerage, banking, asset management, custody, and financial advisory services. The company operates through two segments, Investor Services and Advisor Services. The Investor Services segment provides retail brokerage and banking services, retirement plan services, and other corporate brokerage services; and stock plan services, compliance solutions, and mutual fund clearing services, as well as engages in the off-platform sales business. The Advisor Services segment provides custodial, trading, and support services; and retirement and corporate brokerage retirement services. The company provides brokerage accounts with cash management capabilities; third-party mutual funds through the Mutual Fund Marketplace, including no-transaction fee mutual funds through the Mutual Fund OneSource service, which includes proprietary mutual funds, plus mutual fund trading, and clearing services to broker-dealers; exchange-traded funds (ETFs), including proprietary and third-party ETFs; and advice solutions, such as managed portfolios of proprietary and third-party mutual funds and ETFs, separately managed accounts, customized personal advice for tailored portfolios, and specialized planning and portfolio management. It also offers banking products and services, including checking and savings accounts, certificates of deposit, first lien residential real estate mortgage loans, home equity loans and lines of credit, and Pledged Asset Lines; and trust services comprising trust custody services, personal trust reporting services, and administrative trustee services. The company serves individuals and institutional clients in the United States, the Commonwealth of Puerto Rico, London, and Hong Kong. The Charles Schwab Corporation was founded in 1971 and is headquartered in San Francisco, California.

FINANCIAL RATIOS  of  Charles Schwab (SCHW)

Valuation Ratios
P/E Ratio 29.7
Price to Sales 7.3
Price to Book 3.4
Price to Tangible Book
Price to Cash Flow 21.1
Price to Free Cash Flow 24.3
Growth Rates
Sales Growth Rate 17.6%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 30.1%
Cap. Spend. - 3 Yr. Gr. Rate 6.8%
Financial Strength
Quick Ratio 0
Current Ratio NaN
LT Debt to Equity 17.5%
Total Debt to Equity 1012.9%
Interest Coverage 20
Management Effectiveness
Return On Assets 1%
Ret/ On Assets - 3 Yr. Avg. 0.9%
Return On Total Capital 1.1%
Ret/ On T. Cap. - 3 Yr. Avg. 1.1%
Return On Equity 12.7%
Return On Equity - 3 Yr. Avg. 12%
Asset Turnover 0
Profitability Ratios
Gross Margin 97.8%
Gross Margin - 3 Yr. Avg. 98%
EBITDA Margin 44.3%
EBITDA Margin - 3 Yr. Avg. 41.3%
Operating Margin 39.2%
Oper. Margin - 3 Yr. Avg. 36.2%
Pre-Tax Margin 39.2%
Pre-Tax Margin - 3 Yr. Avg. 36.2%
Net Profit Margin 24.7%
Net Profit Margin - 3 Yr. Avg. 22.8%
Effective Tax Rate 36.9%
Eff/ Tax Rate - 3 Yr. Avg. 37%
Payout Ratio 25.7%

SCHW stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the SCHW stock intrinsic value calculation we used $7644 million for the last fiscal year's total revenue generated by Charles Schwab. The default revenue input number comes from 2016 income statement of Charles Schwab. 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 SCHW stock valuation model: a) initial revenue growth rate of 18.4% 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 13.8%, whose default value for SCHW is calculated based on our internal credit rating of Charles Schwab, 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 Charles Schwab.
    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 SCHW stock the variable cost ratio is equal to 37.5%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $1827 million in the base year in the intrinsic value calculation for SCHW 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 3.5% for Charles Schwab.

Corporate tax rate of 27% is the nominal tax rate for Charles Schwab. 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 SCHW 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 SCHW are equal to 10.6%.

Life of production assets of 10 years is the average useful life of capital assets used in Charles Schwab 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 SCHW is equal to 50%. 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 - $16421 million for Charles Schwab - 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 1292.63 million for Charles Schwab 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 Charles Schwab at the current share price and the inputted number of shares is $54.5 billion.

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COMPANY NEWS

▶ Schwab's New Filing May Kick Off ETFs' No-Fee Future   [Jul-21-17 10:44AM  Bloomberg Video]
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▶ TD Ameritrade Stock Breaks Out As Q3 Beats; Schwab Meets   [04:07PM  Investor's Business Daily]
▶ Jefferies Sees 15% Upside for Charles Schwab   [02:53PM  TheStreet.com]
▶ Schwab: Close, but No Cigar?   [11:51AM  Barrons.com]
▶ Deutsche Bank Downgrades Charles Schwab   [Jul-12-17 11:22AM  Barrons.com]
▶ Schwab Announces Its Summer Business Update   [Jul-07-17 08:45AM  Business Wire]
▶ Four Online Brokers Are In Or Near Buy Zone Right Now   [Jul-05-17 04:04PM  Investor's Business Daily]
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▶ Schwab Reports Monthly Activity Highlights   [08:45AM  Business Wire]
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▶ Ron Baron: Road ahead for Tesla   [07:09AM  CNBC Videos]
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▶ Market a 'sector specific' story: Expert   [May-30-17 07:10AM  CNBC Videos]
▶ Tax Reforms and Spending Cuts to Balance Trumps Budget Plan   [May-25-17 07:37AM  Market Realist]
▶ Charles Schwab IRA and Roth IRA Review (SCHW)   [May-19-17 01:28PM  Investopedia]
▶ Battle Over Online Trading Fees May Be Over   [May-18-17 04:17PM  Barrons.com]
▶ Schwab Declares Preferred Stock Dividend   [May-16-17 07:15PM  Business Wire]
▶ Schwab Reports Monthly Activity Highlights   [May-12-17 08:45AM  Business Wire]
▶ Makena Capital Management Llc Buys Schwab U.S. ...   [May-10-17 02:38PM  GuruFocus.com]
▶ 24 Years In, Which ETF Providers Are At The Top?   [May-05-17 03:06PM  Investor's Business Daily]
▶ The Revolution Has Been Mischaracterized   [10:01AM  Barrons.com]
▶ Go Robo or Die!!!   [May-02-17 03:26PM  Barrons.com]
▶ Weekly Top Insider Buys Highlight for the Week of April 28   [Apr-30-17 12:36PM  GuruFocus.com]
▶ 9 Partners for the Next Decade   [Apr-27-17 04:00PM  Morningstar]
▶ Santoli: The market is disengaged from policy headlines   [Apr-26-17 04:01PM  CNBC Videos]
Stock chart of SCHW Financial statements of SCHW Annual reports of SCHW
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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