Intrinsic value of Time Warner - TWX

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$99.84

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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$99.84

 
Intrinsic value

$255.99

 
Up/down potential

+156%

 
Rating

str. buy

 
Value-price divergence* premium content

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

We calculate the intrinsic value of TWX 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 77.1

 

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, %
  4.27
  11.50
  10.85
  10.27
  9.74
  9.26
  8.84
  8.45
  8.11
  7.80
  7.52
  7.27
  7.04
  6.84
  6.65
  6.49
  6.34
  6.20
  6.08
  5.98
  5.88
  5.79
  5.71
  5.64
  5.58
  5.52
  5.47
  5.42
  5.38
  5.34
  5.31
Revenue, $m
  29,318
  32,690
  36,236
  39,956
  43,847
  47,909
  52,144
  56,552
  61,138
  65,906
  70,860
  76,010
  81,360
  86,922
  92,704
  98,718
  104,975
  111,488
  118,271
  125,339
  132,706
  140,390
  148,408
  156,778
  165,520
  174,655
  184,202
  194,186
  204,629
  215,557
  226,995
Variable operating expenses, $m
 
  13,803
  14,999
  16,254
  17,567
  18,937
  20,365
  21,853
  23,400
  25,008
  26,679
  25,641
  27,446
  29,322
  31,273
  33,302
  35,412
  37,610
  39,898
  42,282
  44,767
  47,359
  50,064
  52,888
  55,837
  58,918
  62,139
  65,507
  69,030
  72,716
  76,575
Fixed operating expenses, $m
 
  9,577
  9,816
  10,061
  10,313
  10,571
  10,835
  11,106
  11,384
  11,668
  11,960
  12,259
  12,565
  12,879
  13,201
  13,531
  13,870
  14,216
  14,572
  14,936
  15,310
  15,692
  16,085
  16,487
  16,899
  17,321
  17,754
  18,198
  18,653
  19,120
  19,598
Total operating expenses, $m
  21,771
  23,380
  24,815
  26,315
  27,880
  29,508
  31,200
  32,959
  34,784
  36,676
  38,639
  37,900
  40,011
  42,201
  44,474
  46,833
  49,282
  51,826
  54,470
  57,218
  60,077
  63,051
  66,149
  69,375
  72,736
  76,239
  79,893
  83,705
  87,683
  91,836
  96,173
Operating income, $m
  7,547
  9,310
  11,421
  13,641
  15,968
  18,402
  20,943
  23,594
  26,355
  29,230
  32,221
  38,110
  41,349
  44,720
  48,230
  51,885
  55,693
  59,662
  63,801
  68,120
  72,629
  77,338
  82,259
  87,404
  92,785
  98,415
  104,309
  110,481
  116,946
  123,721
  130,822
EBITDA, $m
  8,216
  12,473
  14,626
  16,890
  19,263
  21,745
  24,337
  27,040
  29,856
  32,787
  35,837
  39,012
  42,314
  45,752
  49,330
  53,056
  56,939
  60,985
  65,205
  69,608
  74,204
  79,004
  84,020
  89,264
  94,749
  100,488
  106,495
  112,785
  119,374
  126,279
  133,516
Interest expense (income), $m
  1,391
  1,322
  1,589
  1,870
  2,165
  2,474
  2,796
  3,131
  3,481
  3,845
  4,223
  4,615
  5,024
  5,448
  5,889
  6,347
  6,824
  7,320
  7,837
  8,375
  8,935
  9,519
  10,128
  10,764
  11,428
  12,121
  12,845
  13,602
  14,394
  15,222
  16,088
Earnings before tax, $m
  5,195
  7,988
  9,832
  11,770
  13,802
  15,928
  18,148
  20,462
  22,874
  25,385
  27,999
  33,494
  36,325
  39,272
  42,341
  45,537
  48,869
  52,342
  55,965
  59,746
  63,694
  67,819
  72,131
  76,640
  81,357
  86,294
  91,464
  96,879
  102,552
  108,499
  114,734
Tax expense, $m
  1,281
  2,157
  2,655
  3,178
  3,727
  4,301
  4,900
  5,525
  6,176
  6,854
  7,560
  9,043
  9,808
  10,604
  11,432
  12,295
  13,195
  14,132
  15,110
  16,131
  17,197
  18,311
  19,475
  20,693
  21,966
  23,299
  24,695
  26,157
  27,689
  29,295
  30,978
Net income, $m
  3,926
  5,831
  7,178
  8,592
  10,076
  11,627
  13,248
  14,937
  16,698
  18,531
  20,439
  24,451
  26,517
  28,669
  30,909
  33,242
  35,674
  38,210
  40,854
  43,615
  46,497
  49,508
  52,656
  55,947
  59,391
  62,995
  66,769
  70,721
  74,863
  79,205
  83,756

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  1,539
  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
  65,966
  71,845
  79,640
  87,816
  96,367
  105,296
  114,602
  124,291
  134,369
  144,847
  155,737
  167,054
  178,814
  191,037
  203,746
  216,963
  230,714
  245,029
  259,937
  275,469
  291,662
  308,549
  326,171
  344,568
  363,781
  383,856
  404,840
  426,783
  449,735
  473,752
  498,890
Adjusted assets (=assets-cash), $m
  64,427
  71,845
  79,640
  87,816
  96,367
  105,296
  114,602
  124,291
  134,369
  144,847
  155,737
  167,054
  178,814
  191,037
  203,746
  216,963
  230,714
  245,029
  259,937
  275,469
  291,662
  308,549
  326,171
  344,568
  363,781
  383,856
  404,840
  426,783
  449,735
  473,752
  498,890
Revenue / Adjusted assets
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
  0.455
Average production assets, $m
  10,436
  11,637
  12,900
  14,224
  15,610
  17,056
  18,563
  20,133
  21,765
  23,462
  25,226
  27,059
  28,964
  30,944
  33,003
  35,144
  37,371
  39,690
  42,105
  44,621
  47,243
  49,979
  52,833
  55,813
  58,925
  62,177
  65,576
  69,130
  72,848
  76,738
  80,810
Working capital, $m
  3,782
  4,675
  5,182
  5,714
  6,270
  6,851
  7,457
  8,087
  8,743
  9,424
  10,133
  10,869
  11,635
  12,430
  13,257
  14,117
  15,011
  15,943
  16,913
  17,923
  18,977
  20,076
  21,222
  22,419
  23,669
  24,976
  26,341
  27,769
  29,262
  30,825
  32,460
Total debt, $m
  24,339
  27,396
  32,244
  37,329
  42,649
  48,202
  53,990
  60,017
  66,286
  72,803
  79,577
  86,615
  93,930
  101,533
  109,438
  117,659
  126,212
  135,116
  144,389
  154,050
  164,121
  174,626
  185,587
  197,029
  208,980
  221,467
  234,519
  248,167
  262,443
  277,381
  293,017
Total liabilities, $m
  41,631
  44,688
  49,536
  54,621
  59,941
  65,494
  71,282
  77,309
  83,578
  90,095
  96,869
  103,907
  111,222
  118,825
  126,730
  134,951
  143,504
  152,408
  161,681
  171,342
  181,413
  191,918
  202,879
  214,321
  226,272
  238,759
  251,811
  265,459
  279,735
  294,673
  310,309
Total equity, $m
  24,335
  27,157
  30,104
  33,194
  36,427
  39,802
  43,319
  46,982
  50,792
  54,752
  58,869
  63,146
  67,592
  72,212
  77,016
  82,012
  87,210
  92,621
  98,256
  104,127
  110,248
  116,632
  123,293
  130,247
  137,509
  145,098
  153,030
  161,324
  170,000
  179,078
  188,580
Total liabilities and equity, $m
  65,966
  71,845
  79,640
  87,815
  96,368
  105,296
  114,601
  124,291
  134,370
  144,847
  155,738
  167,053
  178,814
  191,037
  203,746
  216,963
  230,714
  245,029
  259,937
  275,469
  291,661
  308,550
  326,172
  344,568
  363,781
  383,857
  404,841
  426,783
  449,735
  473,751
  498,889
Debt-to-equity ratio
  1.000
  1.010
  1.070
  1.120
  1.170
  1.210
  1.250
  1.280
  1.310
  1.330
  1.350
  1.370
  1.390
  1.410
  1.420
  1.430
  1.450
  1.460
  1.470
  1.480
  1.490
  1.500
  1.510
  1.510
  1.520
  1.530
  1.530
  1.540
  1.540
  1.550
  1.550
Adjusted equity ratio
  0.354
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378
  0.378

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  3,926
  5,831
  7,178
  8,592
  10,076
  11,627
  13,248
  14,937
  16,698
  18,531
  20,439
  24,451
  26,517
  28,669
  30,909
  33,242
  35,674
  38,210
  40,854
  43,615
  46,497
  49,508
  52,656
  55,947
  59,391
  62,995
  66,769
  70,721
  74,863
  79,205
  83,756
Depreciation, amort., depletion, $m
  669
  3,163
  3,205
  3,249
  3,296
  3,344
  3,394
  3,446
  3,501
  3,557
  3,616
  902
  965
  1,031
  1,100
  1,171
  1,246
  1,323
  1,403
  1,487
  1,575
  1,666
  1,761
  1,860
  1,964
  2,073
  2,186
  2,304
  2,428
  2,558
  2,694
Funds from operations, $m
  -5,315
  8,994
  10,383
  11,842
  13,371
  14,971
  16,642
  18,384
  20,199
  22,088
  24,055
  25,353
  27,483
  29,700
  32,009
  34,414
  36,920
  39,532
  42,258
  45,102
  48,072
  51,174
  54,417
  57,807
  61,355
  65,067
  68,954
  73,026
  77,292
  81,762
  86,450
Change in working capital, $m
  -9,981
  482
  507
  532
  556
  581
  606
  630
  656
  682
  709
  736
  765
  795
  827
  860
  895
  931
  970
  1,011
  1,054
  1,099
  1,147
  1,197
  1,250
  1,306
  1,365
  1,428
  1,493
  1,563
  1,636
Cash from operations, $m
  4,666
  8,374
  9,876
  11,310
  12,815
  14,390
  16,036
  17,753
  19,543
  21,407
  23,347
  24,616
  26,718
  28,905
  31,182
  33,554
  36,025
  38,601
  41,288
  44,091
  47,018
  50,075
  53,270
  56,610
  60,105
  63,761
  67,589
  71,598
  75,798
  80,200
  84,814
Maintenance CAPEX, $m
  0
  -348
  -388
  -430
  -474
  -520
  -569
  -619
  -671
  -726
  -782
  -841
  -902
  -965
  -1,031
  -1,100
  -1,171
  -1,246
  -1,323
  -1,403
  -1,487
  -1,575
  -1,666
  -1,761
  -1,860
  -1,964
  -2,073
  -2,186
  -2,304
  -2,428
  -2,558
New CAPEX, $m
  -432
  -1,201
  -1,263
  -1,324
  -1,385
  -1,446
  -1,507
  -1,569
  -1,633
  -1,697
  -1,764
  -1,833
  -1,905
  -1,980
  -2,058
  -2,141
  -2,228
  -2,319
  -2,415
  -2,516
  -2,623
  -2,736
  -2,854
  -2,980
  -3,112
  -3,252
  -3,399
  -3,554
  -3,718
  -3,890
  -4,072
Cash from investing activities, $m
  -1,360
  -1,549
  -1,651
  -1,754
  -1,859
  -1,966
  -2,076
  -2,188
  -2,304
  -2,423
  -2,546
  -2,674
  -2,807
  -2,945
  -3,089
  -3,241
  -3,399
  -3,565
  -3,738
  -3,919
  -4,110
  -4,311
  -4,520
  -4,741
  -4,972
  -5,216
  -5,472
  -5,740
  -6,022
  -6,318
  -6,630
Free cash flow, $m
  3,306
  6,825
  8,225
  9,556
  10,956
  12,424
  13,960
  15,565
  17,239
  18,984
  20,801
  21,942
  23,911
  25,959
  28,092
  30,313
  32,626
  35,037
  37,550
  40,172
  42,908
  45,765
  48,750
  51,870
  55,132
  58,545
  62,118
  65,858
  69,776
  73,881
  78,184
Issuance/(repayment) of debt, $m
  512
  4,596
  4,849
  5,085
  5,319
  5,553
  5,788
  6,026
  6,269
  6,517
  6,774
  7,039
  7,315
  7,603
  7,905
  8,221
  8,554
  8,904
  9,273
  9,661
  10,072
  10,504
  10,961
  11,443
  11,951
  12,487
  13,052
  13,648
  14,276
  14,938
  15,636
Issuance/(repurchase) of shares, $m
  -2,150
  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  
  -2,653
  4,596
  4,849
  5,085
  5,319
  5,553
  5,788
  6,026
  6,269
  6,517
  6,774
  7,039
  7,315
  7,603
  7,905
  8,221
  8,554
  8,904
  9,273
  9,661
  10,072
  10,504
  10,961
  11,443
  11,951
  12,487
  13,052
  13,648
  14,276
  14,938
  15,636
Total cash flow (excl. dividends), $m
  653
  11,420
  13,074
  14,641
  16,275
  17,977
  19,749
  21,592
  23,508
  25,501
  27,574
  28,981
  31,226
  33,562
  35,997
  38,534
  41,180
  43,940
  46,823
  49,833
  52,979
  56,269
  59,711
  63,312
  67,083
  71,032
  75,170
  79,506
  84,052
  88,820
  93,820
Retained Cash Flow (-), $m
  -716
  -2,822
  -2,947
  -3,090
  -3,233
  -3,375
  -3,518
  -3,662
  -3,810
  -3,961
  -4,116
  -4,278
  -4,445
  -4,620
  -4,804
  -4,996
  -5,198
  -5,411
  -5,635
  -5,871
  -6,121
  -6,384
  -6,661
  -6,954
  -7,263
  -7,588
  -7,932
  -8,294
  -8,676
  -9,078
  -9,502
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
 
  8,598
  10,127
  11,550
  13,042
  14,602
  16,231
  17,929
  19,698
  21,540
  23,458
  24,704
  26,780
  28,942
  31,193
  33,538
  35,982
  38,529
  41,188
  43,962
  46,859
  49,886
  53,049
  56,358
  59,820
  63,444
  67,238
  71,212
  75,376
  79,741
  84,318
Discount rate, %
 
  5.00
  5.25
  5.51
  5.79
  6.08
  6.38
  6.70
  7.04
  7.39
  7.76
  8.14
  8.55
  8.98
  9.43
  9.90
  10.39
  10.91
  11.46
  12.03
  12.63
  13.27
  13.93
  14.63
  15.36
  16.13
  16.93
  17.78
  18.67
  19.60
  20.58
PV of cash for distribution, $m
 
  8,189
  9,142
  9,833
  10,414
  10,872
  11,198
  11,387
  11,434
  11,342
  11,113
  10,440
  10,004
  9,464
  8,836
  8,139
  7,395
  6,622
  5,843
  5,076
  4,339
  3,646
  3,011
  2,440
  1,940
  1,511
  1,152
  859
  625
  444
  307
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

Time Warner Inc. operates as a media and entertainment company in the United States and internationally. It operates through three segments: Turner, Home Box Office, and Warner Bros. The Turner segment creates and programs branded news, entertainment, sports, and kids multi-platform content for consumers. It operates approximately 175 channels in 200 countries and territories. The Turner segment’s networks and related businesses and brands include TNT, TBS, Adult Swim, truTV, Turner Classic Movies, Turner Sports, Bleacher Report, Cartoon Network, Boomerang, CNN, HLN, and iStreamPlanet; and digital properties comprise NBA.com, NCAA.com, PGA.com, tntdrama.com, TBS.com, adultswim.com, and cartoonnetwork.com. It also provides subscription video-on-demand services; and licenses its original programming, and its brands and characters for consumer products and other business ventures. This segment serves cable system operators, satellite service distributors, telephone companies, and virtual multichannel video programming distributors. The Home Box Office segment provides premium pay, basic tier television, and video content services comprising HBO and Cinemax; operates HBO NOW, a video content service; sells its original programming through physical and digital formats; and licenses home entertainment and content to international television networks and video content services. As of December 31, 2016, this segment had 49 million domestic subscribers. The Warner Bros. segment produces, distributes, and licenses television programming and feature films; distributes digital and physical home entertainment products; and produces and distributes videogames, as well as licenses consumer products and brands. The company was formerly known as AOL Time Warner, Inc. and changed its name to Time Warner Inc. in 2003. Time Warner Inc. was founded in 1985 and is headquartered in New York, New York.

FINANCIAL RATIOS  of  Time Warner (TWX)

Valuation Ratios
P/E Ratio 19.6
Price to Sales 2.6
Price to Book 3.2
Price to Tangible Book
Price to Cash Flow 16.5
Price to Free Cash Flow 18.2
Growth Rates
Sales Growth Rate 4.3%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 2.1%
Cap. Spend. - 3 Yr. Gr. Rate -5.3%
Financial Strength
Quick Ratio 1
Current Ratio 0
LT Debt to Equity 92%
Total Debt to Equity 100%
Interest Coverage 5
Management Effectiveness
Return On Assets 7.7%
Ret/ On Assets - 3 Yr. Avg. 7.5%
Return On Total Capital 8.2%
Ret/ On T. Cap. - 3 Yr. Avg. 8.1%
Return On Equity 16.4%
Return On Equity - 3 Yr. Avg. 15.5%
Asset Turnover 0.5
Profitability Ratios
Gross Margin 44.4%
Gross Margin - 3 Yr. Avg. 43%
EBITDA Margin 24.7%
EBITDA Margin - 3 Yr. Avg. 25.1%
Operating Margin 25.7%
Oper. Margin - 3 Yr. Avg. 24%
Pre-Tax Margin 17.7%
Pre-Tax Margin - 3 Yr. Avg. 18.1%
Net Profit Margin 13.4%
Net Profit Margin - 3 Yr. Avg. 13.7%
Effective Tax Rate 24.7%
Eff/ Tax Rate - 3 Yr. Avg. 23.9%
Payout Ratio 32.3%

TWX stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the TWX stock intrinsic value calculation we used $29318 million for the last fiscal year's total revenue generated by Time Warner. The default revenue input number comes from 2016 income statement of Time Warner. 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 TWX stock valuation model: a) initial revenue growth rate of 11.5% 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%, whose default value for TWX is calculated based on our internal credit rating of Time Warner, 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 Time Warner.
    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 TWX stock the variable cost ratio is equal to 43.2%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $9343 million in the base year in the intrinsic value calculation for TWX 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 5.8% for Time Warner.

Corporate tax rate of 27% is the nominal tax rate for Time Warner. 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 TWX 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 TWX are equal to 35.6%.

Life of production assets of 57 years is the average useful life of capital assets used in Time Warner 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 TWX is equal to 14.3%. 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 - $24335 million for Time Warner - 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 771.774 million for Time Warner 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 Time Warner at the current share price and the inputted number of shares is $77.1 billion.


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COMPANY NEWS

▶ Top 10 Biggest Movies of 2017   [12:48PM  TheStreet.com]
▶ Why It Might Be Time to Sell Time Warner Shares   [Apr-20-17 06:32PM  Barrons.com]
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▶ Time Warner Downgraded at Pivotal Research   [09:33AM  TheStreet.com]
▶ A Look at the AT&TTime Warner Deal: What Changed?   [Apr-19-17 05:05PM  Market Realist]
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Stock chart of TWX Financial statements of TWX
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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