Intrinsic value of Two Harbors Investment - TWO

Previous Close

$14.17

  Intrinsic Value

$84.57

stock screener

  Rating & Target

str. buy

+497%

Previous close

$14.17

 
Intrinsic value

$84.57

 
Up/down potential

+497%

 
Rating

str. buy

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

We calculate the intrinsic value of TWO 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 0001), $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 3.5

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  60.00
  54.50
  49.55
  45.10
  41.09
  37.48
  34.23
  31.31
  28.68
  26.31
  24.18
  22.26
  20.53
  18.98
  17.58
  16.32
  15.19
  14.17
  13.26
  12.43
  11.69
  11.02
  10.42
  9.87
  9.39
  8.95
  8.55
  8.20
  7.88
  7.59
Revenue, $m
  686
  1,059
  1,584
  2,298
  3,243
  4,458
  5,984
  7,857
  10,110
  12,770
  15,857
  19,387
  23,367
  27,803
  32,691
  38,027
  43,804
  50,013
  56,642
  63,682
  71,125
  78,961
  87,186
  95,795
  104,788
  114,165
  123,930
  134,090
  144,654
  155,634
Variable operating expenses, $m
  55
  25
  -16
  -72
  -146
  -242
  -362
  -509
  -686
  -895
  -1,247
  -1,524
  -1,837
  -2,186
  -2,570
  -2,990
  -3,444
  -3,932
  -4,454
  -5,007
  -5,592
  -6,209
  -6,855
  -7,532
  -8,239
  -8,977
  -9,744
  -10,543
  -11,374
  -12,237
Fixed operating expenses, $m
  57
  58
  60
  61
  62
  64
  65
  67
  68
  70
  71
  73
  74
  76
  78
  79
  81
  83
  85
  87
  88
  90
  92
  94
  96
  99
  101
  103
  105
  108
Total operating expenses, $m
  112
  83
  44
  -11
  -84
  -178
  -297
  -442
  -618
  -825
  -1,176
  -1,451
  -1,763
  -2,110
  -2,492
  -2,911
  -3,363
  -3,849
  -4,369
  -4,920
  -5,504
  -6,119
  -6,763
  -7,438
  -8,143
  -8,878
  -9,643
  -10,440
  -11,269
  -12,129
Operating income, $m
  574
  975
  1,540
  2,309
  3,326
  4,636
  6,280
  8,299
  10,728
  13,595
  17,033
  20,838
  25,130
  29,913
  35,184
  40,938
  47,168
  53,862
  61,011
  68,603
  76,629
  85,079
  93,949
  103,233
  112,931
  123,043
  133,573
  144,530
  155,923
  167,764
EBITDA, $m
  706
  1,121
  1,704
  2,498
  3,547
  4,899
  6,596
  8,680
  11,187
  14,147
  17,582
  21,510
  25,941
  30,877
  36,317
  42,256
  48,686
  55,596
  62,974
  70,811
  79,094
  87,817
  96,971
  106,554
  116,563
  127,000
  137,870
  149,179
  160,937
  173,159
Interest expense (income), $m
  116
  1,132
  1,870
  2,897
  4,339
  6,301
  8,896
  12,235
  16,427
  21,574
  27,765
  35,073
  43,556
  53,254
  64,192
  76,378
  89,810
  104,473
  120,346
  137,403
  155,618
  174,963
  195,412
  216,944
  239,543
  263,198
  287,906
  313,670
  340,502
  368,418
  397,444
Earnings before tax, $m
  -559
  -895
  -1,357
  -2,030
  -2,975
  -4,260
  -5,955
  -8,128
  -10,846
  -14,170
  -18,040
  -22,718
  -28,124
  -34,279
  -41,195
  -48,872
  -57,305
  -66,483
  -76,393
  -87,015
  -98,334
  -110,332
  -122,995
  -136,310
  -150,267
  -164,863
  -180,097
  -195,972
  -212,495
  -229,681
Tax expense, $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
Net income, $m
  -559
  -895
  -1,357
  -2,030
  -2,975
  -4,260
  -5,955
  -8,128
  -10,846
  -14,170
  -18,040
  -22,718
  -28,124
  -34,279
  -41,195
  -48,872
  -57,305
  -66,483
  -76,393
  -87,015
  -98,334
  -110,332
  -122,995
  -136,310
  -150,267
  -164,863
  -180,097
  -195,972
  -212,495
  -229,681

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $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 assets, $m
  40,326
  62,304
  93,176
  135,193
  190,738
  262,221
  351,978
  462,169
  594,699
  751,154
  932,762
  1,140,391
  1,374,555
  1,635,449
  1,922,998
  2,236,908
  2,576,730
  2,941,916
  3,331,873
  3,746,014
  4,183,801
  4,644,774
  5,128,584
  5,635,012
  6,163,980
  6,715,560
  7,289,981
  7,887,631
  8,509,051
  9,154,937
Adjusted assets (=assets-cash), $m
  40,326
  62,304
  93,176
  135,193
  190,738
  262,221
  351,978
  462,169
  594,699
  751,154
  932,762
  1,140,391
  1,374,555
  1,635,449
  1,922,998
  2,236,908
  2,576,730
  2,941,916
  3,331,873
  3,746,014
  4,183,801
  4,644,774
  5,128,584
  5,635,012
  6,163,980
  6,715,560
  7,289,981
  7,887,631
  8,509,051
  9,154,937
Revenue / Adjusted assets
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
  0.017
Average production assets, $m
  713
  1,102
  1,647
  2,390
  3,372
  4,636
  6,223
  8,171
  10,514
  13,280
  16,491
  20,162
  24,302
  28,915
  33,999
  39,549
  45,557
  52,013
  58,908
  66,230
  73,970
  82,120
  90,673
  99,627
  108,979
  118,731
  128,887
  139,453
  150,440
  161,859
Working capital, $m
  -415
  -642
  -960
  -1,393
  -1,965
  -2,701
  -3,626
  -4,761
  -6,127
  -7,738
  -9,609
  -11,748
  -14,161
  -16,848
  -19,811
  -23,045
  -26,545
  -30,308
  -34,325
  -38,591
  -43,102
  -47,850
  -52,835
  -58,052
  -63,501
  -69,184
  -75,101
  -81,258
  -87,660
  -94,314
Total debt, $m
  34,633
  53,644
  80,348
  116,694
  164,740
  226,573
  304,212
  399,527
  514,166
  649,499
  806,591
  986,190
  1,188,741
  1,414,415
  1,663,144
  1,934,677
  2,228,623
  2,544,509
  2,881,821
  3,240,054
  3,618,739
  4,017,480
  4,435,977
  4,874,037
  5,331,594
  5,808,710
  6,305,585
  6,822,552
  7,360,081
  7,918,772
Total liabilities, $m
  34,882
  53,893
  80,597
  116,942
  164,989
  226,821
  304,461
  399,776
  514,415
  649,748
  806,839
  986,438
  1,188,990
  1,414,663
  1,663,393
  1,934,925
  2,228,872
  2,544,757
  2,882,070
  3,240,303
  3,618,987
  4,017,729
  4,436,225
  4,874,286
  5,331,842
  5,808,959
  6,305,834
  6,822,801
  7,360,329
  7,919,020
Total equity, $m
  5,444
  8,411
  12,579
  18,251
  25,750
  35,400
  47,517
  62,393
  80,284
  101,406
  125,923
  153,953
  185,565
  220,786
  259,605
  301,983
  347,859
  397,159
  449,803
  505,712
  564,813
  627,044
  692,359
  760,727
  832,137
  906,601
  984,147
  1,064,830
  1,148,722
  1,235,916
Total liabilities and equity, $m
  40,326
  62,304
  93,176
  135,193
  190,739
  262,221
  351,978
  462,169
  594,699
  751,154
  932,762
  1,140,391
  1,374,555
  1,635,449
  1,922,998
  2,236,908
  2,576,731
  2,941,916
  3,331,873
  3,746,015
  4,183,800
  4,644,773
  5,128,584
  5,635,013
  6,163,979
  6,715,560
  7,289,981
  7,887,631
  8,509,051
  9,154,936
Debt-to-equity ratio
  6.360
  6.380
  6.390
  6.390
  6.400
  6.400
  6.400
  6.400
  6.400
  6.400
  6.410
  6.410
  6.410
  6.410
  6.410
  6.410
  6.410
  6.410
  6.410
  6.410
  6.410
  6.410
  6.410
  6.410
  6.410
  6.410
  6.410
  6.410
  6.410
  6.410
Adjusted equity ratio
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135
  0.135

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -559
  -895
  -1,357
  -2,030
  -2,975
  -4,260
  -5,955
  -8,128
  -10,846
  -14,170
  -18,040
  -22,718
  -28,124
  -34,279
  -41,195
  -48,872
  -57,305
  -66,483
  -76,393
  -87,015
  -98,334
  -110,332
  -122,995
  -136,310
  -150,267
  -164,863
  -180,097
  -195,972
  -212,495
  -229,681
Depreciation, amort., depletion, $m
  132
  145
  164
  188
  221
  263
  316
  381
  459
  551
  550
  672
  810
  964
  1,133
  1,318
  1,519
  1,734
  1,964
  2,208
  2,466
  2,737
  3,022
  3,321
  3,633
  3,958
  4,296
  4,648
  5,015
  5,395
Funds from operations, $m
  -426
  -750
  -1,193
  -1,841
  -2,754
  -3,997
  -5,639
  -7,747
  -10,387
  -13,618
  -17,491
  -22,046
  -27,314
  -33,315
  -40,061
  -47,553
  -55,786
  -64,750
  -74,429
  -84,808
  -95,869
  -107,595
  -119,973
  -132,989
  -146,635
  -160,906
  -175,801
  -191,323
  -207,481
  -224,285
Change in working capital, $m
  -156
  -226
  -318
  -433
  -572
  -736
  -925
  -1,135
  -1,365
  -1,612
  -1,871
  -2,139
  -2,412
  -2,688
  -2,962
  -3,234
  -3,501
  -3,762
  -4,017
  -4,266
  -4,510
  -4,749
  -4,984
  -5,217
  -5,449
  -5,682
  -5,918
  -6,157
  -6,402
  -6,654
Cash from operations, $m
  -271
  -523
  -875
  -1,408
  -2,182
  -3,261
  -4,714
  -6,612
  -9,022
  -12,006
  -15,620
  -19,907
  -24,901
  -30,628
  -37,099
  -44,319
  -52,285
  -60,988
  -70,412
  -80,541
  -91,359
  -102,846
  -114,988
  -127,772
  -141,185
  -155,223
  -169,883
  -185,166
  -201,079
  -217,631
Maintenance CAPEX, $m
  -15
  -24
  -37
  -55
  -80
  -112
  -155
  -207
  -272
  -350
  -443
  -550
  -672
  -810
  -964
  -1,133
  -1,318
  -1,519
  -1,734
  -1,964
  -2,208
  -2,466
  -2,737
  -3,022
  -3,321
  -3,633
  -3,958
  -4,296
  -4,648
  -5,015
New CAPEX, $m
  -268
  -389
  -546
  -743
  -982
  -1,264
  -1,587
  -1,948
  -2,343
  -2,766
  -3,211
  -3,671
  -4,140
  -4,613
  -5,084
  -5,550
  -6,008
  -6,456
  -6,894
  -7,322
  -7,740
  -8,150
  -8,554
  -8,954
  -9,352
  -9,752
  -10,156
  -10,566
  -10,987
  -11,419
Cash from investing activities, $m
  -283
  -413
  -583
  -798
  -1,062
  -1,376
  -1,742
  -2,155
  -2,615
  -3,116
  -3,654
  -4,221
  -4,812
  -5,423
  -6,048
  -6,683
  -7,326
  -7,975
  -8,628
  -9,286
  -9,948
  -10,616
  -11,291
  -11,976
  -12,673
  -13,385
  -14,114
  -14,862
  -15,635
  -16,434
Free cash flow, $m
  -553
  -935
  -1,458
  -2,206
  -3,243
  -4,637
  -6,455
  -8,767
  -11,637
  -15,123
  -19,273
  -24,127
  -29,713
  -36,050
  -43,147
  -51,003
  -59,612
  -68,963
  -79,040
  -89,827
  -101,306
  -113,462
  -126,279
  -139,748
  -153,858
  -168,608
  -183,997
  -200,029
  -216,714
  -234,065
Issuance/(repayment) of debt, $m
  13,664
  19,011
  26,704
  36,345
  48,046
  61,833
  77,639
  95,315
  114,639
  135,333
  157,092
  179,599
  202,552
  225,673
  248,729
  271,532
  293,946
  315,886
  337,313
  358,232
  378,685
  398,742
  418,496
  438,060
  457,557
  477,117
  496,875
  516,967
  537,528
  558,691
Issuance/(repurchase) of shares, $m
  2,693
  3,862
  5,524
  7,702
  10,474
  13,910
  18,072
  23,004
  28,738
  35,291
  42,557
  50,748
  59,736
  69,500
  80,014
  91,250
  103,181
  115,784
  129,037
  142,924
  157,435
  172,564
  188,309
  204,677
  221,678
  239,327
  257,644
  276,654
  296,387
  316,875
Cash from financing (excl. dividends), $m  
  16,357
  22,873
  32,228
  44,047
  58,520
  75,743
  95,711
  118,319
  143,377
  170,624
  199,649
  230,347
  262,288
  295,173
  328,743
  362,782
  397,127
  431,670
  466,350
  501,156
  536,120
  571,306
  606,805
  642,737
  679,235
  716,444
  754,519
  793,621
  833,915
  875,566
Total cash flow (excl. dividends), $m
  15,804
  21,937
  30,771
  41,841
  55,277
  71,106
  89,256
  109,552
  131,739
  155,501
  180,376
  206,219
  232,574
  259,123
  285,596
  311,779
  337,515
  362,707
  387,310
  411,330
  434,814
  457,844
  480,526
  502,990
  525,376
  547,835
  570,522
  593,593
  617,201
  641,501
Retained Cash Flow (-), $m
  -2,693
  -3,862
  -5,524
  -7,702
  -10,474
  -13,910
  -18,072
  -23,004
  -28,738
  -35,291
  -42,557
  -50,748
  -59,736
  -69,500
  -80,014
  -91,250
  -103,181
  -115,784
  -129,037
  -142,924
  -157,435
  -172,564
  -188,309
  -204,677
  -221,678
  -239,327
  -257,644
  -276,654
  -296,387
  -316,875
Prev. year cash balance distribution, $m
  262
  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
  13,373
  18,075
  25,246
  34,139
  44,803
  57,196
  71,184
  86,548
  103,001
  120,210
  137,818
  155,472
  172,838
  189,623
  205,583
  220,530
  234,335
  246,923
  258,273
  268,405
  277,379
  285,280
  292,217
  298,313
  303,698
  308,509
  312,878
  316,938
  320,815
  324,626
Discount rate, %
  13.20
  13.86
  14.55
  15.28
  16.04
  16.85
  17.69
  18.57
  19.50
  20.48
  21.50
  22.58
  23.71
  24.89
  26.14
  27.44
  28.81
  30.25
  31.77
  33.36
  35.02
  36.77
  38.61
  40.54
  42.57
  44.70
  46.93
  49.28
  51.75
  54.33
PV of cash for distribution, $m
  11,814
  13,943
  16,795
  19,330
  21,290
  22,473
  22,763
  22,149
  20,723
  18,659
  16,178
  13,513
  10,879
  8,443
  6,316
  4,555
  3,166
  2,120
  1,367
  848
  506
  290
  160
  85
  43
  21
  10
  4
  2
  1
Current shareholders' claim on cash, %
  54.7
  31.8
  19.1
  11.8
  7.4
  4.8
  3.2
  2.1
  1.4
  1.0
  0.7
  0.5
  0.4
  0.3
  0.2
  0.1
  0.1
  0.1
  0.1
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0

Two Harbors Investment Corp. is a real estate investment trust. The Company is focused on investing in, financing and managing residential mortgage-backed securities (RMBS), mortgage servicing rights (MSR), commercial real estate and other financial assets (collectively known as target assets). Its investment objective is to provide attractive risk-adjusted total return to its stockholders over the long-term, primarily through dividends and secondarily through capital appreciation. The Company focuses on managing various associated risks, including interest rate, prepayment, credit, mortgage spread and financing risk. The Company finances its RMBS and commercial real estate assets through short- and long-term borrowings structured as repurchase agreements and advances from the Federal Home Loan Bank of Des Moines, or the FHLB. It also finances its MSR through revolving credit facilities.

FINANCIAL RATIOS  of  Two Harbors Investment (TWO)

Valuation Ratios
P/E Ratio 7
Price to Sales 4.7
Price to Book 0.7
Price to Tangible Book
Price to Cash Flow 10.3
Price to Free Cash Flow -31.6
Growth Rates
Sales Growth Rate -45.5%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 156.5%
Cap. Spend. - 3 Yr. Gr. Rate NaN%
Financial Strength
Quick Ratio 0
Current Ratio NaN
LT Debt to Equity 206.9%
Total Debt to Equity 482.9%
Interest Coverage 4
Management Effectiveness
Return On Assets 2.7%
Ret/ On Assets - 3 Yr. Avg. 2.5%
Return On Total Capital 2.1%
Ret/ On T. Cap. - 3 Yr. Avg. 1.9%
Return On Equity 10.1%
Return On Equity - 3 Yr. Avg. 9.1%
Asset Turnover 0
Profitability Ratios
Gross Margin 41.6%
Gross Margin - 3 Yr. Avg. 63.3%
EBITDA Margin 91.8%
EBITDA Margin - 3 Yr. Avg. 59%
Operating Margin 69.4%
Oper. Margin - 3 Yr. Avg. 44.2%
Pre-Tax Margin 69.6%
Pre-Tax Margin - 3 Yr. Avg. 44.3%
Net Profit Margin 67.1%
Net Profit Margin - 3 Yr. Avg. 47.7%
Effective Tax Rate 3.6%
Eff/ Tax Rate - 3 Yr. Avg. -26.5%
Payout Ratio 94.1%

TWO stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the TWO stock intrinsic value calculation we used $428.467 million for the last fiscal year's total revenue generated by Two Harbors Investment. The default revenue input number comes from 0001 income statement of Two Harbors Investment. 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 TWO stock valuation model: a) initial revenue growth rate of 60% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 13.2%, whose default value for TWO is calculated based on our internal credit rating of Two Harbors Investment, 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 Two Harbors Investment.
    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 TWO stock the variable cost ratio is equal to 17.5%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $56 million in the base year in the intrinsic value calculation for TWO 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 5.4% for Two Harbors Investment.

Corporate tax rate of 27% is the nominal tax rate for Two Harbors Investment. 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 TWO 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 TWO are equal to 104%.

Life of production assets of 918.7 years is the average useful life of capital assets used in Two Harbors Investment 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 TWO is equal to -60.6%. 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 - $3571.424 million for Two Harbors Investment - 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 248.073 million for Two Harbors Investment 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 Two Harbors Investment at the current share price and the inputted number of shares is $3.5 billion.

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