Intrinsic value of Time Warner - TWX

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$99.07

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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$99.07

 
Intrinsic value

$163.00

 
Up/down potential

+65%

 
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 77.0

 

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
  5.80
  5.72
  5.65
  5.58
  5.52
  5.47
  5.43
  5.38
  5.34
  5.31
  5.28
  5.25
  5.23
  5.20
  5.18
  5.16
  5.15
  5.13
  5.12
  5.11
  5.10
  5.09
  5.08
  5.07
  5.06
  5.06
  5.05
  5.05
  5.04
  5.04
Revenue, $m
  29,318
  31,018
  32,793
  34,645
  36,579
  38,600
  40,712
  42,921
  45,231
  47,649
  50,179
  52,828
  55,602
  58,508
  61,552
  64,742
  68,086
  71,591
  75,266
  79,120
  83,161
  87,400
  91,847
  96,512
  101,406
  106,540
  111,929
  117,583
  123,517
  129,744
  136,281
Variable operating expenses, $m
 
  13,239
  13,838
  14,462
  15,115
  15,797
  16,509
  17,254
  18,034
  18,849
  19,703
  17,821
  18,757
  19,737
  20,764
  21,840
  22,968
  24,151
  25,390
  26,690
  28,054
  29,484
  30,984
  32,557
  34,208
  35,941
  37,758
  39,666
  41,667
  43,768
  45,973
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
  22,816
  23,654
  24,523
  25,428
  26,368
  27,344
  28,360
  29,418
  30,517
  31,663
  30,080
  31,322
  32,616
  33,965
  35,371
  36,838
  38,367
  39,962
  41,626
  43,364
  45,176
  47,069
  49,044
  51,107
  53,262
  55,512
  57,864
  60,320
  62,888
  65,571
Operating income, $m
  7,547
  8,203
  9,139
  10,121
  11,151
  12,233
  13,368
  14,561
  15,814
  17,132
  18,516
  22,748
  24,280
  25,891
  27,586
  29,370
  31,248
  33,224
  35,304
  37,493
  39,798
  42,224
  44,778
  47,467
  50,298
  53,279
  56,416
  59,719
  63,196
  66,857
  70,710
EBITDA, $m
  8,216
  11,346
  12,304
  13,307
  14,361
  15,466
  16,627
  17,845
  19,126
  20,472
  21,887
  23,375
  24,940
  26,585
  28,317
  30,139
  32,056
  34,074
  36,197
  38,432
  40,785
  43,261
  45,868
  48,613
  51,502
  54,543
  57,744
  61,114
  64,662
  68,396
  72,327
Interest expense (income), $m
  1,391
  1,322
  1,456
  1,597
  1,744
  1,897
  2,058
  2,225
  2,400
  2,583
  2,775
  2,976
  3,186
  3,406
  3,636
  3,877
  4,130
  4,395
  4,673
  4,965
  5,270
  5,591
  5,927
  6,279
  6,649
  7,037
  7,444
  7,872
  8,320
  8,790
  9,284
Earnings before tax, $m
  5,195
  6,880
  7,683
  8,524
  9,407
  10,335
  11,311
  12,336
  13,414
  14,548
  15,741
  19,772
  21,094
  22,485
  23,950
  25,493
  27,118
  28,829
  30,630
  32,528
  34,528
  36,633
  38,852
  41,188
  43,649
  46,241
  48,972
  51,847
  54,876
  58,066
  61,426
Tax expense, $m
  1,281
  1,858
  2,074
  2,301
  2,540
  2,791
  3,054
  3,331
  3,622
  3,928
  4,250
  5,339
  5,695
  6,071
  6,467
  6,883
  7,322
  7,784
  8,270
  8,783
  9,322
  9,891
  10,490
  11,121
  11,785
  12,485
  13,222
  13,999
  14,817
  15,678
  16,585
Net income, $m
  3,926
  5,023
  5,608
  6,223
  6,867
  7,545
  8,257
  9,005
  9,792
  10,620
  11,491
  14,434
  15,399
  16,414
  17,484
  18,610
  19,796
  21,045
  22,360
  23,746
  25,205
  26,742
  28,362
  30,067
  31,864
  33,756
  35,749
  37,849
  40,060
  42,388
  44,841

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
  68,172
  72,072
  76,142
  80,394
  84,835
  89,478
  94,332
  99,410
  104,723
  110,283
  116,105
  122,202
  128,588
  135,279
  142,290
  149,639
  157,343
  165,420
  173,890
  182,772
  192,089
  201,861
  212,113
  222,869
  234,155
  245,997
  258,424
  271,466
  285,153
  299,518
Adjusted assets (=assets-cash), $m
  64,427
  68,172
  72,072
  76,142
  80,394
  84,835
  89,478
  94,332
  99,410
  104,723
  110,283
  116,105
  122,202
  128,588
  135,279
  142,290
  149,639
  157,343
  165,420
  173,890
  182,772
  192,089
  201,861
  212,113
  222,869
  234,155
  245,997
  258,424
  271,466
  285,153
  299,518
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
  11,043
  11,674
  12,334
  13,022
  13,742
  14,494
  15,280
  16,102
  16,963
  17,864
  18,807
  19,794
  20,829
  21,912
  23,048
  24,239
  25,486
  26,795
  28,167
  29,605
  31,115
  32,697
  34,358
  36,100
  37,928
  39,847
  41,860
  43,972
  46,189
  48,516
Working capital, $m
  3,782
  4,436
  4,689
  4,954
  5,231
  5,520
  5,822
  6,138
  6,468
  6,814
  7,176
  7,554
  7,951
  8,367
  8,802
  9,258
  9,736
  10,238
  10,763
  11,314
  11,892
  12,498
  13,134
  13,801
  14,501
  15,235
  16,006
  16,814
  17,663
  18,553
  19,488
Total debt, $m
  24,339
  25,111
  27,537
  30,069
  32,713
  35,476
  38,363
  41,383
  44,541
  47,845
  51,304
  54,925
  58,717
  62,690
  66,851
  71,213
  75,784
  80,575
  85,599
  90,867
  96,392
  102,187
  108,266
  114,642
  121,333
  128,352
  135,718
  143,448
  151,560
  160,073
  169,008
Total liabilities, $m
  41,631
  42,403
  44,829
  47,361
  50,005
  52,768
  55,655
  58,675
  61,833
  65,137
  68,596
  72,217
  76,009
  79,982
  84,143
  88,505
  93,076
  97,867
  102,891
  108,159
  113,684
  119,479
  125,558
  131,934
  138,625
  145,644
  153,010
  160,740
  168,852
  177,365
  186,300
Total equity, $m
  24,335
  25,769
  27,243
  28,782
  30,389
  32,068
  33,823
  35,658
  37,577
  39,585
  41,687
  43,888
  46,192
  48,606
  51,135
  53,786
  56,564
  59,476
  62,529
  65,730
  69,088
  72,609
  76,303
  80,179
  84,245
  88,511
  92,987
  97,684
  102,614
  107,788
  113,218
Total liabilities and equity, $m
  65,966
  68,172
  72,072
  76,143
  80,394
  84,836
  89,478
  94,333
  99,410
  104,722
  110,283
  116,105
  122,201
  128,588
  135,278
  142,291
  149,640
  157,343
  165,420
  173,889
  182,772
  192,088
  201,861
  212,113
  222,870
  234,155
  245,997
  258,424
  271,466
  285,153
  299,518
Debt-to-equity ratio
  1.000
  0.970
  1.010
  1.040
  1.080
  1.110
  1.130
  1.160
  1.190
  1.210
  1.230
  1.250
  1.270
  1.290
  1.310
  1.320
  1.340
  1.350
  1.370
  1.380
  1.400
  1.410
  1.420
  1.430
  1.440
  1.450
  1.460
  1.470
  1.480
  1.490
  1.490
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
  5,023
  5,608
  6,223
  6,867
  7,545
  8,257
  9,005
  9,792
  10,620
  11,491
  14,434
  15,399
  16,414
  17,484
  18,610
  19,796
  21,045
  22,360
  23,746
  25,205
  26,742
  28,362
  30,067
  31,864
  33,756
  35,749
  37,849
  40,060
  42,388
  44,841
Depreciation, amort., depletion, $m
  669
  3,143
  3,164
  3,186
  3,209
  3,233
  3,258
  3,285
  3,312
  3,341
  3,371
  627
  660
  694
  730
  768
  808
  850
  893
  939
  987
  1,037
  1,090
  1,145
  1,203
  1,264
  1,328
  1,395
  1,466
  1,540
  1,617
Funds from operations, $m
  -5,315
  8,166
  8,773
  9,409
  10,077
  10,778
  11,515
  12,290
  13,104
  13,961
  14,862
  15,061
  16,058
  17,109
  18,214
  19,378
  20,604
  21,894
  23,253
  24,685
  26,192
  27,780
  29,452
  31,213
  33,067
  35,020
  37,078
  39,244
  41,525
  43,928
  46,458
Change in working capital, $m
  -9,981
  243
  254
  265
  277
  289
  302
  316
  330
  346
  362
  379
  397
  416
  435
  456
  478
  501
  526
  551
  578
  606
  636
  667
  700
  734
  771
  809
  849
  891
  935
Cash from operations, $m
  4,666
  7,785
  8,519
  9,144
  9,800
  10,489
  11,213
  11,974
  12,774
  13,615
  14,500
  14,682
  15,662
  16,693
  17,779
  18,922
  20,126
  21,393
  22,728
  24,134
  25,614
  27,173
  28,816
  30,545
  32,367
  34,286
  36,307
  38,435
  40,677
  43,037
  45,523
Maintenance CAPEX, $m
  0
  -348
  -368
  -389
  -411
  -434
  -458
  -483
  -509
  -537
  -565
  -595
  -627
  -660
  -694
  -730
  -768
  -808
  -850
  -893
  -939
  -987
  -1,037
  -1,090
  -1,145
  -1,203
  -1,264
  -1,328
  -1,395
  -1,466
  -1,540
New CAPEX, $m
  -432
  -607
  -632
  -659
  -689
  -719
  -752
  -786
  -822
  -861
  -901
  -943
  -988
  -1,034
  -1,084
  -1,136
  -1,190
  -1,248
  -1,308
  -1,372
  -1,439
  -1,509
  -1,583
  -1,661
  -1,742
  -1,828
  -1,918
  -2,013
  -2,112
  -2,217
  -2,327
Cash from investing activities, $m
  -1,360
  -955
  -1,000
  -1,048
  -1,100
  -1,153
  -1,210
  -1,269
  -1,331
  -1,398
  -1,466
  -1,538
  -1,615
  -1,694
  -1,778
  -1,866
  -1,958
  -2,056
  -2,158
  -2,265
  -2,378
  -2,496
  -2,620
  -2,751
  -2,887
  -3,031
  -3,182
  -3,341
  -3,507
  -3,683
  -3,867
Free cash flow, $m
  3,306
  6,830
  7,519
  8,095
  8,700
  9,336
  10,003
  10,704
  11,442
  12,218
  13,034
  13,143
  14,047
  14,999
  16,001
  17,056
  18,167
  19,337
  20,570
  21,869
  23,236
  24,677
  26,196
  27,795
  29,480
  31,255
  33,125
  35,094
  37,169
  39,355
  41,657
Issuance/(repayment) of debt, $m
  512
  2,311
  2,425
  2,532
  2,644
  2,763
  2,888
  3,019
  3,158
  3,305
  3,459
  3,621
  3,792
  3,972
  4,162
  4,361
  4,571
  4,792
  5,024
  5,268
  5,525
  5,795
  6,079
  6,377
  6,690
  7,020
  7,366
  7,730
  8,112
  8,513
  8,935
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
  2,311
  2,425
  2,532
  2,644
  2,763
  2,888
  3,019
  3,158
  3,305
  3,459
  3,621
  3,792
  3,972
  4,162
  4,361
  4,571
  4,792
  5,024
  5,268
  5,525
  5,795
  6,079
  6,377
  6,690
  7,020
  7,366
  7,730
  8,112
  8,513
  8,935
Total cash flow (excl. dividends), $m
  653
  9,142
  9,945
  10,627
  11,345
  12,098
  12,891
  13,724
  14,600
  15,522
  16,493
  16,765
  17,840
  18,971
  20,163
  21,417
  22,738
  24,129
  25,594
  27,137
  28,761
  30,472
  32,274
  34,172
  36,170
  38,274
  40,490
  42,824
  45,281
  47,868
  50,592
Retained Cash Flow (-), $m
  -716
  -1,434
  -1,474
  -1,539
  -1,607
  -1,679
  -1,755
  -1,835
  -1,919
  -2,008
  -2,102
  -2,201
  -2,305
  -2,414
  -2,529
  -2,650
  -2,778
  -2,912
  -3,053
  -3,202
  -3,358
  -3,522
  -3,694
  -3,875
  -4,066
  -4,266
  -4,476
  -4,697
  -4,930
  -5,174
  -5,430
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
 
  7,707
  8,471
  9,089
  9,738
  10,419
  11,136
  11,889
  12,681
  13,514
  14,391
  14,564
  15,535
  16,557
  17,633
  18,767
  19,960
  21,217
  22,541
  23,935
  25,404
  26,951
  28,580
  30,296
  32,104
  34,008
  36,014
  38,126
  40,351
  42,694
  45,162
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
 
  7,340
  7,647
  7,737
  7,775
  7,758
  7,683
  7,551
  7,361
  7,116
  6,818
  6,155
  5,803
  5,414
  4,995
  4,555
  4,102
  3,647
  3,198
  2,763
  2,352
  1,970
  1,622
  1,312
  1,041
  810
  617
  460
  335
  238
  165
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 segmentÂ’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 19.5
Price to Sales 2.6
Price to Book 3.1
Price to Tangible Book
Price to Cash Flow 16.4
Price to Free Cash Flow 18.1
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 5.8% 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 776.894 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 $77.0 billion.


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Stock chart of TWX Financial statements of TWX Annual reports 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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