Intrinsic value of Verizon Communications - VZ

Previous Close

$44.84

  Intrinsic Value

$42.38

stock screener

  Rating & Target

hold

-5%

  Value-price divergence*

-3%

Previous close

$44.84

 
Intrinsic value

$42.38

 
Up/down potential

-5%

 
Rating

hold

 
Value-price divergence*

-3%

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

We calculate the intrinsic value of VZ 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 181.7

 

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, %
  -4.29
  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
  125,980
  128,500
  131,455
  134,833
  138,626
  142,829
  147,440
  152,462
  157,897
  163,753
  170,037
  176,761
  183,934
  191,573
  199,691
  208,305
  217,433
  227,096
  237,315
  248,112
  259,512
  271,541
  284,227
  297,598
  311,687
  326,525
  342,149
  358,593
  375,897
  394,102
  413,250
Variable operating expenses, $m
 
  96,192
  98,342
  100,799
  103,558
  106,615
  109,969
  113,622
  117,576
  121,835
  126,407
  128,577
  133,795
  139,351
  145,256
  151,522
  158,162
  165,191
  172,624
  180,478
  188,770
  197,520
  206,748
  216,475
  226,723
  237,516
  248,881
  260,842
  273,429
  286,672
  300,600
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  98,921
  96,192
  98,342
  100,799
  103,558
  106,615
  109,969
  113,622
  117,576
  121,835
  126,407
  128,577
  133,795
  139,351
  145,256
  151,522
  158,162
  165,191
  172,624
  180,478
  188,770
  197,520
  206,748
  216,475
  226,723
  237,516
  248,881
  260,842
  273,429
  286,672
  300,600
Operating income, $m
  27,059
  32,308
  33,113
  34,034
  35,068
  36,214
  37,471
  38,840
  40,321
  41,918
  43,631
  48,184
  50,140
  52,222
  54,435
  56,783
  59,271
  61,905
  64,691
  67,634
  70,742
  74,021
  77,479
  81,124
  84,964
  89,009
  93,268
  97,750
  102,467
  107,430
  112,650
EBITDA, $m
  42,987
  49,213
  50,345
  51,639
  53,091
  54,701
  56,467
  58,390
  60,472
  62,714
  65,121
  67,696
  70,444
  73,369
  76,478
  79,777
  83,273
  86,974
  90,887
  95,022
  99,388
  103,995
  108,854
  113,975
  119,371
  125,053
  131,037
  137,335
  143,962
  150,934
  158,267
Interest expense (income), $m
  4,085
  4,006
  4,103
  4,297
  4,518
  4,766
  5,042
  5,344
  5,673
  6,029
  6,413
  6,824
  7,265
  7,735
  8,235
  8,767
  9,332
  9,930
  10,563
  11,232
  11,940
  12,687
  13,475
  14,306
  15,182
  16,105
  17,077
  18,101
  19,178
  20,312
  21,504
Earnings before tax, $m
  20,986
  28,301
  29,010
  29,738
  30,550
  31,447
  32,429
  33,496
  34,649
  35,889
  37,218
  41,360
  42,875
  44,487
  46,199
  48,016
  49,940
  51,976
  54,128
  56,402
  58,802
  61,334
  64,004
  66,818
  69,782
  72,904
  76,191
  79,650
  83,289
  87,118
  91,145
Tax expense, $m
  7,378
  7,641
  7,833
  8,029
  8,249
  8,491
  8,756
  9,044
  9,355
  9,690
  10,049
  11,167
  11,576
  12,011
  12,474
  12,964
  13,484
  14,033
  14,615
  15,228
  15,877
  16,560
  17,281
  18,041
  18,841
  19,684
  20,572
  21,505
  22,488
  23,522
  24,609
Net income, $m
  13,127
  20,660
  21,178
  21,709
  22,302
  22,957
  23,673
  24,452
  25,293
  26,199
  27,169
  30,192
  31,299
  32,475
  33,725
  35,051
  36,456
  37,942
  39,513
  41,173
  42,925
  44,774
  46,723
  48,777
  50,941
  53,220
  55,619
  58,144
  60,801
  63,596
  66,536

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  2,880
  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
  244,180
  246,168
  251,830
  258,302
  265,568
  273,619
  282,453
  292,072
  302,485
  313,703
  325,742
  338,622
  352,365
  366,998
  382,549
  399,051
  416,539
  435,050
  454,626
  475,310
  497,149
  520,194
  544,496
  570,112
  597,102
  625,528
  655,457
  686,959
  720,109
  754,984
  791,666
Adjusted assets (=assets-cash), $m
  241,300
  246,168
  251,830
  258,302
  265,568
  273,619
  282,453
  292,072
  302,485
  313,703
  325,742
  338,622
  352,365
  366,998
  382,549
  399,051
  416,539
  435,050
  454,626
  475,310
  497,149
  520,194
  544,496
  570,112
  597,102
  625,528
  655,457
  686,959
  720,109
  754,984
  791,666
Revenue / Adjusted assets
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
  0.522
Average production assets, $m
  179,388
  182,983
  187,192
  192,003
  197,404
  203,389
  209,955
  217,105
  224,846
  233,184
  242,133
  251,707
  261,923
  272,800
  284,359
  296,626
  309,625
  323,385
  337,936
  353,311
  369,545
  386,674
  404,739
  423,780
  443,842
  464,972
  487,220
  510,636
  535,277
  561,201
  588,468
Working capital, $m
  -3,945
  -4,240
  -4,338
  -4,450
  -4,575
  -4,713
  -4,866
  -5,031
  -5,211
  -5,404
  -5,611
  -5,833
  -6,070
  -6,322
  -6,590
  -6,874
  -7,175
  -7,494
  -7,831
  -8,188
  -8,564
  -8,961
  -9,379
  -9,821
  -10,286
  -10,775
  -11,291
  -11,834
  -12,405
  -13,005
  -13,637
Total debt, $m
  108,078
  107,973
  113,069
  118,894
  125,433
  132,679
  140,630
  149,287
  158,658
  168,755
  179,590
  191,182
  203,550
  216,720
  230,716
  245,568
  261,307
  277,967
  295,585
  314,201
  333,856
  354,596
  376,468
  399,523
  423,813
  449,397
  476,333
  504,685
  534,520
  565,907
  598,921
Total liabilities, $m
  221,656
  221,551
  226,647
  232,472
  239,011
  246,257
  254,208
  262,865
  272,236
  282,333
  293,168
  304,760
  317,128
  330,298
  344,294
  359,146
  374,885
  391,545
  409,163
  427,779
  447,434
  468,174
  490,046
  513,101
  537,391
  562,975
  589,911
  618,263
  648,098
  679,485
  712,499
Total equity, $m
  22,524
  24,617
  25,183
  25,830
  26,557
  27,362
  28,245
  29,207
  30,248
  31,370
  32,574
  33,862
  35,236
  36,700
  38,255
  39,905
  41,654
  43,505
  45,463
  47,531
  49,715
  52,019
  54,450
  57,011
  59,710
  62,553
  65,546
  68,696
  72,011
  75,498
  79,167
Total liabilities and equity, $m
  244,180
  246,168
  251,830
  258,302
  265,568
  273,619
  282,453
  292,072
  302,484
  313,703
  325,742
  338,622
  352,364
  366,998
  382,549
  399,051
  416,539
  435,050
  454,626
  475,310
  497,149
  520,193
  544,496
  570,112
  597,101
  625,528
  655,457
  686,959
  720,109
  754,983
  791,666
Debt-to-equity ratio
  4.798
  4.390
  4.490
  4.600
  4.720
  4.850
  4.980
  5.110
  5.250
  5.380
  5.510
  5.650
  5.780
  5.910
  6.030
  6.150
  6.270
  6.390
  6.500
  6.610
  6.720
  6.820
  6.910
  7.010
  7.100
  7.180
  7.270
  7.350
  7.420
  7.500
  7.570
Adjusted equity ratio
  0.081
  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
  13,127
  20,660
  21,178
  21,709
  22,302
  22,957
  23,673
  24,452
  25,293
  26,199
  27,169
  30,192
  31,299
  32,475
  33,725
  35,051
  36,456
  37,942
  39,513
  41,173
  42,925
  44,774
  46,723
  48,777
  50,941
  53,220
  55,619
  58,144
  60,801
  63,596
  66,536
Depreciation, amort., depletion, $m
  15,928
  16,905
  17,232
  17,604
  18,023
  18,487
  18,996
  19,550
  20,150
  20,797
  21,491
  19,512
  20,304
  21,147
  22,043
  22,994
  24,002
  25,069
  26,197
  27,388
  28,647
  29,975
  31,375
  32,851
  34,406
  36,044
  37,769
  39,584
  41,494
  43,504
  45,618
Funds from operations, $m
  12,694
  37,565
  38,409
  39,313
  40,325
  41,444
  42,669
  44,002
  45,444
  46,996
  48,660
  49,705
  51,603
  53,623
  55,769
  58,046
  60,458
  63,011
  65,710
  68,562
  71,572
  74,749
  78,098
  81,628
  85,348
  89,264
  93,388
  97,729
  102,296
  107,100
  112,154
Change in working capital, $m
  -10,021
  -83
  -98
  -111
  -125
  -139
  -152
  -166
  -179
  -193
  -207
  -222
  -237
  -252
  -268
  -284
  -301
  -319
  -337
  -356
  -376
  -397
  -419
  -441
  -465
  -490
  -516
  -543
  -571
  -601
  -632
Cash from operations, $m
  22,715
  38,582
  38,507
  39,425
  40,450
  41,582
  42,822
  44,168
  45,623
  47,189
  48,867
  49,927
  51,839
  53,875
  56,037
  58,330
  60,759
  63,330
  66,047
  68,918
  71,949
  75,146
  78,517
  82,070
  85,812
  89,754
  93,904
  98,271
  102,867
  107,701
  112,786
Maintenance CAPEX, $m
  0
  -13,906
  -14,185
  -14,511
  -14,884
  -15,303
  -15,767
  -16,276
  -16,830
  -17,430
  -18,076
  -18,770
  -19,512
  -20,304
  -21,147
  -22,043
  -22,994
  -24,002
  -25,069
  -26,197
  -27,388
  -28,647
  -29,975
  -31,375
  -32,851
  -34,406
  -36,044
  -37,769
  -39,584
  -41,494
  -43,504
New CAPEX, $m
  -17,593
  -3,596
  -4,209
  -4,811
  -5,401
  -5,985
  -6,566
  -7,150
  -7,740
  -8,339
  -8,949
  -9,574
  -10,216
  -10,877
  -11,560
  -12,266
  -12,999
  -13,760
  -14,551
  -15,375
  -16,234
  -17,129
  -18,064
  -19,041
  -20,062
  -21,130
  -22,247
  -23,417
  -24,641
  -25,923
  -27,267
Cash from investing activities, $m
  -10,983
  -17,502
  -18,394
  -19,322
  -20,285
  -21,288
  -22,333
  -23,426
  -24,570
  -25,769
  -27,025
  -28,344
  -29,728
  -31,181
  -32,707
  -34,309
  -35,993
  -37,762
  -39,620
  -41,572
  -43,622
  -45,776
  -48,039
  -50,416
  -52,913
  -55,536
  -58,291
  -61,186
  -64,225
  -67,417
  -70,771
Free cash flow, $m
  11,732
  21,080
  20,113
  20,103
  20,165
  20,295
  20,489
  20,742
  21,053
  21,420
  21,842
  21,583
  22,111
  22,694
  23,330
  24,020
  24,766
  25,568
  26,427
  27,346
  28,326
  29,369
  30,477
  31,653
  32,899
  34,218
  35,612
  37,086
  38,641
  40,283
  42,015
Issuance/(repayment) of debt, $m
  -1,358
  2,540
  5,096
  5,825
  6,539
  7,246
  7,950
  8,657
  9,371
  10,096
  10,835
  11,592
  12,369
  13,169
  13,996
  14,852
  15,739
  16,660
  17,618
  18,616
  19,655
  20,740
  21,872
  23,055
  24,291
  25,584
  26,936
  28,352
  29,835
  31,387
  33,014
Issuance/(repurchase) of shares, $m
  3
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -4,060
  2,540
  5,096
  5,825
  6,539
  7,246
  7,950
  8,657
  9,371
  10,096
  10,835
  11,592
  12,369
  13,169
  13,996
  14,852
  15,739
  16,660
  17,618
  18,616
  19,655
  20,740
  21,872
  23,055
  24,291
  25,584
  26,936
  28,352
  29,835
  31,387
  33,014
Total cash flow (excl. dividends), $m
  7,672
  23,620
  25,209
  25,927
  26,704
  27,541
  28,439
  29,400
  30,425
  31,516
  32,677
  33,174
  34,480
  35,863
  37,326
  38,872
  40,505
  42,228
  44,046
  45,962
  47,982
  50,109
  52,349
  54,708
  57,190
  59,801
  62,548
  65,438
  68,476
  71,671
  75,029
Retained Cash Flow (-), $m
  -6,096
  -2,328
  -566
  -647
  -727
  -805
  -883
  -962
  -1,041
  -1,122
  -1,204
  -1,288
  -1,374
  -1,463
  -1,555
  -1,650
  -1,749
  -1,851
  -1,958
  -2,068
  -2,184
  -2,304
  -2,430
  -2,562
  -2,699
  -2,843
  -2,993
  -3,150
  -3,315
  -3,487
  -3,668
Prev. year cash balance distribution, $m
 
  235
  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
 
  21,527
  24,643
  25,280
  25,978
  26,736
  27,556
  28,438
  29,383
  30,395
  31,473
  31,886
  33,106
  34,400
  35,771
  37,222
  38,756
  40,377
  42,088
  43,894
  45,798
  47,805
  49,919
  52,146
  54,491
  56,959
  59,556
  62,288
  65,161
  68,183
  71,360
Discount rate, %
 
  9.80
  10.29
  10.80
  11.34
  11.91
  12.51
  13.13
  13.79
  14.48
  15.20
  15.96
  16.76
  17.60
  18.48
  19.40
  20.37
  21.39
  22.46
  23.58
  24.76
  26.00
  27.30
  28.67
  30.10
  31.61
  33.19
  34.85
  36.59
  38.42
  40.34
PV of cash for distribution, $m
 
  19,606
  20,259
  18,583
  16,902
  15,231
  13,587
  11,989
  10,454
  9,000
  7,644
  6,253
  5,156
  4,181
  3,331
  2,603
  1,995
  1,496
  1,097
  785
  548
  373
  247
  158
  99
  59
  35
  19
  11
  5
  3
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

Verizon Communications Inc., through its subsidiaries, provides communications, information, and entertainment products and services to consumers, businesses, and governmental agencies worldwide. Its Wireless segment offers wireless voice and data services; Internet access on various smart and basic phones, notebook computers, and tablets; and multimedia access, business-focused, location-based, global data, home phone handsets, and high-speed Internet services, as well as network access and value added services to support wireless connections for the Internet of Things (IoT). This segment also provides IoT services that support devices used in fleet management and telematics, energy, agricultural technology, and smart community markets; and wireless devices, such as smartphones and basic phones, tablets, and other Internet access devices. As of February 11, 2016, it had 114.2 million retail connections. The company’s Wireline segment offers high-speed Internet, Fios Internet, and Fios video services; voice services, such as local exchange, regional and long distance calling, and voice messaging services, as well as Voice over Internet protocol services; network products and solutions comprising private Internet protocol (IP), public Internet, Ethernet, and optical networking services; IT infrastructure services that include collocation and managed hosting services; cloud services, which comprise computing, storage, backup, recovery, and application platforms; and business communications services. This segment also provides data security, voice and data, cloud and IT, business communications, IoT, and mobility services; and data, voice, local dial tone, and broadband services primarily to local, long distance, wireless, and other carriers. The company was formerly known as Bell Atlantic Corporation and changed its name to Verizon Communications Inc. in June 2000. Verizon Communications Inc. was founded in 1983 and is headquartered in New York City, New York.

FINANCIAL RATIOS  of  Verizon Communications (VZ)

Valuation Ratios
P/E Ratio 13.9
Price to Sales 1.5
Price to Book 8.1
Price to Tangible Book
Price to Cash Flow 8
Price to Free Cash Flow 35.7
Growth Rates
Sales Growth Rate -4.3%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -36.5%
Cap. Spend. - 3 Yr. Gr. Rate 0.5%
Financial Strength
Quick Ratio 1
Current Ratio 0
LT Debt to Equity 468.1%
Total Debt to Equity 479.8%
Interest Coverage 6
Management Effectiveness
Return On Assets 6.5%
Ret/ On Assets - 3 Yr. Avg. 6.8%
Return On Total Capital 10.2%
Ret/ On T. Cap. - 3 Yr. Avg. 10.6%
Return On Equity 67.4%
Return On Equity - 3 Yr. Avg. 76.5%
Asset Turnover 0.5
Profitability Ratios
Gross Margin 59.2%
Gross Margin - 3 Yr. Avg. 60%
EBITDA Margin 32.5%
EBITDA Margin - 3 Yr. Avg. 32.7%
Operating Margin 21.5%
Oper. Margin - 3 Yr. Avg. 20.7%
Pre-Tax Margin 16.7%
Pre-Tax Margin - 3 Yr. Avg. 16.7%
Net Profit Margin 10.4%
Net Profit Margin - 3 Yr. Avg. 10.5%
Effective Tax Rate 35.2%
Eff/ Tax Rate - 3 Yr. Avg. 30.6%
Payout Ratio 70.6%

VZ stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the VZ stock intrinsic value calculation we used $125980 million for the last fiscal year's total revenue generated by Verizon Communications. The default revenue input number comes from 2016 income statement of Verizon Communications. 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 VZ 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 9.8%, whose default value for VZ is calculated based on our internal credit rating of Verizon Communications, 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 Verizon Communications.
    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 VZ stock the variable cost ratio is equal to 74.9%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for VZ 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 3.8% for Verizon Communications.

Corporate tax rate of 27% is the nominal tax rate for Verizon Communications. 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 VZ 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 VZ are equal to 142.4%.

Life of production assets of 12.9 years is the average useful life of capital assets used in Verizon Communications 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 VZ is equal to -3.3%. 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 - $22524 million for Verizon Communications - 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 4051.4 million for Verizon Communications 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 Verizon Communications at the current share price and the inputted number of shares is $181.7 billion.

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Stock chart of VZ Financial statements of VZ Annual reports of VZ
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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