Portland State UniversityPortland State University

Dave NickelDave Nickel

Intel CorporationIntel Corporation

June 28, 2006June 28, 2006

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AgendaAgenda

IntroductionsIntroductions

Intel Approach on Cost of CapitalIntel Approach on Cost of Capital– CalculationCalculation

– ApplicationsApplications

ConsiderationsConsiderations

Q&AQ&A

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My BackgroundMy Background

Intel ExperienceIntel Experience– Controller, Legal & Government AffairsController, Legal & Government Affairs– Controller, Wireless Networking GroupController, Wireless Networking Group– Controller M&A, Intel CapitalController M&A, Intel Capital– Various Manager and Analyst roles in Business Units and Various Manager and Analyst roles in Business Units and

manufacturingmanufacturing

NEC Computer Systems, Director Business OpsNEC Computer Systems, Director Business Ops Motorola, FinanceMotorola, Finance

EducationEducation– MBA, Indiana UniversityMBA, Indiana University– BS Finance, Northern Illinois UniversityBS Finance, Northern Illinois University

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Intel Financial SnapshotIntel Financial Snapshot

RevenueRevenue $38.8B$38.8B

GMGM $23.0B$23.0B 59%59%

R&DR&D $5.2B$5.2BSG&ASG&A $5.7B$5.7B

PretaxPretax $12.1B$12.1B 31%31%

After taxAfter tax $8.7B$8.7B

Cash & STCash & ST $7.9B$7.9BA/RA/R $3.9$3.9InventoryInventory $3.6$3.6PP&EPP&E $17.6$17.6GoodwillGoodwill $3.9$3.9All otherAll other $10.3$10.3Total AssetsTotal Assets $47.2B$47.2B

Current LiabCurrent Liab $9.8B$9.8BLT DebtLT Debt $2.0$2.0All otherAll other $1.0$1.0SESE $34.4$34.4Liabilities & SELiabilities & SE $47.2B$47.2B

P&L: 2005 Balance Sheet: Q1 2006

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Intel Financial TrendsIntel Financial TrendsCashflow from Operations

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1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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Cash and ST Investments

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1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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Longterm Debt and LTD / Equity

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1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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Dividends and Stock Repurchase

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1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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Dividend Stk Purchase

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CalculationsCalculations

Intel WACC = Cost of EquityIntel WACC = Cost of Equity

Component Component ConsiderationsConsiderations Risk-Free Rate (Rf): Risk-Free Rate (Rf): Time HorizonTime Horizon Beta (Beta ( ): ): Time Horizon & # of observationsTime Horizon & # of observations MRP (Rm-Rf): MRP (Rm-Rf): Historical vs. ImpliedHistorical vs. Implied

Process to Re-assessProcess to Re-assess

)( fmfe RRRK

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ApplicationsApplications

Cost of Capital is basis for many types of financial analysisCost of Capital is basis for many types of financial analysis

Hurdle rate for capital budgetingHurdle rate for capital budgeting– ProductsProducts

– CapacityCapacity

– Margin OptimizationMargin Optimization M&A and Divestiture ValuationsM&A and Divestiture Valuations Asset testingAsset testing Company Performance – ROICCompany Performance – ROIC

Cost of CapitalCost of Capital

Lower RiskLower Risk Higher RiskHigher Risk

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Recommendations & ConsiderationsRecommendations & Considerations

Cost of Capital and hurdle rates are integral components Cost of Capital and hurdle rates are integral components shaping fundamental business directionshaping fundamental business direction

Establish a consistent methodologyEstablish a consistent methodology– Be Clear on Usage ModelsBe Clear on Usage Models

– Repeatable MethodologyRepeatable Methodology– Solid framework to focus debate on business issuesSolid framework to focus debate on business issues– Unintended consequences of rate changesUnintended consequences of rate changes

– Multiple rates can create conflictsMultiple rates can create conflicts– Make vs. BuyMake vs. Buy– Business SegmentsBusiness Segments

– Understand environment & potential biasesUnderstand environment & potential biases– Market valuations, 3Market valuations, 3rdrd party methods party methods– Know the sensitivity to the decision at handKnow the sensitivity to the decision at hand