Krause Fund Research Spring 2016 Telecommunications Recommendation: BUY Analysts Joe Holz Joseph-holz@uiowa.edu

Joe Johnson Josiah-johnson@uiowa.edu

Company Overview Verizon Communications, Inc. (VZ) is an industry leader in the integrated telecommunication sector. They offer products and services through their wireline and wireless operating segments, with a majority of their business deriving from their wireless operations. Their services range from voice, text messaging, high-speed mobile internet, fiber optic internet, entertainment, TV services, business solutions, and more. Verizon currently serves 112.11 million wireless customers, and provides the best network coverage in the U.S. We are currently issuing a BUY recommendation for Verizon Communications, Inc. (VZ) at a current price of $51.73.

Verizon Offers Stable Value

• Dividend to continue at 3.00% growth rate – Verizon’s

dividend yield of 4.38% is an attractive alternative during times of low interest rates for fixed income investors. With a nine-year record of growing dividends at roughly 3.00%, Verizon’s dividend yield will maintain as a positive feature.

• Fixed demand offers stable wireless revenue streams – With consumers deeming wireless services as more of a necessity, Verizon will be able to maintain a steady stream of wireless revenues.

• Seeking out alternative revenue sources – Verizon continues to find new ways to increase revenue growth. They are currently working on entering the advertising market as well as beating the industry in the release of 5GLTE technology.

• Debt levels are too high – Verizon’s debt levels are a cause for concern, as increases in the interest rate may hinder their ability to participate in opportunities that arrive in the market.

• Price War & Competition – With the telecom industry being highly competitive, a current price war has put pressure on Verizon’s ability to maintain their high margins.

Stock Performance Highlights 52-week High $54.49 52-week Low $38.06 Beta 0.74 Average Daily Volume 17.191M Share Highlights Market Capitalization $211.12B Shares Outstanding 4.24M Book Value per share $4.03 EPS (2015 annual) $4.37 P/E Ratio 11.84 Dividend Yield 4.38% Dividend Payout Ratio 51.72% Company Performance Highlights ROA 7.70% ROE 116.60% Profit Margin 13.96% Gross Margin 60.07% Sales $131.62B Financial Ratios Interest Coverage 6.74 Debt/Equity 6.18 Debt/Assets .45 Industry Metrics ARPU (monthly) $55.07 ARPA (monthly) $152.63 Churn Rate (Postpaid annual) .96% One-Year Stock Performance VZ is Blue, S&P is Green (Source: Yahoo! Finance)

Current Price: $51.73 Target Price: $62.00- $72.00

Verizon Communications, Inc. (NYSE: VZ)

April 18, 2016

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Economic Outlook Gross Domestic Product GDP represents the overall growth in the economy, and a strong performance will signify progress towards a healthier economy. Real GDP in Q4 2015 was 1.4%, and we believe in the short-term that it will stay relatively flat.9 In two to three years, our prediction is that it will slightly increase to 1.6%. Our pessimism is attributable to the ever growing and changing global economy, as well as the U.S. still trying to find their economic footing. Increases in the GDP may perhaps indicate a willingness of consumers to purchase more connectable devices, higher priced plans, and equipment that is more expensive. However, we believe the growth of the telecom industry is correlated more directly with penetration rates and consumers’ opinions of whether or not wireless services are a necessity. Our prediction is backed by high smartphone penetration rates as well as consumers perception of wireless technology as a necessity. Verizon’s postpaid service connections have already reached 83.7% smartphone penetration.6 Even though GDP has been at relatively low levels in recent years, the telecom industry has not seen major growth declines. The average growth rate in the last three years for Verizon’s retail postpaid connections has been 4.81%, indicating a steady growth of new customers in their wireless segment.15 Telecom analysts are still trying to determine the overall impact that GDP has on the industry. The graph below shows changes in the real GDP for the last 10 years.

Data Source: Bloomberg economic calendar Interest Rates Interest rates are a major economic driver for the telecom industry, as they must continuingly fund their highly capital-intensive projects. These projects include but are not limited to innovative research and development, infrastructure expansion, acquisitions, and the purchase of spectrum licenses. These capital-intensive requirements force the industry to maintain high debt levels. Verizon recently issued $54B worth of debt to finish purchasing

the rights to the rest of their wireless segment from Vodafone. The cost of debt is directly correlated with the interest rate environment in the economy, which causes Verizon to be particularly sensitive to a change in the rates. The federal funds rate has been at all-time lows in the recent periods, with their current target rate being .50%. We do not believe the Federal Reserve will raise rates in the short term; however, we do see rates increasing to around 1%-1.5% in two to three years. Our assumptions are based off the Fed stating their desires to increase rates, as well as our prediction that inflation will raise during the same period. Even though the federal funds rate is an important economic driver, the industry is driven by long-term rates. These rates are influenced by the government’s participation in quantitative easing, which drives down interest rates on the long end of the yield curve. The Federal Reserve, however, has recently stated that they are done with the easing process. The YTM of a 30-year U.S. Treasury bond currently is 2.66%.12 Our team believes in the short-term that this rate will maintain its current level, but will rise to around 3.00% in two to three years. Our assumption of the rate increasing slightly is a function of inflation, interest rates standing at all-time lows, demand, and the Fed ending quantitative easing. Sovereign bonds around the world are lowering the interest rates and even some are choosing to encompass negative rate policy. We believe this will drive up the demand for U.S. long-term bonds, forcing rates to maintain only slightly above their current status. The rates will not decrease because of demand due to our belief that inflation will increase, and that the Federal Reserve would like to see the rates go up. With the Federal Reserve halting their quantitative easing, the interest rates at the long end of the yield curve will increase. The Graph below represents the current U.S. yield curve.

Source: U.S. Department of Treasury

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Corporate bond yields are also positively correlated with U.S. treasury securities, using their YTM as a base to determine what rates they will offer on their own debt issues. BofA Merrill Lynch U.S. Corporate BBB effective yield index states that the average corporate bond YTM is 3.78%, while Verizon’s long term corporate bond currently offers a YTM of 4.58%.2,15 This indicates they are offering a spread of 192 basis points above the comparable 30-year U.S. Treasury bond. Due to the positive correlation corporate bonds have with their respective treasury bond, we believe that the market will demand higher yields on corporate bonds in two to three years. The average yield reaching around 4.00%, and in Verizon’s case around 5.00%. With Verizon having 110B in debt, an increase in interest rates would not be beneficial towards their profitability. An increase in rates also may put further constraints on Verizon’s free cash flows, limiting them on participating in positive expansion efforts. We believe investors should pay close attention to Verizon’s ability to pay down their debt levels, and the effects on their margins with an interest rate increase. Below is a visual graph showing the change in U.S. corporate bond’s effective yields over time.

Source: FED of St. Louis Inflation Rates Telecommunication company earnings are inversely affected by rises in inflation rates. As inflation rates increase, the expenses each firm must pay increase, therefore hurting the bottom line. This industry is involved in a constant price war and lacks the ability to pass these higher costs on to their customers. If a firm attempted to do this, the customer would simply move their business to a competitor. Inflation currently sits at 1%, which we project to remain constant for the next 6 months. We are forecasting that inflation will grow roughly to 1.5% in the next 2-3 years.9 This forecast comes with the assumption that it will rise to match historical trends in inflation that usually are between 1.5% to 2.00%, as shown in the graph below. The industry will

then recognize a decrease in earnings growth due to their inability to relocate their higher costs to the consumers.

Source: Bloomberg.com Government Regulations The FCC is the main regulatory agency that over sees the telecom industry. They monitor the amount of wireless spectrum that is owned by each firm. This spectrum is what allows companies to send data and telephone signal to their consumers. Spectrum is usually sold to the firms through auctions held by the FCC. The limited amount of spectrum creates a large barrier to entry in this industry. Furthermore, the FCC has been overseeing any potential acquisitions by industry giants like AT&T and Verizon to prevent the creation of a monopoly.21 It is unlikely to see government regulations increase in the near future. The industry may realize a rise in spectrum license costs as limited amounts during a competitive market will drive auction prices higher. We also expect to see the FCC to continue acting with strict scrutiny towards any wireless mergers and acquisitions.

Industry Analysis Industry Overview The telecom industry provides consumers with the ability to communicate and enjoy entertainment at constantly increasing speeds. The industry is made up of three sub-sectors: alternative carriers, wireless telecom services, and integrated telecom services. The integrated sector makes up the largest portion of the industry with 94.6% of the market cap because of top performers, AT&T and Verizon.22

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Source: S&P Capital IQ When comparing the top firms in the industry based on their wireless service revenue, AT&T and Verizon dominate the market share. Sprint and T-Mobile fight for around 30% of the revenues available for wireless services. Due to small private companies not being listed in the comparison, the data is slightly skewed. However, still represents the fact that Verizon and AT&T control most of the industry’s revenue. The graph below demonstrates the breakdown of service revenue from the past year.

Source: Company 10K’s Revenue in this industry relies heavily on the number of connections each firm has. The result of the fight over wireless subscribers is the current telecom price war. In order to retain customers and maintain a low churn rate, firms must offer highly competitive prices. Verizon has the lowest churn rate among the four top competitors in the industry.19 The low churn rate and premium prices compared to their competitors allows Verizon to achieve the highest service revenue in the industry. Verizon and AT&T also own 67% of total wireless connections, as seen in the following graph.

Source: Company 10K’s Segment Analysis Wireline Wireline offers voice and data services through a vast infrastructure that spreads across the whole country. This segment targets mostly businesses due to the need of higher levels of data sharing and transmission.23 Both AT&T and Verizon are witnessing a slowing or negative growth rate in their wireline connections, which hurts their bottom line. AT&T saw their broadband connections drop 1.6% Y/Y.16 While Verizon still recognized a positive broadband connection growth it was down to a .25% increase Y/Y from a 2.11% increase between 2013 and 2014.15 These trends show the market continuing to ease away from wireline technology. Wireless Wireless technology involves transmitting data and voice through wireless spectrum that is dispersed from surrounding towers. Spectrum is acquired through licensing auctions that are held by the FCC or through secondary market transactions with other wireless carriers. The focus in the wireless segment is data, with 4GLTE being the fastest speed available. Verizon expects to start releasing 5G to the market in 2017, which is sooner than the industry-predicted 2020 release date. Speeds from 5G networks are expected to be up to 50 times faster than 4G.24 We anticipate this release to lower our churn rate as well as attract consumers away from their current service provider. Wireless sales continue to dominate the industry, as wireline continues to decline. The industry has achieved a 90% penetration rate amongst adults, and we predict that this will reach 100% in the future.13

Industry Trends The Shift from Wireline to Wireless Wireless services are constantly growing as connection speeds increase and people are acquiring more one than one connectable device. In 2015, there were

38%

32%

16%

14%

Mkt Share based off Service Rev

Verizon AT&T Sprint T-Mobile

112.11128.64

56.1 63.28

Verizon AT&T Sprint T-Mobile

Total Wireless Connections(In Millions)

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approximately 1.4 connections per capita.25 This includes phones, tablets, and car connections. With market penetration being this high, we know that telecom is a mature industry and is nearing a steady-growth state as shown below.

Source: IBISWORLD.com Our team has forecasted Verizon will reach a steady-growth state in 2020. This forecast matches up with the predicted industry forecast. Potential room for growth exists in growing their tablet connections and car space connections. With government regulations regarding hands-free driving, wireless connection in cars is becoming more important and affordable, as more consumers are demanding it. These technological advancements and trends in the wireless industry have caused a cannibalization of the wireline sales of integrated firms as well as an overall decrease in wireline only companies. Fiber Optics While landlines and other wireline services are realizing negative growth, fiber optics is recognizing growth as this trending innovation continues to spread across the country. Fiber optic capabilities deliver Internet and television services at much faster speeds than broadband or wireless. There is high capital intensity involved with fiber optics because of the need to create the infrastructure and technology. Verizon has recently decided to bring their fiber optics services (Fios) to Boston.26 Verizon currently offers fiber optic services in ten different states in the North East region of the U.S. This will allow Verizon to better compete against cable firms like Comcast. Many times consumers only have one option for cable due to location restrictions, so fiber optic ventures from telecom companies could gain high interest from cable consumers dissatisfied with their providers.

Metrics for comparison With the telecom industry being highly competitive, the ability of firms to retain their customers is important for their future success. The industry’s average churn rate was 1.33% in 2015, with Verizon having the lowest churn rate at .96%.19 Verizon loses less subscribers than their competitors, but are able to still charge more for their products and services. They also maintain the highest margins in the industry, showing that Verizon’s management team controls their cost structure better than their major competitors do. Verizon’s profit margin of 13.96% is the best compared to the other major U.S. publicly traded wireless companies. This perhaps can be attributed to their low churn rates, high number of customers, and low cost structure compared to their sales. The table below compares the different margins amongst the industry’s top U.S. based firms.15

Company AT&T VZ Sprint T-Mobile

Mkt Cap 235B 209B 14B 32B Div. Yield 5.00% 4.38% 0% 0% Payout Ratio

81.01% 51.72% 0% 0%

Total Debt

126B 110B 34B 26B

D/E 1.02 6.18 1.56 1.59 Operating Margin

16.88% 25.12% -5.5% 6.44%

Profit Margin

9.09% 13.96% -9.7% 2.12%

Gross Margin

54.33% 60.07% 45% 53.52%

Churn Rate

1.09% .96% 1.87% 1.39%

Source: 10k’s for each company, Yahoo finance! As discussed earlier, telecom companies use large amounts of debt to fund their infrastructural and expansion needs. The average D/E for the industry, excluding Verizon, is 1.39.19 Verizon obtained larger amounts of debt due to their acquisition of Vodafone’s stake in Verizon’s Wireless segment. As you can see in the table above, Verizon’s D/E of 6.18 is much higher than the industry’s average. The management team has committed to work on reducing debt levels down to pre-acquisition levels. However, this will take valuable company time, put restraints on their cash flows, and perhaps hinder their ability to participate in revenue generating projects. Catalysts for Growth/Change Technology & new products With smartphone penetration reaching above 80% at the top two firms, AT&T and Verizon, the industry will need

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to develop new innovative products and services to maintain revenue growth. In 2014, Pew Research found that 90% of adults already own a cellphone; this further more demonstrates that the industry needs to diversify their revenue streams.13 Verizon is currently looking to move into the advertisement and video market, while AT&T is focusing on their recent acquisition of DirectTV. The rest of the industry will need to follow suit, or risk falling further behind. Besides pursuing new business segments, the industry can also focus on developing new innovative wireless products and services. Currently the industry is focusing on developing 5GLTE, Machine to Machine, business solutions, and fiber optic expansion. Installment & Wireless Plans Telecom companies are no longer focusing on the traditional subsidized phone purchasing option, but instead are offering customers installment plans. The negative effect of this option is that customers are not under a two-year service contract and are free to cancel their services at any time. However, the customers still must finish paying of their devices. These plans may allow the industry to sell new phones more often, and therefore create a steady stream of equipment revenue. This has created a new area of competition throughout the industry as the different companies fight to offer the cheapest financing options for their customers. Sprint now offers leasing and installment plans, while Verizon and AT&T focus on their financing plans. The industry would prefer to focus on offering the financing plans, as this pays off the entire cost of the device. When a customer leases a phone, they only have to pay for the time they are actually using the device. This option saves the consumer money, but may reduce equipment revenue growth for the industry over time. There currently is not enough data to analyze the effects, but will need to be looked at in the future. Key Investment Positives/Negatives Defensive Stock & Dividends The telecom industry is a safe haven for investors looking for a fixed income stream. Industry leaders Verizon and AT&T offer dividend yields of 4.38% and 5.00%, as well as payout ratios of 51.72% and 81.01%.15,16 Both of these telecom companies provide dividend yields above the current bond market yield. Corporate bonds rated BBB and above have an estimated average yield of 3.78%.2

Verizon has also consistently increased their dividend by roughly 3.00% for the last nine years, which provides investors a steady growth of fixed payments. The industry also sees a consistent demand for their wireless products and services, which sets up the companies for steady

revenue streams. With 90% of adults in the U.S. currently owning a cellphone, it is safe to say many consumers consider their devices a necessity moving forward. The industry also has an 84% penetration rate for adults whose household income is less than $30,000/year.13 This shows that consumers are still willing to pay for their wireless plans regardless of their income. For risk adverse investors that are looking for a steady equity investment with consistently growing dividends, large telecom companies are a strong area to consider. ARPU & Price Wars: Currently, the industry is experiencing a highly competitive price war. With the ability to gain completely new cellphone users among adults shrinking, major wireless providers are lowering prices to retain current customers and entice subscribers to switch over from their carrier. This has lowered average revenue per user in recent years, causing some growth pains for telecom companies. As seen in the graph below, all four of the major publicly trade wireless providers have seen a decrease in their ARPUs.

Source: Company 10k’s Consumer’s demands for lower prices also puts strain on the industry’s margins. Companies such as Sprint, which currently has profit and operating margins of (9.69%) and (5.49%), is not able to endure much more pressure on their revenues.17 Verizon is leading the industry with profit and operating margins of 13.96% and 25.12%. However, because of fixed costs associated with high amounts of debt and maintaining their infrastructure, the industry as a whole wants prices to stabilize. There are still areas of opportunity for the wireless providers to increase their revenues. Besides interest in expanding into new projects, the industry can also focus on increasing consumers’ dependency on their data services. Currently, just 7% of smartphone users depend on their devices for internet access.13 Pending an increase in this statistic, we

$45.00

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$55.00

$60.00

$65.00

Postpaid ARPU

2013

2014

2015

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believe that telecom companies will recognize higher service revenues. One way they can focus on increasing their consumers’ data usage is through competitive hotspot plans, which allows customers to use their cellphone’s internet on their personal computers and tablets. With the industry looking for new ways to stimulate growth, we are not overly concerned with the shrinking ARPU.

Company Analysis Overview Verizon Communication Inc. (VZ) is the holding company that consists of multiple subsidiaries, such as Verizon Wireless, Verizon Fios, and recently AOL. While they offer products and services in both Wireless and Wireline segments, their management’s main goal is to create and maintain the largest and most reliable wireless network in the U.S. To achieve this goal they are expanding their infrastructure as well as innovating new products and services to generate higher consumer satisfaction and company value. Verizon’s target market consists of retail consumers, businesses of all sizes and government agencies. In 2015, wireless operating revenue was 91.7B, which represented 69.7% of their 131.6B total operating revenue. Wireline contributed 28.7%, with other revenue providing around 2% of total revenue. The following chart demonstrates the breakdown of segment revenues from 2014 to our forecasted CV year of 2020.15

Data Source: Verizon 2015 10k Our projections show that wireless revenues will make-up approximately 77% of Verizon’s total revenues by 2020. That is roughly a 7% increase from the current revenue contribution from wireless. This is due to the deteriorating demand in the wireline segment. Evidence of this decline can be seen in the decreasing connection growth rates. The Global Enterprise and Global Wholesale operations are recognizing negative revenue

growth; however, Mass Markets is still experiencing a slight growth rate. For the ninth consecutive year, the board has declared an increase in dividends. The annual dividend for 2015 was $2.23 (4.38%), which is a 2.7% increase Y/Y. With their EPS being $4.37 this past year, Verizon had a payout ratio of roughly 51% in 2015.15 AT&T is the only other major wireless competitor that currently offers dividends, which were $1.92 (5.00%) with a payout ratio of roughly 81% in 2015.16 Both competitors rank above the S&P’s average Dividend Yield of 2.12%, making these stocks attractive to investors looking for a safe haven during times of low interest rates and high market volatilitiy.8

Verizon saw a large increase in their debt levels in 2014, mainly from the strategic purchase of Vodafone’s 45% indirect stake in Verizon Wireless. The total Wireless Transaction cost Verizon approximately $130B, which was paid for with mostly cash and common stock. $54B of the cash portion was funded through acquiring long-term debt.15 Another reason for Verizon’s high debt levels is the yearly increase in capital expenditures due to constant market demand for higher bandwidth capacity. Currently, Verizon has total contractual obligations of $244B, which includes their long-term debt of $110B. Verizon’s debt levels will place a burden upon their ability to pursue valuable investment opportunities, as our projected $77B worth of FCF through 2020 will be largely consumed to paying off these obligations. The Vodafone Transaction also limits potential projects by requiring Verizon to maintain a certain leverage ratio or recognize an increase in their credit rating before taking on any more debt obligations.15 Products and Services: Verizon has both a wireless and wireline operation, in which they offer a variety of products and services. Wireless Verizon’s wireless segment makes up the majority of their total revenue, at 69.7%. In 2015, the segments total revenue was 91.7B, showing a Y/Y growth of 4.6%. The segment’s revenue can be broken up into service, equipment, and other. The service portion makes up the largest revenue source for wireless at 70.4B and is 76.8% of the segment’s operating revenue. However, these 2015 figures show a 3.1% decrease Y/Y. Verizon also incurred a decrease in their monthly-postpaid service ARPU of 7.12%.15 As discussed in the industry analysis, all the major wireless competitors have been realizing decreases in their ARPU. This is mainly due to the price war that is taking place within the industry. We have forecasted that

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2014 2015 2016 2017 2018 2019 2020

Segment Revenue as % of Total Revenue

Wireless

Wireline

Other

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wireless service revenues will rebound in 2016, growing by 1.00%. This is mainly due to our prediction that Verizon will realize a 4.78% increase in their postpaid wireless subscribers. Verizon on average has gained this percentage of customers the last four years. However, with nearly 100% of the adult market owning cellphones, we believe that their postpaid connections will grow at a decreasing rate. We projected a decrease from 4.78% in 2016 to 4.58% in 2017, continuing that trend until reaching a steady state in 2020 at 3.98%. Verizon will also continue to see slight growth in their service revenues based on our predictions that their connections per account will continue to grow by .05 connections per year, which perhaps allows the company to receive more revenue from larger data allowances. The industry is expecting to launch 5GLTE around the year 2020, while Verizon has hinted at releasing their 5GLTE technology around 2017.24 We have forecasted that this will help generate higher service revenue growth in 2017 and 2018, at 1.50% and 2.25%. We also believe that the price war will hit a wall, as the two companies driving down prices are already receiving narrow margins. Sprint and T-Mobile have been two of the leaders in driving down the industry’s prices, as they compete to gain wireless subscribers. They both currently have operating margins of (5.49%) and 6.44% in 2015.17,18 This hinders their ability to drive prices down much further. Verizon’s Equipment revenue on the other hand showed a 54.4% increase Y/Y, generating 16.9B worth of revenue in 2015.15 Verizon’s method of using installment plans, such as their Verizon Edge program, is the leading cause for this dramatic increase. We have predicted that their equipment revenue growth will slow down to 5.00% in 2016, mainly due to Verizon’s high penetration rate of smartphone users. In the future, most of the revenue from equipment will be existing customers upgrading their current devices. This will allow for some growth in equipment revenue, however will not be as high as their growth in 2015. Verizon offers both postpaid and prepaid wireless services and equipment. The largest portion of their 112.1m retail connections is postpaid, representing 95% of their market share.4 We have predicted that they will continue to grow their total wireless connections at 4.67% in 2016. Some of the connection growth will be due to customers switching from traditional wireline services to wireless services. The graph below demonstrates our forecast for wireless retail connections, with the average growth being 4.30%.

Source: Verizon 10K The percentage of postpaid connections that use smartphone devices hit an all-time high for the company in 2015 at 83.7%.6 In theory, higher smartphone penetration would lead to more connections that are profitable because customers would have to purchase data plans. However, the constant price war occurring within the industry has forced Verizon’s monthly ARPA to decline to $152.63 in 2015, which is a 4.5% decrease Y/Y.15 We have forecasted that the ARPA will experience growth in 2016 of .50%, mainly due from an increase of connections per account. Not only are smartphones reaching extremely high penetration rates, other connectable devices will allow Verizon to expand their revenue-generating base. Devices such as tablets, connectable cars, and watches will cause consumers the need for higher data allowances as usage increases. Within the postpaid connections, Verizon experienced a low churn rate at .96%, which is a decrease of .08% Y/Y.15 They have the lowest churn rate when compared to the other major U.S. wireless carriers, with the industry average of the four big telecom companies being 1.33%.19 This shows an increase in customer satisfaction and loyalty during a very competitive time in the market. Even though competitors’ prices appear to be lower, the reputation of being reliable has value to Verizon’s customers. Open Signal used data from around 376 million tests, to conclude that Verizon and T-Mobile are tied for the fastest download speeds out of all the carriers. They also presented Verizon with the award for having the best and widest 4GLTE coverage.14 We predict that Verizon’s churn rate will rise slightly to .98%, but stay steady at the low rate. The slight increase is mainly due to the end of the price wars, with a few subscribers switching to cheaper services. In the long run, as smartphone penetration nears 100%, it will put a cap on wireless revenue growth. Verizon will have to not only maintain their low churn rate, but also find ways to entice consumers to switch to their service. This will perhaps

108.21 112.11 117.35 122.61 127.88 133.13 138.34

2014 2015 2016 2017 2018 2019 2020

Wireless Retail Connections( I n M i l l io n s )

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force Verizon to find alternative ways to increase wireless revenues, such as tablets, hotspots, and car connections.6 Wireline Verizon’s wireline segment makes up 28.7% of their total revenue in 2015.15 This segment is comprised of three different market breakdowns: Mass Markets, Global Enterprise, and Global Wholesale. The graph below will represent the composition of the three different market breakdowns based on revenue.

Source: Verizon 2014 10k Mass Markets is the retail consumer and small business portion of the wireline segment. The major products and services offered to these customers is the Verizon Fios TV, internet, and digital voice. These commodities offer access to high-speed internet through fiber optic technology, local and long distance calls, and TV entertainment. This group represents the largest portion of the wireline revenue at 47%. The growth rate for mass markets revenue experienced 2.4% Y/Y compared with 2014. We believe the increase in revenue was obtained by the slight increases in Fios internet and entertainment connections to a total of 12.8M.15 The increase in connections may be attributed to customer’s ability to customize their packages, which is an attractive substitute to what cable and satellite companies have to offer. Verizon’s Fios services are currently available in 10 different states, all located in the Northeastern part of the country.15 We have forecasted that Mass markets will grow at a decrease rate, starting with 1.50% in 2016. The growth will occur based on consumers wanting to leave their internet providers such as Comcast, and switch to the fiber optic technology. However, the growth is minimal as more consumers and local businesses are switching to wireless products. AT&T is the only other telecom company to offer competitive products in this category, as they have now acquired DirectTV.

Global Enterprise is the medium to large business and government portion of the wireline segment. This group represented the second largest portion of the wireline revenue at 36%. There was a decline of 5.2% in Global Enterprise revenue Y/Y compared to 2014.15 We have forecasted that the decline in this portion of the business segment will continue to occur, with a decreasing rate of 4.58% through our CV period of 2020. We based our assumption on that total voice connections will continue to decrease at an increasing rate, starting at -7.11% in 2016. We also see businesses and government agencies moving more and more into wireless technology. However, there are still areas in which Verizon could achieve growth. Those solutions include IP communications, infrastructure, cloud services, security, and machine-to-machine technology (M2M). Verizon sees the greatest growth opportunity and revenue generator through advances in the M2M services. As the M2M market is just starting to expand, there is still yet to be data to support the suggestion. However, we believe that the M2M market is indeed an area of opportunity for Verizon to diversify their income and create technological advances. Not only is this currently being applied to the Global Enterprise consumers, but eventually retail customers will purchase these services for more advanced remote home control and other uses. The Global Wholesale operations sells Verizon’s facilities and networks to other companies, so that they can rebrand and sell to their own customers. This is the smallest portion of the wireline revenue at 16%. Verizon realized a decrease in Global Wholesale’s revenue by 3.4%.15 We expect the decline in the Wholesale operations to continue as prepaid carriers choose to lease from cheaper corporations. Two of the largest prepaid carriers, Boost and Cricket, use Sprint to provide for their network needs. We have forecasted the Verizon will experience a continual decline of 5% in their wholesale business. Marketing Strategy Verizon focuses on advertising that their network has the more reliable and extensive coverage in the U.S. As I mentioned earlier, Open Signal concluded that in fact Verizon does have the best coverage. This method seems to work for their business, as Verizon achieved the lowest churn rate in the industry at .96%. Verizon did not spend the most in advertising last year. AT&T out spent them on advertisement, as they try to push for more wireless subscribers. However, Verizon does spend significantly more than the other two major U.S. carriers. The graph below compares the different amounts spent on advertisement in 2015.

47%

36%

16%1%

% of Total Wireline Revenue

Mass Markets Global Enterprise

Global Wholesale Other

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Source: All four of the companies 10Ks Analysis & Management Guidance As stated in the above parts of the analysis, earnings were overall good in 2015 at $4.37 a share. The overall consolidated net income attributable to Verizon was $17.8B at the end of 2015, which is a growth of 85.8% Y/Y.15 This major growth rate is due largely to Verizon purchasing Vodafone’s 45% indirect interest in Verizon Wireless, therefore allowing them to maintain all of the profits created by their wireless segment. Verizon’s ability to maintain steady net income growth Y/Y, with the exception of 2014 due to the Wireless Transaction, has allowed them to continue to increase their yearly dividend. Verizon now provides a dividend yield of 4.38%, and a payout ratio of 51.72%.15 The only other competitor to pay a dividend is AT&T, who had a dividend yield and payout ratio of 5.00% and 81.01% in 2015.16 We have forecasted that Verizon will maintain their same 3.00% increase of dividends in our valuation model, which would increase their payout ratio to 54.35% in 2016. We expect net income to decrease slightly in 2016, mainly due to revenue growth slowing down. However, net income will grow slightly in 2017 and beyond due to the revenue growth increases with the release of 5GLTE and connection growth. Management has expressed their goal to achieve their credit rating they had prior to the Vodafone transaction, and using cash flows to continue paying down their high levels of debt. S&P’s credit rating of Verizon was A-, until they downgraded the company to BBB+ after Verizon borrowed around $50B for the acquisition. However, Verizon’s management has still forecasted that their capital expenditures in 2016 will be between $17.2B and $17.7B.7 This is roughly in line with what they had used in 2015, which in turn would allow them to maintain their growth structure. With the high demand for constant infrastructure improvement, we have forecasted that Verizon will grow their capital expenditures by 1.00% in 2017. With their capital expenditures peeking at 2.00%

growth in 2020. These assumptions are mainly tide to Verizon’s plans for rolling out their 5GLTE, while still maintaining their infrastructural needs. The below visual bellows represents our forecasted capital expenditures through our CV year of 2020.7

Source: Verizon’s 10K Production and Distribution Production Through Verizon’s networks and distribution channels they are able to cover 98% of the United States with 4GLTE data.4 This infrastructure consists of cellular towers, smaller cell antennas, spectrum emitted from antennas, and miles of underground fiber optic cable. Their coverage ranks as first among competitors.

4G LTE Network as of April 2016

Source: Verizon Wireless.com AT&T is making a push to expand their infrastructure and compete with Verizon in more locations across the country. In fiscal year 2015, AT&T spent $17.7B on wireless spectrum licenses compared to Verizon’s $9.9B.15,16 Verizon’s latest acquisition of spectrum coming from an FCC auction held in 2014. The auction cost Verizon $10.4B, which had to be paid by February 2015. Therefore, it is already reflective in their current financial data.8 This transaction is being funded by the recent sale of wireline assets to Frontier Communication. Further details about this sale are available later in the report.

2.75

3.63

1.5 1.6

Verizon AT&T Sprint T-Mobile

Advertising Expense (In Bi l l ions)

17.217.7 17.7 17.9 18.1

18.518.8

2014 2015 2016 2017 2018 2019 2020

Capital Expenditures(In Billions)

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AT&T also spent $19.2B on capital expenditures compared to Verizon’s $17.7B.15,16 The next largest firm, based on revenue, is Sprint and they spent $5.9B and $163 million on capital expenditures and spectrum, respectively.17 This 2014 Sprint data (last publicly available data), shows the huge difference between the top two competitors and the rest of the field. With AT&T spending more than competitors in both of these categories, it shows that this huge conglomerate is looking to become the premier wireless carrier in the United States. This could lead to a higher churn rate for Verizon if AT&T can successfully establish itself as the top competitor. Distribution Verizon distributes their services by using both direct and indirect forms of sales. The direct forms include company operated stores, telemarketing sales force and Verizon Destination Stores. The Destination Stores are high-tech centers that demonstrate Verizon’s ability to innovate new technology. Verizon is working on making all of their company-operated stores more like these Destination Stores to attract more customers. The indirect forms of distribution include the sale of Verizon services in stores such as Best Buy and Wal-Mart. Both prepaid and postpaid services are offered here. Verizon also sells prepaid services in small stores such as Dollar General and drug stores. This attempts to reach consumers who have lower income. Through their distribution tactics, Verizon increased their connections by 3.6% Y/Y.8 Competition Verizon faces a substantial amount of competition not only from traditional wireless carriers, but also other corporations such as Google. Google offers fiber optic services that compete directly with Verizon’s Fios service. The wireless market in particular is a very competitive industry due to the limited customer base a carrier can attract. Directly related to this competitive landscape is the pricing of plans and equipment continuing to decline. A key example of recent competition is the marketing strategy of competitors to offer subsidies for switching to their carrier from another. The market is also facing limited amounts of spectrum for their network to operate efficiently. Below is a table comparing major wireless carriers and key financial metrics.15,16

VZ T S TMUS Market Cap (B) 204.63 225.95 11.08 29.74

Wireless Connections (M)

112.11 128.64 56.1 63.28

Service Revenue (B)

91.68 73.71 -1.87 1.76

EPS $4.37 $2.37 $-.42 $.60 Dividend Payout 4.38% 5.00% N/A N/A

Wireless Licenses (B) $86.6 $81.1 $40.0 $24.0

ARPU (monthly ‘15)

$55.07 $56.88 $56.72 $47.68

Source: Yahoo Finance!, Company 10K’s & Statista This chart helps depict the large size difference between Verizon, AT&T, and the rest of the industry. Even with fewer connections, Verizon has larger wireless service revenue than AT&T, showing they can generate higher margins. With wireless licenses cost directly correlated with the amount of spectrum the company owns, it is no wonder Verizon and AT&T provide more coverage. Both the industry leaders offer strong dividend yields, which supports our team’s opinion that Verizon is a safe haven for investors looking for a fixed income. Sales & Acquisitions Frontier Communications Verizon announced in February 5, 2015 that they were selling their wireline operations in California, Texas, and Florida to Frontier Communications for approximately $10.5B pre-tax. The sale of the assets included the transfer of Fios customers, high-speed internet services, and local and long distance voice connections. The businesses being sold generated $5.4B worth of revenue in 2013, which was the last year this data was available. Frontier will also be assuming $0.6B worth of Verizon Debt as part of the transaction. The transaction is set to close in the beginning of 2016.8 We see this as a strategic move for Verizon to focus their resources on more profitable projects in both wireline and wireless segments. Verizon will use the funds from this sale in order to help pay for their recent $10.4B wireless license acquisition.27

AOL Verizon finished the purchase of AOL in 2015 for $4.4B. Many believe Verizon acquired AOL to obtain a digital platform to help launch their own online digital advertisement services. AOL possessed an advanced advertising network, particularly in the video streaming

12

market. This will help Verizon diversify their revenues and launch their video streaming and advertising services. This is important strategic move for Verizon, since the wireless revenues are expected to flatten in the future.1 Yahoo! Verizon is looking to acquire Yahoo in order to improve their online advertising revenue. This acquisition would add to their online revenues by combining them with the aforementioned AOL. Verizon currently owns a lot of information that they could use to successfully advertise to specific target markets. As of mid-April, Verizon was leading the bidding process. The expected auction price of Yahoo is expected to stand between $4-8 billion.26 We could not add the potential acquisition of Yahoo to our forecasted revenues because of the inability to accurately predict mergers and acquisitions. Catalysts for Growth/Change Product and Service Development If Verizon wants to continue to experience growth in connections and revenues, they must continue to develop innovative products and services. They must be adaptable to change in customers’ demand of services, while providing cheaper plans and equipment prices. In addition, consumers are increasing demand for more access to data. This is evident in the increase of smartphone penetration. However, because of competitors driving prices lower, Verizon must find ways to maintain high margins while still offering competitive prices. A way that Verizon is looking to increase revenue is adding more connections per account through tablet, car, and other connections. Another way to further develop their product and services is the continued search for key assets to complement and diversify their existing services. They have already successfully attempted this with the purchase of AOL, and are looking into companies such as Yahoo!. With AT&T purchasing DIRECTV, Verizon may need to look into acquiring a similar firm in order to expand and remain competitive in their Fios operations. We believe Verizon must focus on creating or finding new revenue generating projects that diversify their operations. Key Investment Positives/Negatives During a current time of volatility and uncertainty in the market place, Verizon has outperformed the S&P and their major competitors YTD. With the beginning of 2016 being a volatile time in the stock market, Verizon has been realizing steady returns as investors look for a safe investment. The top blue line in the graph below represents Verizon.

Source: Yahoo Finance! As discussed earlier on in the industry analysis, telecom companies are a safe haven in times of market uncertainty. Currently, the bond market is offering historically low interest rates for investors looking for a fixed income stream. Verizon becomes an attractive alternative as they offer a dividend yield of 4.38% and a payout ratio of 51.72%.15 Verizon’s dividend yield is higher than the average corporate bond yield of 3.78%, and the 2.66% offered by the 30-year U.S. Treasury bond.2,12 With adult consumption of wireless services reaching 90% penetration rate and even 84% among households who make less than $30,000 a year, we believe that wireless products and services are a becoming a fixed costs.13 Many consumers are moving away from the traditional landline services, as seen in Verizon loosing 7.11% of their landline voice connections in 2015, to wireless products and services. With consumers deeming cellphones a necessity, demand for wireless services is becoming steady. This shows value in the company as their revenues will stay relatively steady. Therefore, we have forecasted that revenues will grow at a steady state of .94% in 2020. The growth rate is slim because penetration is high in the wireless market, causing companies to look elsewhere if they want to continue growing revenue at higher rates. Verizon is looking for ways in which to boost revenue, such as video advertisement. Their recent acquisition of AOL and their attempt to acquire yahoo for their advertisement technology shows that Verizon is committed to entering that market. Verizon does have an industry high Debt to equity ratio of 6.18.15 As discussed earlier, Verizon is experiencing higher debt levels due to their acquisition of Vodafone’s stake in Verizon’s wireless business. They now own 100% of their wireless business, but some of the upside his hindered by Verizon needing to pay down their high debt levels. Management has stated that they are going to focus on paying down Verizon’s debt, and we have forecasted that they will pay off 5.00% of the debt every

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year. We wanted to be realistic, as Verizon will still need cash flows to invest in projects such as 5GLTE technology. The debt levels have also lowered Verizon’s credit rating from A- to BBB+, which will perhaps force them to offer higher returns on future debt issues. We believe that Verizon is capable of handling the repayment of their debt obligations, but will require a long amount of time for them to reach similar levels before the Vodafone transaction. With the average industry debt to equity ratio being 1.39, other telecom companies may be in a better position to take advantage of opportunities that arrive in the market.19

Valuation Discussion Revenue Decomposition Verizon’s wireless segment is the largest revenue generator for the company, with the division contributing 69.66% of their total revenue in 2015.15 We forecast that on average during the next four years the segment’s revenue will grow at 2.18% until it reaches its steady growth rate of 1.81% in 2020. Wireless service revenue represented 53.49% of total revenue. We have service revenue growing at an average rate of 1.69% during the next four years, and then steadily growing at 1.75% thereafter. We determined low growth rates based on the high competitive nature in the industry that is driving prices down, 90% of adults already own cellphones, and Verizon already having 83.7% of their postpaid wireless customers owning a smartphone.13,6 Wireless equipment contributed 16.17% of their total revenue in 2015. We have equipment sales growing at 3.75% on average during the next four years, and will reach a steady 2.00% growth rate in 2020. Equipment revenue has been skyrocketing in the last two years mainly due to the creation of the Verizon Edge program. Installment plans are increasing wireless carriers’ revenue on equipment because they no longer subsidize at extremely high levels. The plans also allow consumers to afford more expensive devices due to the fact they don’t have to pay for them upfront, and in essence are receiving financing with no interest payments. We believe equipment revenues will slow down to our forecasted growth rates mainly due to high penetration rates and the Edge program loosing its new car smell. With penetration rates already being high, most of the equipment sales will be based on existing customers upgrading their current devices. The wireline segment represented 28.66% of total revenue in 2015.15 We have forecasted that the segment will decline on average during the next four years by

1.56%, and will reach a steady decline rate of 1.47% in 2020. We do believe that mass markets, the consumer and small business customers of the wireline division, will grow at a decreasing rate. We have forecasted that Mass Market revenues will grow by 1.50% in 2016, and then decreasing the growth rate by .10% per year until reaching its steady rate of 1.10% in 2020. The growth predictions is mainly due to consumers signing up for fiber optic internet services as well as Verizon offering business solutions for small businesses. However, we have anticipated Verizon’s global wholesale and global enterprise revenues to continue declining. Both sections have declined over the last three years due mainly to consumers switching to wireless products and services. In which some of the decline will be offset by an increase in wireless as consumers switch products and services that they are consuming within the Verizon brand. Overall, we have forecasted that Verizon’s total revenue will grow by 1.11% on average over the next four years, and then leveling off at a .94% growth rate in 2020. There are still areas in which we see Verizon increasing their growth rates. With current management expressing their desires to enter the mobile video and advertising market, Verizon could create a whole new segment within their corporation. They have already acquired AOL, and currently are considering purchasing Yahoo! for their advertising technology. It will be important to keep an eye on the development of these products and services, and to analyze Verizon’s ability to enter the market. Margins & Costs Verizon has been able to maintain their gross margin at 60% for over ten years. Their management team does an exceptional job at producing goods and services at a steady cost structure. We have forecasted that their gross margin will maintain at 60% through our CV period. Verizon also recently pushed their operating margin to around 25%, and we believe this will maintain as well through the CV period. We believe they are able to achieve this by keeping their SGA costs steady at 23% of sales. Even though the industry is highly competitive, we don’t see the need for Verizon to increase their SGA expenses. One of the main components of their SGA is advertisement expense, in which Verizon maintains growing around 5%. Even with our forecast of Verizon paying 5% of their debt off every year, we believe they will maintain their profit margin around 14%. Our forecasts show that Verizon will be able to maintain profitability at a steady rate.

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Capital Expenditures Management stated in their press release of their 2015 financials that their goal is to maintain their capital expenditures at $17B in 2016.7 Thereafter, we forecasted that their cap ex will grow at 1%, 1.5%, and 1.75% leading up to a steady growth rate of 2% in 2020. These predictions are based off the notion that telecom companies must continue to maintain and expand their infrastructure. The industry also sees shifts into new technology, such as 5GLTE. These network changes require Verizon and other wireless carriers to invest heavily into new technology to offer faster and more reliable services to consumers. WACC Since Verizon’s management has stated their desire to pay down their debt until they reach credit ratings and debt levels prior to the Vodafone transaction, we used a variable WACC in our models. Verizon still maintains a good credit rating, with S&P giving them a BBB+ rating. We forecasted our CV WACC to be 5.51%. Cost of equity We used CAPM in determining the cost of equity for our WACC calculation. Our cost of equity is 6.37% until increasing to 6.71% in 2018 and beyond. The increase is due to our assumption that the risk free rate will increase based on our economic analysis. We based our risk free rate of 2.66% in our model off the 30-year U.S. Treasury bond’s YTM.12 Our team predicts that the rate will stay the same until increasing slightly to 3.00% in 2018. We used a 5.00% equity risk premium in our forecast, which is based off the historical geometric average. We determined over time that this premium would stay steady. To conclude Verizon’s .74 beta, we used Bloomberg’s 2 year, weekly raw beta.20 This parameter was used to capture their volatility following their reacquisition of Vodafone’s stake in Verizon Wireless roughly two years ago. On average, 65.8% was the weight put on equity in the WACC equation. Cost of Debt We have forecasted Verizon’s pre-tax cost of debt at 4.58%, which is made up of the risk free rate plus a default spread. To determine our default spread, we found a current Verizon bond that has an equivalent maturity compared to the 30-year U.S. Treasury bond. The bond’s YTM offers 4.58%, therefore having a 192 basis point spread over the risk free rate of 2.66%. We decided to keep the spread consistent due to our belief that their credit rating will stay the same. Based on our economic analysis that the risk free rate will increase to 3.00%, our forecasted pre-tax cost of debt increased to 4.92% in 2018

and beyond. With a marginal tax rate of 37.1%, Verizon’s after-tax cost of debt is 2.88% until increasing slightly to 3.09% in 2018 and beyond. With our prediction that Verizon will pay off 5.00% of their debt annually, the weight associated with debt in the WACC equation decreases marginally every year. This in turn causes our WACC to increase over our horizon until reaching our CV WACC of 5.51%. DCF_EP Using our Discounted Cash Flows and Economic Profit models, we derived an intrinsic stock value of $65.23. This would imply that Verizon currently has a stock that is extremely undervalued by the market. Our value drivers, net operating profits less adjusted taxes and invested capital influence this stock price. We have a continuing value NOPLAT growth rate of 1.39%, which we choose as our CV growth rate for our model. Our low growth rate begins in terminal year 2020. This quick approaching terminal year is due to the industry being in a mature state as well as Verizon nearing 100% smart-phone penetration. Verizon will create this added value for its shareholders through its stable revenues during a volatile economy. We found this model to be the most effective in valuating Verizon’s stock because it takes into account the factors that we truly believe are driving the value of the firm. While dividends and other firms in the industry do effect Verizon’s value, we think that Verizon’s stable revenues and close proximity to their terminal year force us to focus more on internal value drivers. DDM Through the construction of a dividend discount model, we discovered an intrinsic stock price of $73.24. We think this model may not create the most realistic stock price for Verizon. Telecommunication companies and Verizon specifically have been known to offer high dividend payouts. They currently have a payout ratio of 52% while the S&P average payout ratio was roughly 41%.28 Although Verizon is above the S&P average, we do not think this higher payout ratio creates an added intrinsic value premium of 37% from their current stock price. We would not recommend using the DDM to generate an intrinsic stock price for Verizon. Relative P/S Valuation It was difficult to perform a relative valuation for the telecommunication industry due to the size differences in the competing firms. Verizon and AT&T are much larger and realize higher revenues. They also both have positive P/E ratios, while Sprint recognizes a negative P/E. We decided to perform our valuation using P/S because of the

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industry being in a mature state and most firms recognizing stable revenues. Although Verizon and AT&T achieved sales levels about five times higher than Sprint and T-Mobile, we think that P/S does a good job of capturing the intrinsic value of Verizon.3 Our valuation gave us an intrinsic stock price of $64.45 and $61.44 based on P/S ratios in 2016 and 2017, respectively. The intrinsic value derived from this method needs to be used with caution due to the vast differences in sales between the firms in the telecom industry. ROIC We calculated an ROIC of 10.07% in our terminal year of 2020. This gives us an idea of how efficiently Verizon is using its resources. To determine if Verizon is effectively creating shareholder value, we must compare it to the WACC from our terminal year. The WACC in 2020 was forecasted to be 5.51%. Given that the ROIC of 10.07% is greater than the WACC of 5.39%, we can conclude that Verizon is in fact creating shareholder value.

Sensitivity Analysis We conducted a sensitivity analysis of our models to determine the impact a variation in a particular assumption would have on our target stock price. We decided to create six data tables to examine the sensitivity of our model. Market Risk Premium/Beta Both beta and the MRP are used in CAPM to determine Verizon’s cost of equity, and therefore impact the companies WACC. The analysis suggests that our target stock price, based off our DCF model, is very sensitive to a change in either of these two metrics. This is logical due to our WACC having on average 65% weight on equity. The table shows that given a .10 increase in Beta and .50% increase in the MRP, the target stock price would drop from $64.81 to $55.30. Which is a 14.67% decrease in value. The percentage increases or decreases depending upon the combination. CV ROIC/CV NOPLAT Growth The CV ROIC and CV NOPLAT growth rate are both used in CV formula to determine Verizon’s value of operations. While both metrics are important, our sensitivity test shows that a change in either metric does not impose a large impact on the target stock price. For example, given a .10% increase in CV NOPLAT growth rate and a .25% increase in CV ROIC, the target stock price increases by only 2%.

COGS as % of Sales/SGA as % of Sales Verizon has kept their costs relatively steady in the past; however, the sensitivity test shows that the stock price is volatile if their expenses were to change. Our analysis shows that if SGA and COGs as a percentage of sales were to increase by 1% each, the target stock price would decrease from $64.81 to $55.63. This represents a 14.16% decrease in the value of the stock. The sensitivity comes from the fact that SGA and COGs decrease the firm’s noplat, therefore causing the DCF target price to decline. COGs as % of Revenue/Wireless Service Revenue Growth With wireless service revenue being the largest component of Verizon’s total revenue, we wanted to see the target stock price volatility that would occur from a changing in the cogs as a percentage of revenue and wireless service revenue growth rate. Our analysis determined that the target stock price is semi sensitive in a change of the two metrics. With a .50% increase in the wireless service growth rate and a 1% increase in the cogs as a percentage of revenue, the stock price decreased by 6%. The test perhaps shows that the stock’s value is more sensitive to a change in the cost structure than a change in the largest revenue component. Default Spread/Risk Free Rate The risk free rate is an important metric in our valuation model due to the effects it has on both the cost of equity and the cost of debt. The sensitivity analysis shows that the target price does not change greatly when comparing a change in the risk free rate and default spread. Given an estimated .50% increase in the risk free rate and the default spread, the target price only decreases by roughly 3.70%. However, with our prediction that the risk free rate will increase to 3.00%, which is roughly a .50% increase, Verizon’s stock will decrease in value. The decrease will be minimal if the default spread stays consistent. Marginal tax rate/default spread Both the default spread and the marginal tax rate are inputs into the after-tax cost of debt. The sensitivity analysis shows that given a change in either one of the metrics the target price volatility is minimal. However, the model is slightly more sensitive to a change in the marginal tax rate. We determine this makes sense due to the marginal tax rate being used to calculate the adjusted in the NOPLAT calculations, as well as figuring out the after-tax cost of debt. Given a 1% decrease in the marginal tax rate, the target price increases by 2%. Depending on the regulatory climate, the sensitivity of the model based

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on the marginal tax rate may decrease the firm’s forecasted value. Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

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References [1] Fitchard, Kevin. "The Real Reason Verizon Bought AOL." Fortune. N.p., 24 June 2015. Web. 14 Feb. 2016. <http://fortune.com/2015/06/24/verizon-gains-aol/>.

[2] "BofA Merrill Lynch US Corporate BBB Effective Yield©." FRED. Federal Reserve Bank of St. Louis, n.d. Web. 11 Apr. 2016. <https://research.stlouisfed.org/fred2/series/BAMLC0A4CBBBEY>.

[3] "Yahoo Finance! VZ, S, T, TMUS." Yahoo Finance. N.p., 2016. Web. 13 Feb. 2016. <http://finance.yahoo.com/>.

[4] "Verizon At A Glance." Verizon.com/ourcompany. N.p., 2016.

Web. 15 Feb. 2016. <http://www.verizon.com/about/our-company/verizon-glance>.

[5] "Dividend History." Verizon.com/Investors. N.p., 2015. Web.

13 Feb. 2016. <http://www.verizon.com/about/investors/dividend-history>.

[6] "4Q 2015 Quarter Earnings." Verizon.com/InvestorsRelations.

N.p., 20 Jan. 2016. Web. 13 Feb. 2016. <http://www.verizon.com/about/investors/quarterly-reports/4q-2015-quarter-earnings-conference-call-webcast>.

[7] "Verizon Caps Transformational Year with Strong, Balanced

4Q Results." Verizon.com/News. N.p., 20 Jan. 2016. Web. 15 Feb. 2016. <http://www.verizon.com/about/news/verizon-caps-transformational-year-strong-balanced-4q-results>.

[8] http://www.multpl.com/s-p-500-dividend-yield/

[9] "Economic Calendar." Bloomberg.com. Bloomberg, n.d. Web. 15 Apr. 2016. <http://www.bloomberg.com/markets/economic-calendar>.

[10] "How Will Rising Interest Rates Impact Dividend Stocks?" NASDAQ.com. N.p., 28 Mar. 2014. Web. 12 Apr. 2016. <http://www.nasdaq.com/article/how-will-rising-interest-rates-impact-dividend-stocks-cm341670>.

[11] "News Release: Gross Domestic Product." U.S. Department of Commerce. N.p., 25 Mar. 2016. Web. 12 Apr. 2016. <http://www.bea.gov/newsreleases/national/gdp/2016/gdp4q15_3rd.htm>.

[12] "Resource Center." US Department of the Treasury. N.p., n.d. Web. 14 Apr. 2016. <https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-Yield-Data-Visualization.aspx>.

[13] "Mobile Technology Fact Sheet." Pew Research Center Internet Science Tech RSS. N.p., 27 Dec. 2013. Web. 12 Apr.

2016. <http://www.pewinternet.org/fact-sheets/mobile-technology-fact-sheet/>.

[14] Epstein, Zach. "Which Carrier Has the Fastest LTE Network in America?"BGR. N.p., 02 Feb. 2016. Web. 13 Apr. 2016. <http://bgr.com/2016/02/02/fastest-lte-network-america-testss/>.

[15] Verizon 10K – 2015

[16] At&t 10K – 2015

[17] Sprint 10K – 2014

[18] T-Mobile 10K – 2015

[19] combines all of the 10Ks, or combines 15-18

[20] Bloomberg Terminal

[21] Blau, Gavan. "Wireless Telecommunications Carriers in the US." IBIS World. N.p., 26 Feb. 2016. Web. <http://clients1.ibisworld.com/reports/us/industry/default.aspx?entid=1267>. [22] Zino, Angelo. "S&P Capital IQ NetAdvantage." S&P Capital IQ NetAdvantage. N.p., Jan. 2016. Web. <http://www.netadvantage.standardandpoors.com/NASApp/NetAdvantage/showIndustrySurvey.do?code=twn>. [23] Sheffer, Ray. "An Overview of the US Telecom Industry." Market Realist. N.p., 16 Jan. 2015. Web. <http://marketrealist.com/2015/01/overview-us-telecom-industry/>. [24] "Wireless Quick Facts." CTIA. N.p., n.d. Web. <http://www.ctia.org/your-wireless-life/how-wireless-works/wireless-quick-facts/1.4-mobile-connected-devices-for-every-person-in-united-states>. [25] Knutson, Ryan. "Verizon to Expand Fios Fiber-Optic Network Into Boston." WSJ. N.p., 12 Apr. 2016. Web. <http://www.wsj.com/articles/verizon-to-expand-fios-fiber-optic-network-into-boston-1460494493>. [26] MacMillan, Douglas. "Verizon Tops Pack of Suitors Chasing Yahoo." WSJ. N.p., 17 Apr. 2016. Web. <http://www.wsj.com/articles/verizon-tops-pack-of-suitors-chasing-yahoo-1460939767>. [27] Nayak, Malathi, and Liana B. Baker. "Verizon to Sell Wireline Operations, Towers worth $15.6 Billion." Reuters. Thomson Reuters, 05 Feb. 2015. Web. <http://www.reuters.com/article/us-verizon-comms-divestiture-idUSKBN0L92UG20150206>. [28] "S& P Earnings: 1960-Current." S&P Earnings History. N.p., n.d. Web. <http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/spearn.htm>

Verizon Communications, Inc.

Revenue Decomposition

All figures stated in Billions (U.S. dollars), except for ARPU and otherwise stated

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E CV (2020)

Wireless Revenues

Service 69.03 72.63 70.40 71.10 72.17 73.79 75.27 76.58

Y/Y Growth 8.32% 5.21% ‐3.08% 1.00% 1.50% 2.25% 2.00% 1.75%

Equipment & Other 11.99 15.02 21.28 22.35 22.91 24.05 24.65 25.15

Y/Y Growth ‐1.19% 25.24% 41.74% 5.00% 2.50% 5.00% 2.50% 2.00%

Total Operating Revenue 81.02 87.65 91.68 93.45 95.07 97.84 99.92 101.73

Y/Y Growth 6.79% 8.17% 4.60% 1.93% 1.74% 2.91% 2.12% 1.81%

Wireless Connections (000')

Retail PostPaid 96,752        102,079      106,528      111,625        116,742      121,861      126,960      132,019     

Y/Y Growth 4.56% 5.51% 4.36% 4.78% 4.58% 4.38% 4.18% 3.98%

Retail PrePaid 6,047           6,132           5,580           5,721             5,866           6,015           6,168           6,324          

Y/Y Growth 6.09% 1.41% ‐9.00% 2.53% 2.53% 2.53% 2.53% 2.53%

Total Retail Connections 102,799      108,211      112,108      117,346        122,609      127,876      133,128      138,343     

Y/Y Growth 4.65% 5.26% 3.60% 4.67% 4.48% 4.30% 4.11% 3.92%

Wireless Churn

Retail Postpaid Churn Rate 0.97% 1.04% 0.96% 0.98% 0.98% 0.98% 0.98% 0.98%

Total Churn Rate 1.27% 1.33% 1.24% 1.28% 1.28% 1.28% 1.28% 1.28%

Wireless ARPA

Retail PostPaid ARPA (Monthly) 153.93 159.86 152.63 153.39 154.93 156.86 158.43 159.62

Y/Y Growth 6.87% 3.85% ‐4.52% 0.50% 1.00% 1.25% 1.00% 0.75%

Retail postpaid connections per acco 2.76 2.87 2.98 3 3.05 3.1 3.15 3.2

Wireline Revenues

Mass Markets 17.38 18.05 18.47 18.75 19.01 19.26 19.49 19.71

Y/Y Growth 3.80% 3.82% 2.36% 1.50% 1.40% 1.30% 1.20% 1.10%

Global Enterprise 14.18 13.65 12.94 12.35 11.78 11.24 10.73 10.24

Y/Y Growth ‐2.71% ‐3.76% ‐5.17% ‐4.58% ‐4.58% ‐4.58% ‐4.58% ‐4.58%

Global WholeSale 6.59 6.19 5.98 5.68 5.40 5.13 4.87 4.63

Y/Y Growth ‐7.05% ‐6.13% ‐3.41% ‐5.00% ‐5.00% ‐5.00% ‐5.00% ‐5.00%

Other 0.47 0.54 0.33 0.33 0.33 0.33 0.33 0.33

Y/Y Growth ‐11.93% 16.77% ‐40.15% 0% 0% 0% 0% 0%

Total Operating Revenue 38.62 38.43 37.72 37.11 36.52 35.95 35.41 34.89Y/Y Growth ‐0.82% ‐0.50% ‐1.84% ‐1.63% ‐1.58% ‐1.54% ‐1.50% ‐1.47%

Wireline Connections (000')

Fios Internet  6,072 6,616 7,034 7478 7882 8221 8525 8738

Y/Y Growth 11.95% 8.96% 6.32% 6.32% 5.40% 4.30% 3.70% 2.50%

Fios TV 5,262 5,649 5,827 6011 6191 6361 6488 6586

Y/Y Growth 11.34% 7.35% 3.15% 3.15% 3.00% 2.75% 2.00% 1.50%

Total BroadBand Connections 9,015 9,205 9,228 9251 9274 9297 9321 9344

Y/Y Growth 2.50% 2.11% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%

Total Voice Connections 21,085 19,795 18,387 17079 15798 14598 13474 12423

Y/Y Growth ‐6.30% ‐6.12% ‐7.11% ‐7.11% ‐7.50% ‐7.60% ‐7.70% ‐7.80%

Other Revenues 0.90 1.00 2.22 2.22 2.22 2.22 2.22 2.22

Total Revenue 120.55 127.08 131.62 132.77 133.81 136.02 137.55 138.84

Total Revenue Growth 4.06% 5.42% 3.58% 0.88% 0.78% 1.65% 1.13% 0.94%

Verizon Communications, Inc.

Income Statement

All figures in Billions, except per share amountsFiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E CV (2020)

Sales 120.55 127.08 131.62 132.77 133.81 136.02 137.55 138.84

Cost of Goods Sold excluding D&A 44.89 49.93 52.56 53.11 53.52 54.41 55.02 55.54

Gross Income 75.66 77.15 79.06 79.66 80.29 81.61 82.53 83.31

Depreciation  15.02 14.97 14.32 13.86 14.49 15.05 15.57 16.05

Amortization of Intangibles  1.59 1.57 1.70 1.70 1.49 1.31 1.08 0.81

Selling, General, & Administration Expense 27.09 41.02 29.99 30.54 30.78 31.28 31.64 31.93

Operating Income 31.97 19.60 33.06 33.57 33.53 33.96 34.25 34.52

Equity in earnings of unconsolidated Businessess 0.14 1.78 ‐0.09 0.00 0.00 0.00 0.00 0.00

Other income and (expense) ‐ net ‐0.17 ‐1.19 0.19 ‐0.2 ‐0.2 ‐0.2 ‐0.2 ‐0.2

Interest Expense 2.67 4.92 4.92 5.05 2.01 1.88 1.84 1.73

PreTax Income 29.28 15.27 28.24 28.33 31.31 31.88 32.20 32.59

(Provision) Benefit for Income taxes ‐5.73 ‐3.31 ‐9.87 ‐10.51 ‐11.62 ‐11.83 ‐11.95 ‐12.09Net Income 23.55 11.96 18.38 17.82 19.70 20.05 20.26 20.50

Net income attributable to noncontrolling interests 12.05 2.33 0.50 0.53 0.59 0.60 0.61 0.61

Net income attributable to Verizon 11.50 9.63 17.88 17.28 19.10 19.45 19.65 19.88

Net Income 23.55 11.96 18.38 17.82 19.70 20.05 20.26 20.50

EPS ‐ Basic 4.01 2.42 4.37 4.23 4.67 4.76 4.80 4.86

Weighted Average Shares Outstanding 2.87 3.97 4.09 4.09 4.09 4.09 4.09 4.09

Total Shares Outstanding  2.87 4.00 4.24 4.26 4.27 4.29 4.30 4.32

Dividends per share 2.09 2.16 2.23 2.30 2.37 2.44 2.51 2.59

Dividend payout Ratio 52.17% 89.09% 51.01% 54.35% 50.65% 51.23% 52.25% 53.18%

Verizon Communications, Inc.

Balance Sheet

All Figures in BillionsFiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E CV (2020)

Assets

Current Assets

Cash and Cash Equivalents 53.53 10.60 4.47 8.46 6.21 9.42 8.47 12.18

Short‐Term Investments 0.60 0.56 0.35 0.36 0.36 0.37 0.38 0.39

Accounts Receivable 12.44 13.99 13.46 14.18 14.29 14.53 14.69 14.83

Inventories 1.02 1.15 1.25 1.23 1.24 1.26 1.27 1.28

Prepaid Expenses and Other 3.41 3.32 1.96 3.62 3.64 3.70 3.75 3.78

Assets Held For Sale 0.79

Total Current Assets 70.99 29.62 22.28 27.84 25.74 29.28 28.56 32.46

Plant Property Equipment 220.87 230.51 220.16 237.86 255.74 273.89 292.35 311.18

Less Accumulated Depreciation 131.91 140.56 136.62 150.48 164.97 180.03 195.59 211.64

PPE, net 88.96 89.95 83.54 87.38 90.77 93.86 96.75 99.54

Investments in Unconsolidated Businesses 3.43 0.80 0.80 0.80 0.80 0.80 0.80 0.80

Wireless Licenses 75.75 75.34 86.58 87.44 88.32 89.20 90.09 90.99

Goodwill 24.63 24.64 25.33 25.33 25.33 25.33 25.33 25.33

Other Intangible Assets, net 5.80 5.73 8.34 6.642 5.151 3.84 2.758 1.953

Non Current Assets Held For Sale 10.27

Other Assets 4.54 6.63 7.51 7.51 7.51 7.51 7.51 7.51

Total Assets 274.10 232.71 244.64 242.95 243.62 249.82 251.80 258.58

Liabilities

Current Liabilities

Short Term Debt 3.93 2.74 6.49 6.33 4.20 7.07 5.65 8.86

Accounts Payable and Accrued Liab. 16.45 16.68 19.36 18.46 18.61 18.91 19.13 19.31

Liabilities Related to Assets Held for Sale 0.46

Other 6.66 8.65 8.74 8.74 8.74 8.74 8.74 8.74

Total Current Liabilities 27.05 28.06 35.05 33.53 31.54 34.72 33.51 36.91

Long Term Debt 89.66 110.54 103.71 98.52 93.59 88.91 84.47 80.24

Employee Benefit Obligations 27.68 33.28 29.96 29.96 29.96 29.96 29.96 29.96

Deferred Income Taxes 28.64 41.58 45.48 43.21 41.05 39.00 37.05 35.19

Non Current Liabilities Related to Assets for Sale 0.96

Other Liabilities 5.65 5.57 11.64 11.64 11.64 11.64 11.64 11.64

Total Liabilities 178.68 219.03 226.80 216.85 207.78 204.23 196.62 193.94

Common Equity 38.24 11.58 11.62 12.37 13.11 13.86 14.61 15.35

Reinvested Earnings 1.78 2.45 11.25 18.75 27.75 36.75 45.59 54.31

Accumulated and other comprehensive income 2.36 1.11 0.55 0.55 0.55 0.55 0.55 0.55

Common Stock in Treasury, at cost ‐3.96 ‐3.26 ‐7.42 ‐7.42 ‐7.42 ‐7.42 ‐7.42 ‐7.42

Deferred compensation‐employee stock ownership plans and  0.42 0.42 0.43 0.43 0.43 0.43 0.43 0.43

Non‐Controlling Interest 56.58 1.38 1.41 1.41 1.41 1.41 1.41 1.41

Total Equity 95.42 13.68 17.84 26.09 35.83 45.58 55.18 64.64

Total Liabilities & Equity 274.10 232.71 244.64 242.95 243.62 249.82 251.80 258.58

Verizon Communications, Inc.

Cash Flow Statement

All Figures in BillionsFiscal Years Ending Dec. 31 2013 2014 2015

Cash Flows from Operating Activities

Net Income 23.55 11.96 18.38

Adjustments to reconcile NI to net cash provided by operating activities:

Depreciation and Amoritization Expense 16.61 16.53 16.02

Employee Retirement Benefits ‐5.05 8.13 ‐1.75

Deferred Income Taxes 5.79 ‐0.09 3.52

Provision for Uncollectible Accounts 0.99 1.10 1.61

Equity in earnings of unconsolidated businesses, net of dividends received ‐0.10 ‐1.74 0.13

Accounts receivable ‐0.84 ‐2.75 ‐0.95

Inventories 0.06 ‐0.13 ‐0.10

Other Assets ‐0.14 ‐0.70 0.94

Accounts Payable and accrued liabilities 0.93 1.41 2.55

Other, net ‐2.95 ‐3.09 ‐1.41

Net Cash Provided by Operating Activities 38.82 30.63 38.93

Cash Flows from Investing Activities

Capital expenditures (including capitalized software) ‐16.60 ‐17.19 ‐17.78

Acquisitions of investments and businesses, net of cash acquired ‐0.49 ‐0.18 ‐3.55

Acquisitions of wireless licenses ‐0.58 ‐0.35 ‐9.94

Proceeds from dispositions of wireless licenses 2.11 2.37

Proceeds from dispositions of businesses 0.12 0.05

Other, net 0.73 ‐0.62 1.17

Net cash used in investing activies ‐14.83 ‐15.86 ‐30.04

Cash Flows from Financing Activities

Proceeds from long‐term borrowings 49.17 30.97 6.67

Repayments of long‐term borrowings and capital lease obligations ‐8.16 ‐17.67 ‐9.34

Increase (Decrease) in short‐term obligations, excluding current maturities ‐0.14 ‐0.48 ‐0.34

Dividends paid ‐5.94 ‐7.80 ‐8.54

Proceeds from sale of common stock 0.09 0.03 0.04

Purchase of common stock for treasury ‐0.15 ‐5.13

Special distribution to noncontrolling interest ‐3.15

Acquisition of noncontrolling interest ‐58.89

Other, net ‐5.26 ‐3.87 1.63

Net cash provided by (used in) financing activities 26.45 ‐57.71 ‐15.02

Increase (decrease) in cash and cash equivalents 50.44 ‐42.93 ‐6.13

Cash and cash equivalents, beginning of period 3.09 53.53 10.60

Cash and cash equivalents, end of period 53.53 10.60 4.47

Fiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E CV (2020)

Cash Flows from Operating Activities

Net Income 17.82 19.70 20.05 20.26 20.50

Adjustments to reconcile net income to cash from operating 

activities

   Less: Income attributable to non‐controlling interest ‐0.53 ‐0.59 ‐0.60 ‐0.61 ‐0.61

   Add: Depreciation 13.86 14.49 15.05 15.57 16.05

Add: Amortization of intangibles 1.70 1.49 1.31 1.08 0.81

Change in deferred taxes ‐2.27 ‐2.16 ‐2.05 ‐1.95 ‐1.85

Changes (increases or decreases) in working capital accounts:

Change in receivables, net allowance ‐0.72 ‐0.11 ‐0.24 ‐0.16 ‐0.14

Change in inventories 0.03 ‐0.01 ‐0.02 ‐0.01 ‐0.01

Change in prepaid expenses & Other ‐1.66 ‐0.03 ‐0.06 ‐0.04 ‐0.04

Change in accounts payable and accrued liabilities  ‐0.90 0.14 0.31 0.21 0.18

Change in other liabilities 0.00 0.00 0.00 0.00 0.00

Net Cash Provided by Operating Activities  27.31 32.92 33.76 34.34 34.88

Cash Flows from Investing Activities

(Increase) decrease in short‐term investments ‐0.01 ‐0.01 ‐0.01 ‐0.01 ‐0.01

(Increase) decrease in long‐term investments 0.00 0.00 0.00 0.00 0.00

Capital expenditures ‐17.70 ‐17.88 ‐18.15 ‐18.46 ‐18.83

Change in intangible assets 0.00 0.00 0.00 0.00 0.00

Change in Wireless Licenses ‐0.87 ‐0.87 ‐0.88 ‐0.89 ‐0.90

Change in discontinued operations 9.64 0.00 0.00 0.00 0.00

(Increase) decrease in other assets 0.00 0.00 0.00 0.00 0.00

Net Cash used in Investing Activities ‐8.94 ‐18.76 ‐19.04 ‐19.36 ‐19.74

Cash Flows from Financing Activities 

Proceeds from issuance (payments) of short‐term debt ‐0.16 ‐2.13 2.88 ‐1.43 3.22

Proceeds from issuance (payments) of long‐term debt ‐5.19 ‐4.93 ‐4.68 ‐4.45 ‐4.22

Payment of Dividends ‐9.78 ‐10.11 ‐10.45 ‐10.80 ‐11.17

Net Proceeds from sale/issuance of common stock 0.75 0.75 0.75 0.75 0.75

Net Cash provided by (used in) Financing Activities ‐14.38 ‐16.42 ‐11.51 ‐15.93 ‐11.43

Increase (decrease) in cash and cash equivalents 3.99 ‐2.25 3.21 ‐0.95 3.71

Cash and cash equivalents, beginning of period 4.47 8.46 6.21 9.42 8.47

Cash and cash equivalents, end of period 8.46 6.21 9.42 8.47 12.18

Verizon Communications, Inc.Projected Statement of Cash FlowsAll Figures in Billions

Verizon Communications, Inc.

Common Size Income StatementFiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E CV (2020)

Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Cost of Goods Sold excluding D&A 37.24% 39.29% 39.93% 40.00% 40.00% 40.00% 40.00% 40.00%

Gross Margin 62.76% 60.71% 60.07% 60.00% 60.00% 60.00% 60.00% 60.00%

Depreciation  12.46% 11.78% 11.27% 10.44% 10.83% 11.07% 11.32% 11.56%

Amortization of Intangibles  1.32% 1.23% 1.34% 1.28% 1.11% 0.96% 0.79% 0.58%

Selling, General, & Administration Expense 22.47% 32.28% 22.78% 23.00% 23.00% 23.00% 23.00% 23.00%

Operating Income 26.52% 15.42% 25.12% 25.29% 25.05% 24.97% 24.90% 24.86%

Equity in Earnings of Unconsolidated Businessess 0.12% 1.40% ‐0.07% 0.00% 0.00% 0.00% 0.00% 0.00%

Other Income and (Expense) ‐ net ‐0.14% ‐0.94% 0.14% ‐0.15% ‐0.15% ‐0.15% ‐0.15% ‐0.14%

Interest Expense 2.21% 3.87% 3.74% 3.80% 1.50% 1.38% 1.34% 1.25%

PreTax Income 24.29% 12.02% 21.46% 21.34% 23.40% 23.44% 23.41% 23.47%

(Provision) Benefit for Income taxes ‐4.75% ‐2.61% ‐7.50% ‐7.92% ‐8.68% ‐8.70% ‐8.69% ‐8.71%Net Income 19.53% 9.41% 13.96% 13.42% 14.72% 14.74% 14.73% 14.76%

Net income attributable to noncontrolling interests 10.00% 1.83% 0.38% 0.40% 0.44% 0.44% 0.44% 0.44%

Net income attributable to Verizon 9.54% 7.57% 13.58% 13.02% 14.28% 14.30% 14.28% 14.32%

Net Income 19.53% 9.41% 13.96% 13.42% 14.72% 14.74% 14.73% 14.76%

Verizon Communications, Inc.

Common Size Balance SheetFiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E CV (2020)

Assets

Current Assets

Cash and Cash Equivalents 44.40% 8.34% 3.40% 6.37% 4.64% 6.93% 6.16% 8.77%

Short‐Term Investments 0.50% 0.44% 0.27% 0.27% 0.27% 0.27% 0.28% 0.28%

Accounts Receivable 10.32% 11.01% 10.22% 10.68% 10.68% 10.68% 10.68% 10.68%

Inventories 0.85% 0.91% 0.95% 0.92% 0.92% 0.92% 0.92% 0.92%

Prepaid Expenses and Other 2.83% 2.62% 1.49% 2.72% 2.72% 2.72% 2.72% 2.72%

Assets Held For Sale 0.60% 0.00% 0.00% 0.00% 0.00% 0.00%

Total Current Assets 58.89% 23.31% 16.93% 20.97% 19.24% 21.53% 20.76% 23.38%

Plant Property Equipment 183.21% 181.39% 167.27% 179.15% 191.12% 201.36% 212.53% 224.12%

Less Accumulated Depreciation 109.42% 110.61% 103.80% 113.33% 123.29% 132.36% 142.19% 152.43%

PPE, net 73.79% 70.78% 63.47% 65.82% 67.83% 69.01% 70.34% 71.69%

Investments in Unconsolidated Businesses 2.85% 0.63% 0.60% 0.60% 0.59% 0.59% 0.58% 0.57%

Wireless Licenses 62.83% 59.29% 65.78% 65.86% 66.00% 65.58% 65.49% 65.54%

Goodwill 20.43% 19.39% 19.25% 19.08% 18.93% 18.62% 18.42% 18.24%

Other Intangible Assets, net 4.81% 4.51% 6.33% 5.00% 3.85% 2.82% 2.01% 1.41%

Non Current Assets Held For Sale 7.80% 0.00% 0.00% 0.00% 0.00% 0.00%

Other Assets 3.76% 5.22% 5.71% 5.66% 5.61% 5.52% 5.46% 5.41%

Total Assets 227.37% 183.12% 185.87% 182.98% 182.06% 183.67% 183.06% 186.24%

Liabilities  0.00% 0.00% 0.00% 0.00% 0.00%

Current Liabilities 0.00% 0.00% 0.00% 0.00% 0.00%

Short Term Debt 3.26% 2.15% 4.93% 4.76% 3.14% 5.20% 4.10% 6.38%

Accounts Payable and Accrued Liab. 13.65% 13.13% 14.71% 13.91% 13.91% 13.91% 13.91% 13.91%

Liabilities Related to Assets Held for Sale 0.35% 0.00% 0.00% 0.00% 0.00% 0.00%

Other 5.53% 6.81% 6.64% 6.58% 6.53% 6.42% 6.35% 6.29%

Total Current Liabilities 22.44% 22.08% 26.63% 25.25% 23.57% 25.53% 24.36% 26.58%

Long Term Debt 74.37% 86.98% 78.79% 74.20% 69.94% 65.37% 61.41% 57.80%

Employee Benefit Obligations 22.96% 26.19% 22.76% 22.56% 22.39% 22.02% 21.78% 21.58%

Deferred Income Taxes 23.76% 32.72% 34.56% 32.54% 30.68% 28.67% 26.93% 25.35%

Non Current Liabilities Related to Assets for Sale 0.73% 0.00% 0.00% 0.00% 0.00% 0.00%

Other Liabilities 4.69% 4.39% 8.84% 8.77% 8.70% 8.56% 8.46% 8.38%

Total Liabilities 148.22% 172.36% 172.31% 163.33% 155.28% 150.15% 142.94% 139.68%

Common Equity 31.72% 9.11% 8.83% 9.31% 9.80% 10.19% 10.62% 11.06%

Reinvested Earnings 1.48% 1.93% 8.54% 14.12% 20.74% 27.02% 33.15% 39.12%

Accumulated and other comprehensive income 1.96% 0.87% 0.42% 0.41% 0.41% 0.40% 0.40% 0.40%

Common Stock in Treasury, at cost ‐3.29% ‐2.57% ‐5.63% ‐5.59% ‐5.54% ‐5.45% ‐5.39% ‐5.34%

Deferred compensation‐employee stock owner ship plans and  0.35% 0.33% 0.33% 0.32% 0.32% 0.31% 0.31% 0.31%

Non‐Controlling Interest 46.93% 1.08% 1.07% 1.06% 1.06% 1.04% 1.03% 1.02%

Total Equity 79.15% 10.76% 13.56% 19.65% 26.78% 33.51% 40.11% 46.55%

Total Liabilities and Equity 227.37% 183.12% 185.87% 182.98% 182.06% 183.67% 183.06% 186.24%

Verizon Communications, Inc.

Variable WACC

t=0 2016E 2017E 2018E 2019E CV (2020)

Risk Free 2.66% 2.66% 2.66% 3.00% 3.00% 3.00%

Risk Premium 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%

Beta 0.74 0.74 0.74 0.74 0.74 0.74

Cost of Equity 6.37% 6.37% 6.37% 6.71% 6.71% 6.71%

Debt Rating BBB+ BBB+ BBB+ BBB+ BBB+ BBB+

Default Spread 1.92% 1.92% 1.92% 1.92% 1.92% 1.92%

Pre‐Tax Cost of Debt 4.58% 4.58% 4.58% 4.92% 4.92% 4.92%

Tax Rate 37.1% 37.1% 37.1% 37.1% 37.1% 37.1%

After‐Tax Cost of Debt 2.88% 2.88% 2.88% 3.09% 3.09% 3.09%

MV Weight of Equity 63% 64% 65% 66% 67% 67%

MV Weight of Debt 37% 36% 35% 34% 33% 33%

Forward WACC 5.09% 5.12% 5.16% 5.47% 5.51% 5.51%

Discount Factor 1.05         1.11         1.17         1.23              1.30        

Implied Constant WACC 5.12% 5.14% 5.25% 5.31% 5.35%

Verizon Communications, Inc.

Value Driver EstimationFiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E CV (2020)

Marginal Tax Rate 37.10% 37.70% 37.10% 37.10% 37.10% 37.10% 37.10% 37.10%

NOPLAT

EBITA

Sales 120.55 127.08 131.62 132.77 133.81 136.02 137.55 138.84

Cost of Goods Sold 44.89 49.93 52.56 53.11 53.52 54.41 55.02 55.54

Depreciation & Amortization 16.61 16.53 16.02 15.55 15.98 16.37 16.65 16.85

Selling, General, and administration Expe 27.09 41.02 29.99 30.54 30.78 31.28 31.64 31.93

Implied interest on operating leases 0.22 0.26 0.32 0.33 0.35 0.36 0.37 0.38

EBITA 32.18 19.85 33.38 33.91 33.87 34.32 34.62 34.90

Less: Adjusted Taxes

Income Tax Provision 5.73 3.31 9.87 10.51 11.62 11.83 11.95 12.09

Plus: Tax Shield on Interest Expense 0.99 1.85 1.83 1.87 0.75 0.70 0.68 0.64

Plus: Tax shield on lease interest  0.08 0.10 0.12 0.12 0.13 0.13 0.14 0.14

Less: Tax Non‐operating income 0.05 0.67 ‐0.03 0.00 0.00 0.00 0.00 0.00

Less: Tax on Equity in Earnings of 

Unconsolidated Businesses 0.05 0.67 ‐0.03 0.00 0.00 0.00 0.00 0.00

Adjusted Taxes 6.75 4.59 11.84 12.51 12.49 12.66 12.77 12.87

Change in Deferred Taxes

Deferred Tax End Period 28.64 41.58 45.48 43.21 41.05 39.00 37.05 35.19

Deferred tax Previous Period 24.68 28.64 41.58 45.48 43.21 41.05 39.00 37.05

Net Change in Deferred Tax Liabilities 3.96 12.94 3.91 ‐2.27 ‐2.16 ‐2.05 ‐1.95 ‐1.85

NOPLAT 29.40 28.20 25.44 19.13 19.22 19.61 19.90 20.17

Invested Capital

Current Operating Assets

Normal Cash 3.22 3.39 3.51 3.55 3.57 3.63 3.67 3.71

Accounts Receivable 12.44 13.99 13.46 14.18 14.29 14.53 14.69 14.83

Inventory 1.02 1.15 1.25 1.23 1.24 1.26 1.27 1.28

Prepaid Expenses & Other Current Assets 3.41 3.32 1.96 3.62 3.64 3.70 3.75 3.78

Current Operating Assets 20.08 21.86 20.18 22.57 22.74 23.12 23.38 23.60

Current Operating Liabilities

Accounts Payable & Accrued Liabilities 16.45 16.68 19.36 18.46 18.61 18.91 19.13 19.31

Other Current Liabilities 6.66 8.65 8.74 8.74 8.74 8.74 8.74 8.74

Current Operating Liabilities 23.12 25.33 28.10 27.20 27.35 27.65 27.87 28.05

Net Operating Working Capital ‐3.03 ‐3.47 ‐7.92 ‐4.63 ‐4.60 ‐4.53 ‐4.49 ‐4.45

Plus: Net PPE 88.96 89.95 83.54 87.38 90.77 93.86 96.75 99.54

Other Operating Assets

PV of Operating Leases 11.30 13.32 16.65 17.42 18.09 18.71 19.29 19.84

Net Intangible Assets (non‐Goodwill) 5.80 5.73 8.34 6.64 5.15 3.84 2.76 1.95

Wireless Licenses 75.75 75.34 86.58 87.44 88.32 89.20 90.09 90.99

Other Assets 4.54 6.63 7.51 7.51 7.51 7.51 7.51 7.51

Plus: Other Operating Assets 97.38 101.02 119.08 119.01 119.07 119.26 119.65 120.30

Less: Other Operating Liabilities 5.65 5.57 11.64 11.64 11.64 11.64 11.64 11.64

Invested Capital 177.65 181.92 183.06 190.12 193.60 196.94 200.27 203.75

ROIC

NOPLAT 29.40 28.20 25.44 19.13 19.22 19.61 19.90 20.17

Beginning Invested Capital 179.44 177.65 181.92 183.06 190.12 193.60 196.94 200.27

ROIC 16.38% 15.87% 13.99% 10.45% 10.11% 10.13% 10.10% 10.07%

FCF

NOPLAT 29.40 28.20 25.44 19.13 19.22 19.61 19.90 20.17

Ending Invested Capital 177.65 181.92 183.06 190.12 193.60 196.94 200.27 203.75

Beginning Invested Capital 179.44 177.65 181.92 183.06 190.12 193.60 196.94 200.27

FCF 31.19 23.93 24.31 12.06 15.75 16.26 16.57 16.70

EP

Beginning Invested Capital 179.44 177.65 181.92 183.06 190.12 193.60 196.94 200.27

ROIC 16.38% 15.87% 13.99% 10.45% 10.11% 10.13% 10.10% 10.07%

WACC 5.52% 5.52% 5.52% 5.12% 5.16% 5.47% 5.51% 5.51%

EP 19.49 18.40 15.40 9.76 9.41 9.03 9.06 9.14

Verizon Communications, Inc.

Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:

     CV Growth 1.39%

     CV ROIC 10.07%

Fiscal Year Ending Dec. 31 2016 2017 2018 2019 2020

     WACC 5.12% 5.16% 5.47% 5.51% 5.51%

     Cost of Equity 6.37% 6.37% 6.71% 6.71% 6.71%

DCF ModelFiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E

NOPLAT 19.13 19.22 19.61 19.90 20.17

Change in Invested Capital 7.06 3.47 3.35 3.33 3.48

FCF 12.06 15.75 16.26 16.57 16.70

CV 422.21

Discount Factor 1.05 1.11 1.17 1.23 1.23

Present Value of Cash Flows 11.48 14.24 13.95 13.47 343.24

Value of Operations 396.38

Excess Cash 0.96

Investments in Unconsolidated 

Businesses 0.80

Short Term Investments 0.35

Long Term Debt 103.71

Short Term Debt 6.49

Underfunded Pension Plan 5.89

PV of Operating Leases 16.65

Employee Stock Option Plans 0.47

Net Assets Held for Sale 9.64

Value of Equity 274.91

Shares Outstanding 4.24

Implied Share Price 64.81

Adjusted Price 65.23

EP Model

Fiscal Years Ending Dec. 31 2016 2016E 2017E 2018 2019E 2020E

Invested Capital 183.06

Economic Profit 9.76 9.41 9.03 9.06 9.14

CV 221.94

Discount Factor 1.05 1.11 1.17 1.23 1.23

PV of Economic Profit 9.28 8.51 7.74 7.36 180.43

Value of Operations 396.38

Excess Cash 0.96

Investments in Unconsolidated 

Businesses 0.80

Short Term Investments 0.35

Long Term Debt 103.71

Short Term Debt 6.49

Underfunded Pension Plan 5.89

PV of Operating Leases 16.65

Employee Stock Option Plans 0.47

Net Assets Held for Sale 9.64

Value of Equity 274.91

Shares Outstanding 4.24

Implied Share Price 64.81

Adjusted Price 65.23

Verizon Communications, Inc.

Fundamental P/E Dividend Discount Model (DDM)Fiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E

EPS 4.23$         4.67$     4.76$       4.80$      4.86$     

Key Assumptions

   CV growth 1.20%

   CV ROE 36.04%

   Cost of Equity 6.37%

Future Cash Flows

     Dividends Per Share 2.30 2.37 2.44 2.51 2.59

CV 90.91

Discount Factor 1.06 1.13 1.20 1.28 1.36

Discounted Dividends 2.16 2.09 2.02 1.96 66.76

Intrinsic Value 72.84

Adjusted Intrinsic Value 73.32

Verizon Communications, Inc.

Relative Valuation ModelsSales in Billions

Sales SalesTicker Company Price 2016E 2017E P/S 16 P/S 17

T AT&T $38.64 166.9 170.5 0.23         0.23        

S Sprint $3.59 32.4 33.2 0.11         0.11        TMUS T‐Mobile $39.10 35.1 37.5 1.11         1.04        

Average 0.49         0.46        

VZ Verizon Wireless $53.52 132.77 133.81 0.403       0.400      

Implied Value:

   Relative P/S (Sales16) 64.45

Relative P/S (Sales17) 61.44

Verizon Communications, Inc.

Key Management RatiosFiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E CV (2020)

Liquidity Ratios

Current Ratio Current Assets / Current Liabilities 2.62 1.06 0.64 0.83 0.82 0.84 0.85 0.88

Quick Ratio

(Cash and Cash equivalents + A/R,  net + Short Term Investments) / Current 

Liabilities 2.59 1.01 0.60 0.79 0.78 0.81 0.81 0.84

Operating Cash Flow Ratio Cash Flow From Operations / Current Liabilities 1.44 1.09 1.11 0.81 1.04 0.97 1.02 0.95

Activity or Asset‐Management Ratios

Fixed Asset Turnover Ratio Revenue / PPE 1.36 1.41 1.58 1.52 1.47 1.45 1.42 1.39

Asset Turnover Ratio Revenue / Total Assets 0.44 0.55 0.54 0.55 0.55 0.54 0.55 0.54

Receivables Turnover Ratio Revenue / Average Accounts Receivable 9.64 9.62 9.59 9.61 9.40 9.44 9.42 9.41

Financial Leverage Ratios

Interest Coverage EBITA / Interest Expense 11.98 4.11 6.74 6.61 16.55 17.98 18.47 19.84

Debt/Total Assets Total Debt / Total Assets 0.34 0.49 0.45 0.43 0.40 0.38 0.36 0.34

Debt/Equity Total Debt / Total Equity 0.98 8.28 6.18 4.02 2.73 2.11 1.63 1.38

Profitability Ratios

ROE Net Income / Average Total Equity 26.03% 21.92% 116.60% 81.11% 63.61% 49.26% 40.21% 34.22%

ROA Net Income / Average Total Assets 9.43% 4.72% 7.70% 7.31% 8.10% 8.13% 8.08% 8.03%

Profit Margin Net Income / Revenue 19.53% 9.41% 13.96% 13.42% 14.72% 14.74% 14.73% 14.76%

Gross margin (Revenue‐COGS) / Revenue 62.76% 60.71% 60.07% 60.00% 60.00% 60.00% 60.00% 60.00%

Payout Policy Ratios

Dividend Payout Ratio Dividends Per Share / Earnings Per Share 52.17% 89.09% 51.01% 54.35% 50.65% 51.23% 52.25% 53.18%

Retention Ratio 1 ‐ (Dividends Per Share / Earnings Per Share) 47.83% 10.91% 48.99% 45.65% 49.35% 48.77% 47.75% 46.82%

Dividend Coverage Ratio Earnings Per Share / Dividends Per Share 1.92 1.12 1.96 1.84 1.97 1.95 1.91 1.88

Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)

Operating Operating Operating Operating

Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases #REF! Leases Fiscal Years Ending  Leases

2016 2.744 2015 2.499 2014 2.255 2013 2.038

2017 2.486 2016 2.245 2015 2.02 2014 1.84

2018 2.211 2017 1.960 2016 1.703 2015 1.572

2019 1.939 2018 1.660 2017 1.379 2016 1.28

2020 1.536 2019 1.369 2018 1.085 2017 0.992

Thereafter 7.297 Thereafter 4.670 Thereafter 3.748 Thereafter 4.119

Total Minimum Payments 18.213 Total Minimum Payments 14.403 Total Minimum Payments 12.19 Total Minimum Payments 11.841

Less: Interest 1.56 Less: Interest 1.083 Less: Interest 0.893 Less: Interest 0.93

PV of Minimum Payments 16.65 PV of Minimum Payments 13.32 PV of Minimum Payments 11.30 PV of Minimum Payments 10.91

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre‐Tax Cost of Debt 1.92% Pre‐Tax Cost of Debt 1.92% Pre‐Tax Cost of Debt 1.92% Pre‐Tax Cost of Debt 1.92%

Number Years Implied by Year 6 Payment 4.8 Number Years Implied by Year 6 Payment 3.4 Number Years Implied by Year 6 Payment 3.5 Number Years Implied by Year 6 Payment 4.2

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease

Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment

1 2.744 2.7 1 2.499 2.5 1 2.255 2.2 1 2.038 2.0

2 2.486 2.4 2 2.245 2.2 2 2.02 1.9 2 1.84 1.8

3 2.211 2.1 3 1.96 1.9 3 1.703 1.6 3 1.572 1.5

4 1.939 1.8 4 1.66 1.5 4 1.379 1.3 4 1.28 1.2

5 1.536 1.4 5 1.369 1.2 5 1.085 1.0 5 0.992 0.9

6 & beyond 1.536 6.3 6 & beyond 1.369 4.1 6 & beyond 1.085 3.3 6 & beyond 0.992 3.6

PV of Minimum Payments 16.65 PV of Minimum Payments 13.32 PV of Minimum Payments 11.30 PV of Minimum Payments 10.91

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares):  0.031

Average Time to Maturity (years): 2.000

Expected Annual Number of Options Exercised: 0.0155

Current Average Strike Price: 48.15$             

Cost of Equity: 6.37%

Current Stock Price: $53.52

2016E 2017E 2018E 2019E 2020E

Increase in Shares Outstanding: 0.0155 0.0155 0.0155 0.0155 0.0155

Average Strike Price: 48.15$              48.15$          48.15$          48.15$          48.15$         

Increase in Common Stock Account: 0.7463              0.7463          0.7463          0.7463          0.7463         

Shares Outstanding (beginning of the year) 4.2420 4.2575 4.2730 4.2885 4.3040

Plus: Shares Issued Through ESOP 0.0155 0.0155 0.0155 0.0155 0.0155

Less: Shares Repurchased in Treasury ‐                     ‐                 ‐                 ‐                 ‐                

Shares Outstanding (end of the year) 4.26 4.27 4.29 4.30 4.32

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol VZ

Current Stock Price $53.52

Risk Free Rate 2.66%

Current Dividend Yield 0.00%

Annualized St. Dev. of Stock Returns 38.80%

Average Average B‐S Value

Range of Number Exercise Remaining Option of Options

Outstanding Options of Shares Price Life (yrs) Price Granted

RSU (restricted units) 13,903 48.15 2.00 15.09$         209,755$           

PSU (performance units) 17,203 48.15 2.00 15.09$         259,542$           

Total 31,106 48.15$         2.00 15.09$         469,297$           

$64.81 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% $64.81 37.00% 38.00% 39.00% 40.00% 41.00% 42.00% 43.00%

0.40 121.41$   113.96$   107.21$    101.07$    95.45$          90.30$    85.55$      ‐0.50% $76.83 $72.35 $67.84 $63.33 $58.79 $54.23 $49.65

0.50 108.84$   $101.07 $94.12 $87.88 $82.23 $77.10 72.42$      0.00% $77.36 $72.86 $68.35 $63.82 $59.27 $54.70 $50.10

0.60 98.20$     $90.30 $83.32 $77.10 $71.54 $66.52 61.98$      Wireless Service 0.50% $77.90 $73.38 $68.86 $64.31 $59.75 $55.17 $50.55

Beta 0.74 85.62$     $77.73 $70.86 $64.81 $59.44 $54.66 50.36$      Revenue Growth 1.00% $78.43 $73.90 $69.36 $64.81 $60.23 $55.63 $51.01

0.80 81.17$     $73.33 $66.52 $60.56 $55.30 $50.61 46.42$      1.50% $78.96 $74.42 $69.87 $65.30 $60.71 $56.10 $51.46

0.90 74.25$     $66.52 $59.87 $54.07 $48.99 $44.48 40.46$      2.00% $79.49 $74.94 $70.38 $65.79 $61.19 $56.57 $51.92

1.00 68.14$     60.56$     54.07$      48.46$      43.55$          39.22$    35.37$      2.50% $80.03 $75.46 $70.88 $66.29 $61.67 $57.04 $52.37

$64.81 8.50% 9.00% 9.50% 10.07% 10.50% 11.00% 11.50% $64.81 0.40% 0.90% 1.40% 1.92% 2.40% 2.90% 3.40%

0.80% $58.28 $58.70 $59.09 $59.48 $59.75 $60.03 $60.29 1.00% $74.22 $71.85 $69.60 $67.39 $65.44 $63.51 $61.67

1.00% $59.56 $60.12 $60.62 $61.13 $61.48 $61.85 $62.19 1.50% $73.37 $71.02 $68.79 $66.60 $64.67 $62.76 $60.93

CV 1.20% $60.96 $61.66 $62.29 $62.94 $63.37 $63.84 $64.26 2.00% $72.53 $70.20 $68.00 $65.82 $63.91 $62.01 $60.20

NOPLAT G 1.39% $62.41 $63.26 $64.02 $64.81 $65.33 $65.90 $66.41 Risk Free Rate 2.66% $71.44 $69.14 $66.96 $64.81 $62.92 $61.04 $59.261.60% $64.19 $65.22 $66.15 $67.10 $67.74 $68.42 $69.05 3.00% $70.88 $68.60 $66.43 $64.29 $62.41 $60.55 $58.77

1.80% $66.07 $67.29 $68.39 $69.52 $70.27 $71.08 $71.83 3.50% $70.07 $67.81 $65.66 $63.54 $61.68 $59.83 $58.07

2.00% $68.16 $69.60 $70.89 $72.21 $73.10 $74.05 $74.92 4.00% $69.27 $67.03 $64.90 $62.80 $60.96 $59.13 $57.38

COGS as % of Sales Marginal Tax Rate

$64.81 37.00% 38.00% 39.00% 40.00% 41.00% 42.00% 43.00% $64.81 34.10% 35.10% 36.10% 37.10% 38.10% 39.10% 40.10%

20.00% $91.93 $87.44 $82.94 $78.43 $73.90 $69.36 $64.81 1.30% $71.69 $70.27 $68.83 $67.38 $65.92 $64.45 $62.97

21.00% $87.44 $82.94 $78.43 $73.90 $69.36 $64.81 $60.23 1.50% $70.76 $69.36 $67.95 $66.53 $65.10 $63.66 $62.21

SG&A as 22.00% $82.94 $78.43 $73.90 $69.36 $64.81 $60.23 $55.63 1.70% $69.84 $68.47 $67.09 $65.70 $64.30 $62.89 $61.46

% of Sales 23.00% $78.43 $73.90 $69.36 $64.81 $60.23 $55.63 $51.01 Default Spread 1.92% $68.85 $67.51 $66.17 $64.81 $63.44 $62.05 $60.66

24.00% $73.90 $69.36 $64.81 $60.23 $55.63 $51.01 $46.35 2.10% $68.06 $66.75 $65.42 $64.09 $62.74 $61.39 $60.02

25.00% $69.36 $64.81 $60.23 $55.63 $51.01 $46.35 $41.66 2.30% $67.19 $65.91 $64.61 $63.30 $61.99 $60.66 $59.32

26.00% $64.81 $60.23 $55.63 $51.01 $46.35 $41.66 $36.93 2.50% $66.34 $65.09 $63.82 $62.54 $61.25 $59.94 $58.63

Market Risk Premium

CV ROIC

COGS as % of Revenue

Default Spread