Intrinsic value of Taiwan Semiconductor Manufacturing ADR - TSM

Previous Close

$37.77

  Intrinsic Value

$24.73

stock screener

  Rating & Target

sell

-35%

  Value-price divergence*

-126%

Previous close

$37.77

 
Intrinsic value

$24.73

 
Up/down potential

-35%

 
Rating

sell

 
Value-price divergence*

-126%

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

We calculate the intrinsic value of TSM 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 191.3

 

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, %
  12.38
  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
  30,475
  31,085
  31,799
  32,617
  33,534
  34,551
  35,666
  36,881
  38,196
  39,612
  41,133
  42,759
  44,494
  46,342
  48,306
  50,390
  52,598
  54,935
  57,407
  60,019
  62,777
  65,687
  68,755
  71,990
  75,398
  78,988
  82,767
  86,745
  90,931
  95,335
  99,967
Variable operating expenses, $m
 
  13,801
  14,118
  14,480
  14,887
  15,338
  15,833
  16,371
  16,954
  17,582
  18,256
  18,958
  19,727
  20,547
  21,417
  22,341
  23,320
  24,356
  25,452
  26,610
  27,833
  29,123
  30,484
  31,918
  33,429
  35,020
  36,696
  38,460
  40,316
  42,268
  44,322
Fixed operating expenses, $m
 
  5,037
  5,163
  5,292
  5,424
  5,560
  5,699
  5,841
  5,987
  6,137
  6,290
  6,448
  6,609
  6,774
  6,943
  7,117
  7,295
  7,477
  7,664
  7,856
  8,052
  8,253
  8,460
  8,671
  8,888
  9,110
  9,338
  9,571
  9,811
  10,056
  10,307
Total operating expenses, $m
  18,329
  18,838
  19,281
  19,772
  20,311
  20,898
  21,532
  22,212
  22,941
  23,719
  24,546
  25,406
  26,336
  27,321
  28,360
  29,458
  30,615
  31,833
  33,116
  34,466
  35,885
  37,376
  38,944
  40,589
  42,317
  44,130
  46,034
  48,031
  50,127
  52,324
  54,629
Operating income, $m
  12,146
  12,247
  12,519
  12,844
  13,223
  13,653
  14,135
  14,669
  15,255
  15,893
  16,586
  17,353
  18,158
  19,022
  19,945
  20,932
  21,983
  23,102
  24,291
  25,553
  26,892
  28,310
  29,812
  31,401
  33,081
  34,857
  36,733
  38,714
  40,804
  43,010
  45,337
EBITDA, $m
  19,342
  18,389
  18,802
  19,289
  19,848
  20,479
  21,181
  21,954
  22,798
  23,716
  24,709
  25,777
  26,924
  28,151
  29,462
  30,858
  32,345
  33,924
  35,600
  37,377
  39,259
  41,250
  43,357
  45,583
  47,934
  50,417
  53,038
  55,802
  58,718
  61,791
  65,031
Interest expense (income), $m
  106
  172
  182
  192
  204
  218
  233
  250
  268
  287
  308
  331
  355
  380
  408
  437
  468
  501
  535
  572
  611
  651
  695
  740
  788
  838
  892
  948
  1,007
  1,069
  1,134
Earnings before tax, $m
  12,408
  12,074
  12,337
  12,652
  13,018
  13,435
  13,902
  14,419
  14,987
  15,606
  16,278
  17,023
  17,804
  18,641
  19,537
  20,495
  21,515
  22,601
  23,755
  24,981
  26,281
  27,659
  29,117
  30,661
  32,293
  34,018
  35,841
  37,766
  39,798
  41,942
  44,203
Tax expense, $m
  1,659
  3,260
  3,331
  3,416
  3,515
  3,627
  3,754
  3,893
  4,046
  4,214
  4,395
  4,596
  4,807
  5,033
  5,275
  5,534
  5,809
  6,102
  6,414
  6,745
  7,096
  7,468
  7,862
  8,278
  8,719
  9,185
  9,677
  10,197
  10,745
  11,324
  11,935
Net income, $m
  10,746
  8,814
  9,006
  9,236
  9,503
  9,808
  10,148
  10,526
  10,941
  11,393
  11,883
  12,427
  12,997
  13,608
  14,262
  14,961
  15,706
  16,499
  17,341
  18,236
  19,185
  20,191
  21,256
  22,382
  23,574
  24,833
  26,164
  27,569
  29,052
  30,617
  32,268

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  20,453
  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
  60,648
  41,009
  41,952
  43,030
  44,240
  45,582
  47,053
  48,656
  50,390
  52,259
  54,265
  56,410
  58,700
  61,137
  63,728
  66,477
  69,390
  72,474
  75,735
  79,181
  82,819
  86,658
  90,706
  94,974
  99,470
  104,205
  109,191
  114,439
  119,961
  125,771
  131,882
Adjusted assets (=assets-cash), $m
  40,195
  41,009
  41,952
  43,030
  44,240
  45,582
  47,053
  48,656
  50,390
  52,259
  54,265
  56,410
  58,700
  61,137
  63,728
  66,477
  69,390
  72,474
  75,735
  79,181
  82,819
  86,658
  90,706
  94,974
  99,470
  104,205
  109,191
  114,439
  119,961
  125,771
  131,882
Revenue / Adjusted assets
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
Average production assets, $m
  30,024
  30,618
  31,322
  32,127
  33,031
  34,033
  35,131
  36,328
  37,623
  39,018
  40,516
  42,118
  43,827
  45,647
  47,581
  49,634
  51,809
  54,111
  56,546
  59,119
  61,835
  64,701
  67,724
  70,910
  74,267
  77,803
  81,525
  85,444
  89,567
  93,905
  98,467
Working capital, $m
  16,058
  -1,337
  -1,367
  -1,403
  -1,442
  -1,486
  -1,534
  -1,586
  -1,642
  -1,703
  -1,769
  -1,839
  -1,913
  -1,993
  -2,077
  -2,167
  -2,262
  -2,362
  -2,469
  -2,581
  -2,699
  -2,825
  -2,956
  -3,096
  -3,242
  -3,396
  -3,559
  -3,730
  -3,910
  -4,099
  -4,299
Total debt, $m
  8,011
  5,190
  5,493
  5,839
  6,227
  6,658
  7,130
  7,644
  8,201
  8,801
  9,445
  10,134
  10,869
  11,651
  12,483
  13,365
  14,300
  15,290
  16,337
  17,443
  18,611
  19,843
  21,143
  22,513
  23,956
  25,476
  27,076
  28,761
  30,534
  32,399
  34,360
Total liabilities, $m
  15,985
  13,164
  13,467
  13,813
  14,201
  14,632
  15,104
  15,618
  16,175
  16,775
  17,419
  18,108
  18,843
  19,625
  20,457
  21,339
  22,274
  23,264
  24,311
  25,417
  26,585
  27,817
  29,117
  30,487
  31,930
  33,450
  35,050
  36,735
  38,508
  40,373
  42,334
Total equity, $m
  44,663
  27,845
  28,485
  29,217
  30,039
  30,950
  31,949
  33,037
  34,215
  35,484
  36,846
  38,303
  39,857
  41,512
  43,271
  45,138
  47,116
  49,210
  51,424
  53,764
  56,234
  58,841
  61,590
  64,487
  67,540
  70,755
  74,141
  77,704
  81,454
  85,399
  89,548
Total liabilities and equity, $m
  60,648
  41,009
  41,952
  43,030
  44,240
  45,582
  47,053
  48,655
  50,390
  52,259
  54,265
  56,411
  58,700
  61,137
  63,728
  66,477
  69,390
  72,474
  75,735
  79,181
  82,819
  86,658
  90,707
  94,974
  99,470
  104,205
  109,191
  114,439
  119,962
  125,772
  131,882
Debt-to-equity ratio
  0.179
  0.190
  0.190
  0.200
  0.210
  0.220
  0.220
  0.230
  0.240
  0.250
  0.260
  0.260
  0.270
  0.280
  0.290
  0.300
  0.300
  0.310
  0.320
  0.320
  0.330
  0.340
  0.340
  0.350
  0.350
  0.360
  0.370
  0.370
  0.370
  0.380
  0.380
Adjusted equity ratio
  0.649
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  10,746
  8,814
  9,006
  9,236
  9,503
  9,808
  10,148
  10,526
  10,941
  11,393
  11,883
  12,427
  12,997
  13,608
  14,262
  14,961
  15,706
  16,499
  17,341
  18,236
  19,185
  20,191
  21,256
  22,382
  23,574
  24,833
  26,164
  27,569
  29,052
  30,617
  32,268
Depreciation, amort., depletion, $m
  7,196
  6,143
  6,284
  6,445
  6,626
  6,826
  7,046
  7,285
  7,544
  7,823
  8,122
  8,424
  8,765
  9,129
  9,516
  9,927
  10,362
  10,822
  11,309
  11,824
  12,367
  12,940
  13,545
  14,182
  14,853
  15,561
  16,305
  17,089
  17,913
  18,781
  19,693
Funds from operations, $m
  15,394
  14,957
  15,290
  15,681
  16,129
  16,633
  17,194
  17,811
  18,484
  19,216
  20,005
  20,850
  21,762
  22,737
  23,779
  24,888
  26,068
  27,321
  28,651
  30,060
  31,552
  33,131
  34,800
  36,564
  38,427
  40,394
  42,469
  44,658
  46,966
  49,398
  51,962
Change in working capital, $m
  -1,961
  -26
  -31
  -35
  -39
  -44
  -48
  -52
  -57
  -61
  -65
  -70
  -75
  -79
  -84
  -90
  -95
  -101
  -106
  -112
  -119
  -125
  -132
  -139
  -147
  -154
  -163
  -171
  -180
  -189
  -199
Cash from operations, $m
  17,355
  14,983
  15,320
  15,716
  16,168
  16,677
  17,242
  17,863
  18,541
  19,276
  20,071
  20,920
  21,837
  22,817
  23,863
  24,977
  26,163
  27,422
  28,757
  30,172
  31,671
  33,256
  34,932
  36,704
  38,574
  40,548
  42,632
  44,829
  47,146
  49,588
  52,161
Maintenance CAPEX, $m
  0
  -6,005
  -6,124
  -6,264
  -6,425
  -6,606
  -6,807
  -7,026
  -7,266
  -7,525
  -7,804
  -8,103
  -8,424
  -8,765
  -9,129
  -9,516
  -9,927
  -10,362
  -10,822
  -11,309
  -11,824
  -12,367
  -12,940
  -13,545
  -14,182
  -14,853
  -15,561
  -16,305
  -17,089
  -17,913
  -18,781
New CAPEX, $m
  -10,683
  -594
  -704
  -805
  -904
  -1,001
  -1,099
  -1,196
  -1,295
  -1,395
  -1,497
  -1,602
  -1,709
  -1,820
  -1,934
  -2,053
  -2,175
  -2,302
  -2,435
  -2,573
  -2,716
  -2,866
  -3,023
  -3,186
  -3,357
  -3,536
  -3,723
  -3,918
  -4,123
  -4,338
  -4,563
Cash from investing activities, $m
  -12,713
  -6,599
  -6,828
  -7,069
  -7,329
  -7,607
  -7,906
  -8,222
  -8,561
  -8,920
  -9,301
  -9,705
  -10,133
  -10,585
  -11,063
  -11,569
  -12,102
  -12,664
  -13,257
  -13,882
  -14,540
  -15,233
  -15,963
  -16,731
  -17,539
  -18,389
  -19,284
  -20,223
  -21,212
  -22,251
  -23,344
Free cash flow, $m
  4,642
  8,384
  8,493
  8,647
  8,839
  9,070
  9,337
  9,640
  9,980
  10,357
  10,770
  11,215
  11,704
  12,231
  12,799
  13,409
  14,061
  14,757
  15,500
  16,290
  17,131
  18,023
  18,969
  19,973
  21,035
  22,159
  23,348
  24,606
  25,934
  27,337
  28,818
Issuance/(repayment) of debt, $m
  -145
  267
  303
  346
  389
  431
  472
  514
  557
  600
  644
  689
  735
  782
  832
  882
  935
  990
  1,047
  1,106
  1,168
  1,232
  1,300
  1,370
  1,443
  1,520
  1,600
  1,685
  1,773
  1,865
  1,962
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  
  -71
  267
  303
  346
  389
  431
  472
  514
  557
  600
  644
  689
  735
  782
  832
  882
  935
  990
  1,047
  1,106
  1,168
  1,232
  1,300
  1,370
  1,443
  1,520
  1,600
  1,685
  1,773
  1,865
  1,962
Total cash flow (excl. dividends), $m
  4,313
  8,651
  8,795
  8,993
  9,228
  9,500
  9,809
  10,155
  10,537
  10,956
  11,414
  11,904
  12,439
  13,014
  13,631
  14,291
  14,996
  15,747
  16,547
  17,396
  18,298
  19,255
  20,269
  21,342
  22,478
  23,679
  24,949
  26,290
  27,706
  29,202
  30,779
Retained Cash Flow (-), $m
  -5,388
  -547
  -640
  -732
  -822
  -911
  -999
  -1,088
  -1,178
  -1,269
  -1,362
  -1,457
  -1,555
  -1,655
  -1,759
  -1,867
  -1,978
  -2,094
  -2,214
  -2,340
  -2,470
  -2,607
  -2,749
  -2,898
  -3,053
  -3,215
  -3,385
  -3,563
  -3,750
  -3,945
  -4,149
Prev. year cash balance distribution, $m
 
  17,365
  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
 
  25,469
  8,155
  8,261
  8,406
  8,589
  8,810
  9,067
  9,359
  9,688
  10,052
  10,447
  10,884
  11,359
  11,872
  12,425
  13,018
  13,653
  14,332
  15,057
  15,828
  16,649
  17,520
  18,445
  19,425
  20,464
  21,564
  22,727
  23,957
  25,257
  26,630
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  24,419
  7,466
  7,189
  6,921
  6,658
  6,394
  6,125
  5,850
  5,565
  5,270
  4,961
  4,645
  4,319
  3,986
  3,648
  3,308
  2,971
  2,639
  2,318
  2,011
  1,722
  1,454
  1,209
  989
  796
  629
  488
  371
  276
  201
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

Taiwan Semiconductor Manufacturing Company Limited (TSMC) is a semiconductor foundry. The Company is engaged in the manufacturing, selling, packaging, testing and computer-aided design of integrated circuits and other semiconductor devices and the manufacturing of masks. It operates through foundry segment. The foundry segment is engaged in manufacturing, selling, packaging, testing and computer-aided design of integrated circuits (IC) and other semiconductor devices and the manufacturing of masks. It operates three 12-inch wafer fabs, four eight-inch wafer fabs, one six-inch wafer fab (fab 2) and two backend fabs (advanced backend fab 1 and 2). It also manages two eight-inch fabs at its subsidiaries, WaferTech, LLC in the United States and TSMC China Company Limited. Its exploratory work focuses on transistors and technologies, such as three dimensional (3D) structures, strained-layer complementary metal-oxide semiconductor (CMOS), high-mobility materials and 3D IC devices.

FINANCIAL RATIOS  of  Taiwan Semiconductor Manufacturing ADR (TSM)

Valuation Ratios
P/E Ratio 91.1
Price to Sales 32.1
Price to Book 21.9
Price to Tangible Book
Price to Cash Flow 56.4
Price to Free Cash Flow 146.8
Growth Rates
Sales Growth Rate 12.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 26.9%
Cap. Spend. - 3 Yr. Gr. Rate 2.7%
Financial Strength
Quick Ratio 7
Current Ratio 0
LT Debt to Equity 11%
Total Debt to Equity 17.9%
Interest Coverage 118
Management Effectiveness
Return On Assets 19%
Ret/ On Assets - 3 Yr. Avg. 19.3%
Return On Total Capital 21.5%
Ret/ On T. Cap. - 3 Yr. Avg. 21.9%
Return On Equity 25.6%
Return On Equity - 3 Yr. Avg. 26.8%
Asset Turnover 0.5
Profitability Ratios
Gross Margin 50.1%
Gross Margin - 3 Yr. Avg. 49.4%
EBITDA Margin 64.7%
EBITDA Margin - 3 Yr. Avg. 66.4%
Operating Margin 39.9%
Oper. Margin - 3 Yr. Avg. 38.8%
Pre-Tax Margin 40.7%
Pre-Tax Margin - 3 Yr. Avg. 40.6%
Net Profit Margin 35.3%
Net Profit Margin - 3 Yr. Avg. 35.4%
Effective Tax Rate 13.4%
Eff/ Tax Rate - 3 Yr. Avg. 12.9%
Payout Ratio 46.5%

TSM stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the TSM stock intrinsic value calculation we used $30475 million for the last fiscal year's total revenue generated by Taiwan Semiconductor Manufacturing ADR. The default revenue input number comes from 2016 income statement of Taiwan Semiconductor Manufacturing 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 TSM 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 4.3%, whose default value for TSM is calculated based on our internal credit rating of Taiwan Semiconductor Manufacturing 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 Taiwan Semiconductor Manufacturing 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 TSM stock the variable cost ratio is equal to 44.4%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $4914 million in the base year in the intrinsic value calculation for TSM 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 Taiwan Semiconductor Manufacturing ADR.

Corporate tax rate of 27% is the nominal tax rate for Taiwan Semiconductor Manufacturing 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 TSM 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 TSM are equal to 98.5%.

Life of production assets of 4.2 years is the average useful life of capital assets used in Taiwan Semiconductor Manufacturing 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 TSM is equal to -4.3%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $44663 million for Taiwan Semiconductor Manufacturing 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 5063.77 million for Taiwan Semiconductor Manufacturing 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 Taiwan Semiconductor Manufacturing ADR at the current share price and the inputted number of shares is $191.3 billion.

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Financial statements of TSM
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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