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Valuation Using the PE Multiple

The following table provides summary data for Applied Materials Inc. and its competitors, KLA Tencor Corporation and Lam Research Corporation.

(in millions)			Applied Materials	KLA Tencor	Lam Research
Company assumed value			-	$10,000	$11,739
Equity assumed value			-	$9,197	$13,454
NOPAT			$1,444	$440	$674
Net income			$1,377	$479	$769
Net nonoperating obligations (assets)			$(1,369)	$803	$(1,715)
Common shares outstanding			1,160.0	157.9	158.5

a. Compute the price to net income ratio for both KLA Tencor Corporation and Lam Research Corporation.

Round answers to two decimal places, when applicable.

	Price to Net income ratio
KLA Tencor	Answer
Lam Research	Answer

b. Use KLA Tencor Corporation and Lam Research Corporation as comparables, along with the price to net income ratios from part a, and then estimate for Applied Materials Inc. its equity intrinsic value and its equity intrinsic value per share.

• Round equity intrinsic value to the nearest million.

• Round equity intrinsic value per share to two decimal places.

KLA Tencor Corporation
Equity intrinsic value		Answer	million
Equity intrinsic value per share		Answer

Answer 1

a) Price to net income ratio = market value of equity/net income

KLA Tencor'd prrice to net income ratio = 9197/479 = 19.2

Lam research's price to net income ratio = 13454/769 = 17.49

b) Applied material's intrinsic equity value = Net income of applied material x average of price to net income ratio of KLA Tencor and Lam Research

Average price to net income ratio of KLA and Lam Research = (19.2 + 17.49) / 2 = 18.34

Applied material's intrinsic equity value = 1377 x 18.34 = $25,254

Applied material's price to net income ratio per share = 25254.18 / 1377 = 18.34

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