Krause Fund Research Spring 2015

Hawkeye Pride Alcoa Inc. (NYSE: AA)

Recommendation: STRONG BUY April 17, 2015

Analysts Greg Kordesh Gregory-kordesh@uiowa.edu

Steven Hensley Steven-hensley@uiowa.edu

Mitch Ross Mitch-ross@uiowa.edu

Michael Lewiston Michael-lewiston@uiowa.edu

Current Price $13.43 1 Year Target Price $18-20

Alcoa Poised to Outperform Specialty Metals

Company Overview

Alcoa, Inc. is an aluminum and specialty metals company headquartered in New York City. Alcoa is a vertically integrated company, with upstream operations in Alumina and Primary Metals. Their downstream production includes Rolled Products and Engineered Solutions. Their primary end markets are aerospace and defense, automotive, and construction. Alcoa operates globally, with most operations in North America and Western Europe. They have sites in China, the Middle East, South America, and Australia as well. Alcoa has recently undergone significant restructuring, shifting away from upstream operations to downstream production.

Stock Performance Highlights 52 week High $17.75 52 week Low $12.34 Beta Value 1.61 Average Daily Volume 24.3 m

Share Highlights Market Capitalization $16.41 b Shares Outstanding 1,216 m Book Value per share $0.08 EPS (FY’14) $0.90 P/E Ratio 16.58 Dividend Yield .76% Dividend Payout Ratio 13.3%

Company Performance Highlights ROA 0.72% ROE 1.81% Sales $23.91 b

• Initiating coverage with a BUY rating and $18-20 price target

• Increasing margins from shift to downstream, value-added

products as well as cutting high-cost smelting • High potential for market share gains due to strategic

contract bids in automotive OEM and aerospace industries, and a reduction in steel’s market share in these markets

• Recent acquisitions of Firth Rixson and RTI Metals increase

aerospace production and diversifies metals in to titanium • Current share price reflects uncertainty regarding ability to

execute on restructuring efforts, and net losses and earnings volatility post-recession

• First-quarter earnings beat suggests management is on track

to continue meeting restructuring goals which will lead to long term share gain

One Year Stock Performance

Yahoo! Finance

1 | P a g e

Financial Ratios Current Ratio 1.48 Debt to Equity 1.38

Producer Price Index

The Producer Price Index (PPI), a measure of the price change from the perspective of the seller, directly affects Alcoa by changing their potential for volume and profit margins. If the PPI surges, companies face either decreases in volume as they are forced to increase prices, or reduced margins as they maintain price levels. The most recent PPI report showed only a 0.2% increase in prices, which was in line with consensus. Continued low oil prices have significantly contributed to low inflation, as the year-on-year change still remains a 4.3% decrease, while PPI excluding food and energy shows a 0.9% gain12.

In the short-term, we believe the PPI change will remain low due to relatively low oil, continued consumer uncertainty, and a propensity to save. We forecast a 0 .5% increase in PPI in six months due to these factors. However, in 2-3 years, the PPI will increase more significantly at a 2% clip as oil prices and the economy recover.

Alcoa will receive tailwinds in the short-term as a result of low producer prices, particularly in regard to oil. Low oil prices contribute to lower aluminum prices, boosting Alcoa’s margins. In addition, Alcoa’s transportation costs will fall. However, rising oil prices in the future will increase aluminum prices, which could hurt Alcoa’s bottom line. We believe Alcoa’s restructuring, which will decrease their exposure to changes in aluminum prices, will help offset this upward movement in price.

Unemployment

The U.S. unemployment rate is a concern for all sectors of the economy for many reasons that have significant impact on performance.

A high unemployment rate suggests that many citizens won’t

have the sufficient funds to purchase products made by firms. This affect trickles down through all sectors of the economy. Retailer’s sales will decline, and will lack the capital to purchase more inventories along with the lack of demand from consumers. This effect transfers to producers of these goods and then through to the industrial firms that help support the upkeep and development of the producers of consumer goods. In regards to Alcoa, a high unemployment rate will result in a lower demand for the goods that they provide and decrease firm value.

As of March 2015, the unemployment rate came in at 5.5%, meeting consensus estimates. Overall for 2015, this was unchanged from the February unemployment rate which was down from 5.7% in January. As shown in the graph above, unemployment has been on a relatively stable decline since 201026. Because of this trend and the continued improvement in the economy, we forecast the unemployment rate to take a slight drop in the next 4-6 months to 5.3%. Moving forward, in the next 2-3 years we predict the trend to continue and for the unemployment rate to drop under 5% for the first time since February 2008 and come in at 4.8%. This trend will show to have a positive effect on Alcoa’s performance in the coming years.

Gross Domestic Product

Over the next three to five years, we are expecting the US economy to regain its strength from the past recession with growth projected to reach 3% by 2016 and to continue on a slow growth rate. With no forerunners in the economy forecasted to have substantial growth that will carry the US economy forward, we look to international trade and consumer and government spending as our indicators.

When looking at international trade, we are expecting strong increases in import and exports despite continued trouble in Europe and the Middle East. With a strong surge in consumer spending outlook, fueled by anticipated increases in employment gains and an increasing national minimal wage, we expect imports to respond positively. While exports will increase in responses to President Obama’s proposed goal of doubling US exports within the next five years17. Government spending is forecasted to remain subdued in the short term as a result of

Important disclosures appear on the last page of this report. 2 | P a g e

Economic Analysis

Bureau of Labor Statistics

budget cuts implemented to pass an increase in the debt ceiling. Additionally, defense spending is projected to wane20. However, these savings will be offset by a rise in domestic spending in the later years of the outlook period as greater tax revenues from a healthier economy allow for heightened expenditures, particularly on social security and healthcare. This will be a strong revenue generator for industrials that are dealing in the consumer products and for companies with expansive dealings with countries overseas like Alcoa.

St. Louis FRED

Foreign Exchange Market

The foreign exchange market is a critical component to industrials that own and operate manufacturing operations multiple countries all over the globe. Slight changes in foreign currency price ratios can cause major changes in revenue forecasts and earnings estimates.

Form a short-term perspective for the EUR/USD we observe a continuing decreasing trend in the price, falling to lows of 1.02 to even parity in some forecasts for the six to eight month outlook. This can be contributed to declining confidence in US Federal interest rate policy set for September and monetary easing in effect with Greece still uncertain. The infusion of monetary funds from the ECB correlate with falling trends and adhere to our analysis of a short term downtick19. With seemingly increasing growth for the US, there are still concerns of unlikely Federal Reserve policy change and possible new taxes on corporate funds held overseas, which provoke a negative effect on the EUR.

With the governmental and economic reform policies that the Eurozone and especially Greece have enacted and plan to initiate in the coming future, we believe that we will see stronger growth than this year’s .08% to the US 2.4%. We can expect with the ECB bonds program to sustain Greece to an elevated economic plateau where they can start relieving debt, increasing exports and invite a slow increase in inflation solidifying Greece participation in the Euro and well needed correction for Greece’s economy.

That being said, our long term outlook for the EUR/USD will see strong rebounds to levels of 1.12.

St Louis FRED

Oil Market

The energy market, specifically looking at oil is a significant component of the economic outlook for Alcoa. This due to the heavy utilization of the commodity to fuel their manufacturing and production facilities across the globe.

Looking at our short-term for the oil futures market, we see prices increasing from their current levels of around 46.00/bbl. to 58.00/bbl. within four to six months. Over the past months, we have been observing a strengthening decline in oil prices due to the increasing production and increasing amount of oil reserves.

We are confident that the oil futures market has bottomed out and we can expect oil prices to steadily climb. Current producers of oil have been operating at deficits for months and they are starting to feel the pressure on their revenues. Many countries including the United States and the Eurozone’s breakeven point on oil is around 65.00/bbl. whereas other countries like Russia are even higher at 73.00/bbl15.

Looking at our long-term analysis of oil futures, we are predicting that oil prices rise to 76.00/bbl. over that two to three year period. As we observe events in the Middle East subside and new relationships form, we will see compromises develop in the realm of oil which will lead to the decrease in the production therefore the supply of oil, effectively having prices rise to normal levels at perpetuity.

3 | P a g e Important disclosures appear on the last page of this report

This will effect industrials when securing future oil contracts and in their hedging efforts for the long term. Companies are going to purchase abnormally high amounts of oil futures while prices are low. As we see oil prices rise in the next five years, they will use those futures to observe long term constant low oil costs, curbing manufacturing costs for the long term.

Aluminum Trends Alumina is projecting strong growth in the years ahead. The world price of aluminum is going to observe a strong annual growth rate of 1.7% over the next five years1. This is due to increasing demand of aluminum from multiple industries including car manufacturers and the food industry.

Aluminum

The aluminum industry consists of companies that engage in the acts from alumina collecting, processing, and manipulating aluminum bi-products. According to GICS classifications, Alcoa belongs to the Basic Metals sector, and more specifically in the Aluminum subsector. Other than Alcoa, the key players in this industry are Novelis Inc., Kaiser Aluminum Corporation, Constellium, Noranda Aluminum Inc. and Century Aluminum Company1. The key drivers for this industry include the world price of aluminum, demand from the automotive industry, and general production metrics observed from the global economy1.

Industry Trends and Drivers

IBISWorld Industry Analysis

Car manufacturers are expected to expand over the next five years and with that there has been a strong push towards eco- friendly, lightweight, and fuel efficient vehicles. Many of the innovations in this area are trending towards the increased use of aluminum products in their cars specifically for decreasing weight which increases fuel efficiency24.

With increasing consumer spending forecasts, consumers have the ability to spend more money on food which will result in a larger demand for canned food products, leading to increased aluminum needs for manufactures in this space. With increased spending on food, a large percentage of that increase will be on aluminum packaged food which will resonate in the metal can manufacturing industry requiring manufactures to increase alumina purchasing.

For Alcoa, the manufacturing of alumina will no longer be a significant part of their current business segments due to large competition and miniscule margins, although the rising costs of aluminum will still affect their bottom line. Alcoa is moving to purchasing instead of manufacturing to sustain their downstream production. For companies in this space, you will see rising costs for utilization and increasing revenues from the sale of the good.

The Aluminum Manufacturing industry has endured significant volatility over the past five years due to fluctuations in aluminum prices, which reflect global supply and demand trends. While higher prices raise the cost of refining purchased aluminum, cost increases are generally passed on to customers and usually result in higher industry revenue. Aluminum prices surged after the recession in response to rapidly rising demand from manufacturers, especially in emerging economies. Higher prices for aluminum products and rebounding demand from major markets, namely the automotive industry, bolstered revenue over past years and the trend will continue into the future.1

Despite overall revenue growth, weakened demand from major markets and volatility in aluminum prices contributed to a more competitive environment over the past five years. Many operators exited the industry or were acquired by larger manufacturers. Furthermore, companies continued to expand operations overseas and merge with foreign manufacturers to take advantage of stronger demand and lower labor costs in developing economies. However, the sharp appreciation of the US dollar has hurt demand for exports in recent years, while simultaneously boosting the competitiveness of imports.1

Industry/Competitive Analysis

1

4 | P a g e Important disclosures appear on the last page of this report

The industry is expected to continue to grow as US and global construction and manufacturing markets gain strength. In particular, rising demand from automakers will be a major driver of industry growth. Since aluminum is a lighter alternative to other metals, car manufacturers are increasingly using it for building motor vehicle bodies and parts to meet growing fuel- efficiency standards. As automakers expand production of lightweight vehicles, this growing market will support higher demand and prices for aluminum. Over the five years to 2020, industry revenue is forecast to increase at an average annual rate of 2.7% to $49.6 billion.1

Threat of New Entrants

Due to the level of saturation in the aluminum industry, new companies emerging in this sector is unlikely. Alcoa is currently the leader in terms of market share with 12.5%, followed by Novelis Inc. with 8%. The next industry leader is Kaiser Aluminum Corporation with 3%, suggesting that the remaining 77% is widely spread between a numerous amounts of firms1. Sourcing and startup costs for this industry are also quite large, which further lessens the probability of a new firm to enter aluminum.

Threat of Substitute Products

Increasing steel prices are a positive for Alcoa as manufactures will move to look for less expensive options for their products and will be matched by increasing usage in the automotive industry that are using aluminum as a lightweight material for production.

Bargaining Power of Customers

The aluminum industry is heavily diluted with 432 companies that are able to produce the commodity and with that much competition among firms; prices are driven to margin stressing levels1. Customers are then able to shop around until they can find the best deals at the commodity level; this however is not the case at the primary and specialty levels where capabilities are highly specialized.

Bargaining Power of Suppliers

The market of substitute products for aluminum is primarily steel. Steel prices are influenced by the housing and automotive industries and by general economy growth. IBIS World forecasts that in the next two years, global steel prices are going to grow at a staggering 13.2% and 18% for 2016 and 2017 respectively then drop to a long-term annual rate of 4%1. We see this as due to anticipated growth in multiple industry segments including recovering economies, accelerating industrial production in the housing and automotive industries and decreasing excess capacity of the material. As the US and European economies being to recover, we will see increasing import and export opportunities in conjunction with a growing automotive industry and a recovering housing market that will entice a larger demand for steel in the upcoming years. Moreover, excess capacity is anticipated to be removed which will limit overproduction and put an upward pressure on steel prices25.

The power of the suppliers lies solely in their specialized aluminum products that make up the majority of their product mix as you can see below. Intellectual property and being able to be flexible in manufacturing methods in terms of being able to differentiate within this market.

IBISWorld Industry Analysis

Porters Five Forces Analysis

5 | P a g e Important disclosures appear on the last page of this report

Third-party sales for declined 4% in 2013 c

Intensity of Competitive Rivalry

The competitive space that makes up the aluminum market is comprised of competition over sources of raw materials and attempts to gain contracts with new customers. With the limited amount of resources for these companies to use, it limits potential expansion. The companies that own the claims to these resources are better positioned against their competition. The companies that are better-equipped and are more flexible in production capabilities are those who are going to be more competitive in gaining new production contracts and being able to expand and gain market share over their competitors. Having access to the resources and the capabilities to produce large quantities and develop new products will lead to higher success in this industry among their rivals.

EXECUTIVE SUMMARY

Alcoa is a multi-national innovative metals company working primarily with aluminum with stakes in titanium, nickel, and aluminum alloys. They have 60,000 employees in 30 countries with approximately 50% foreign sales4.

The past year saw meaningful EPS growth from $0.33 in 2013 to $0.92 in 2014 realizing the benefit of extensive expansionary efforts in 20132,4. Organic growth continued in 2014 pushed forward by the acquisition of Firth Rixon who specializes in aerospace grade materials and brings a multi material component to Alcoa’s aerospace division. In addition to solid growth and acquisitions, Alcoa recently completed their fourth consecutive earnings beat.2

On account of a challenging aluminum pricing environment in recent years Alcoa has repositioned their portfolio to a leaner upstream portfolio with stronger emphasis on higher margin product segments as well as a commitment to compete in price rather than volume. Decreases in oil prices have proved to be a tailwind where Alcoa uses oil to power their smelting operations which is likely to continue in the 6-18 month range. Oil makes

companies that operate as pure plays in commodities or specialty metals. The upstream production business sells slightly over half of production to 3rd parties while the remainder is used to supply downstream segments supplemented by 3rd party aluminum.4 Over the past 5 years Alcoa has repositioned their product portfolio to a higher weight on downstream businesses while becoming leaner in their upstream production to better compete on price in a challenging metals market.

Product Lines and Markets

Global rolled products, primary metals, engineered products and solutions and alumina and chemicals make up the four product segments of Alcoa at 31%, 29%, 21% and 15% of global sales respectively4.

3

The primary business of Alcoa’s Global Rolled Products segment is in the production and sale of aluminum plate, sheet, and specialty foil. This segment includes rigid container sheet (RCS), which is sold directly to customers in the packaging and consumer market. This segment also includes sheet and plate used in the aerospace, automotive, brazing, commercial transportation, and building and construction markets. For Alcoa, this segment is the largest portion of their corporate revenues of $7.14bil4. Alcoa has done a large amount of development in this department expanding production capabilities of their alumina manufacturing plans with investments of $575mil and entertaining corporate buyouts and global partnerships with China Power Investment Corporation, Ma’aden Rolling Company, and new operations in Saudi Arabia.

the Global Rolled Products segment up approximately 25% of their total alumina energy costs4. ompared with 2012, primarily driven by Strengthening U.S. currency against other nations creates a substantial headwind to foreign sales which comprise 50% of sales4. Weakened foreign sales will continue to create a drag on foreign business as the Euro and other currencies continue to degrade.

Overview

Alcoa is one of few integrated aluminum companies with sales split approximately 50-50 domestic vs foreign. An integrated aluminum company competes in both the upstream commodity businesses and the downstream specialized materials businesses supplying aluminum for aerospace and auto unlike other

unfavorable pricing, mostly due to a decrease in metal prices, and unfavorable product mix, partially offset by increased demand4. Volume improvements were mostly due to the packaging, automotive, and building and construction end markets, partially offset by a decline in the industrial products end market.

Engineered Products and Solutions represents Alcoa’s downstream operations and includes titanium, aluminum, and super alloy investment castings; fasteners; aluminum wheels; integrated aluminum structural systems; architectural extrusions; and forgings and hard alloy extrusions. These products, which are used in the aerospace, automotive, building and construction,

Company Analysis

Alcoa 10k

6 | P a g e Important disclosures appear on the last page of this report

commercial transportation, power generation, and industrial markets, are sold directly to customers and through distributors. Engineered Products and Services (EPS) makes up 25% of their sales totaling around $5.1bil4. Alcoa has ambitious plans to expand its aluminum lithium capacity and its production capabilities in plants in the United States and the UK5. This is due to the increasing demand that Alcoa is facing within this segment and they forecast growth with the capture of this market share.

Primary Metals holds a large portion of Alcoa’s upstream operations and consists of Alcoa’s worldwide smelter system. Primary Metals receives alumina, mostly from the Alumina segment, and produces primary aluminum used by Alcoa’s fabricating businesses, as well as sold to external customers and traders. Results from the sale of aluminum powder, scrap, and excess power are also included in this segment, as well as the results of aluminum derivative contracts and buy/resell activity. Primary aluminum produced by Alcoa and used internally is transferred to other segments at prevailing market prices. The sale of primary aluminum represents more than 90% of this segment’s third-party sales which brings in almost $6.1billion in revenues4.

Alumina and chemicals mainly consist of the land, process and production of the material used to create Alumina, Bauxite. When evaluating this section of Alcoa, it is important to see where the resources that the company makes are being allocated to. In this case, a little over 50% of the Alumina is sold off to third party companies while the rest is allocated back into Alcoa’s other business segments to supply them with that resource. When analyzing the reserves of Bauxite that Alcoa holds they do not directly state the amount, though they consumed 48 million metric tons of the substance 41 million of which are from their own reserves. From a statement from management in their 10-k, “They (Alcoa) believe its present sources of bauxite on a global basis are sufficient to meet the forecasted requirements of its alumina refining operations for the foreseeable future”4

Recent Earnings Analysis

Diluted EPS for 2014 was $0.21, compared to 2013’s diluted EPS of ($2.14)4. It is important to note that in 2013 the company faced an impairment in goodwill, as well as incurred high expansion costs - both contributing to negative earnings on the year. Another large factor impacting the earnings for Alcoa is derived from their business model, where cost of goods sold is a high percentage of their total revenues. The fourth quarter (un- annualized) percentage of revenues for COGS was reported in the quarterly update as 78%, improving from Q4 of 2013’s percentage of 84.3%. We believe the cause of this is due to who their customers are. Companies like Boeing and Ford who use aluminum-based products for their own production also need to create margins on their products. Because of this fact, the price Alcoa charges must be relatively low to their competition in order to keep these large customer bases. In terms of quarterly revenues, Q4 of 2014 increased year over year by 14%; again

showing that they are beginning to reap the rewards of the large expansion costs that were incurred in 20134.

This upward trend began in Q2 of 2014, when they reported a quarterly net income of $138 million (EPS $0.12) mostly driven by a record breaking ATOI in the engineered products and solutions segment of $204 million4. The other segments of the business flourished as well, with global rolled products’ ATOI increasing 34% from the previous quarter and primary metals & alumina products improving performance for the 11th consecutive quarter4. The trend continued in the third quarter with a year over year growth in quarterly revenues of 8%, where second quarter year over year revenue growth was steady. Global rolled products ATOI continued to increase, with a year over year growth of 45%.

Looking forward, management projects the upward trend for Alcoa to continue. They foresee demand in all of their markets to increase from 2014. Specifically global aerospace sales are projected to increase between nine and ten percent, derived from demand for commercial and regional jets and the engines that power them. Automotive is projected to continue a steady increase between two and four percent, as well as global packaging growth between two and three percent. The trucking industry had a good showing in 2014, therefore management projects the industry to grow between three and seven percent in North America. The industrial gas turbine industry fell last year and is expected by management to rebound in 2015 with growth between one and three percent. The largest factor affecting Alcoa is the growth in global aluminum demand, which management projects to be the same as it was in 2014 at seven percent growth. The only potential negative in Alcoa’s report in regards to 2015 was in the commercial transportation industry, which managements projection was between negative one percent change and a positive three percent change5.

Overall, management sees 2015 to be a great year for Alcoa moving forward. While it is management’s duty to be optimistic for shareholder’s sake, we generally agree with the trends that they are projecting just not to the same extent. Alcoa is still recovering from the major expansion costs in 2013, and growing sales in these segments will continue to reflect in 2015 the effect that was had on 2014 sales.

Alcoa prides their products in innovation, and the innovations made in their aluminum-based products that are being sold are focused on lighter-weight for their respective uses. For example, in the automotive industry the focus on consumers is being shifted towards efficiency and higher gas mileage. One way that this is obtained is through lighter weight vehicles, and is achieved through using products that Alcoa provides to manufacturers such as Ford. Their projection for aerospace sales is derived from the acquisition of Firth Rixon and their specialization in this industry. However nine to ten percent seems rather high, and we foresee the projection for 2015 to be closer to six and eight percent. The projections for the other industries seems rather conservative in comparison to these two mentioned, and we agree with the reasonableness of management’s projections.

7 | P a g e Important disclosures appear on the last page of this report

CATALYSTS FOR GROWTH/CHANGE

A key growth driver for Alcoa is the demand for aluminum; this is forecasted to grow 7-8%24 over the next year as auto manufacturers’ outputs increase and consumption in China continues to grow. In addition, the price is forecasted to increase due to supply cutbacks; many smelters were shut down outside of China. These cutbacks began for Alcoa in 2007; since then they have removed 31% of their high-cost smelters4.

An additional growth catalyst will be a business strategy that increasingly focuses on value-added products rather than raw materials. Value-added products allow Alcoa to differentiate themselves from competitors and prevent being price-takers in the market. These products typically earn much higher margins than raw materials as well. According to Alcoa’s 10K, 58% of Alcoa’s sales came from Global Rolled Products and Engineered Products and Solutions in 2014; given the increased value-added segment CapEx and decreasing materials CapEx shown in the graph below, we believe that this percentage will continue to increase4.

S.W.O.T ANALYSIS

Strengths

Vertically Integrated Operations As one of few integrated aluminum companies Alcoa is well positioned to maintain a market leading position across product segments. Through the combination of streamlined upstream segments operating at higher margins and strong acquisitions and growth in downstream aerospace and auto segments they are protected from commodity pricing while poised to take advantage of growing aerospace demands and aggressively bid automotive contracts, like the F-150 and 2018 Camry4.

Weaknesses

Financial Performance While the most recent year was marked by four straight quarterly earnings beats, in 2011 and 2012 they struggled due to restructuring and input headwinds4. On account of past performance they have struggled to regain investor confidence despite strong acquisitions and financial performance in recent years.

Opportunities

Automotive Industry A strong movement in auto motive’s transitioning from the use of steel to manufactured, lightweight aluminum products is a large opportunity for Alcoa to bid additional contracts to supply automakers who are eager to produce lower weight, higher mileage vehicles. Alcoa is already among the suppliers for the Ford F-1504.

Aerospace Opportunity

The aerospace industry is rapidly adopting new technologies to increase the efficiency of their fleets by utilizing new technologies in engines and materials. By utilizing lightweight materials that can provide equal or superior performance while also utilizing a smaller footprint they are able to greatly increase fuel efficiency through weight reduction and aerodynamic increases24. In addition, new engine technology often generates heat exceeding the melting temperatures of common alloys used in the industry however coatings and specialized materials can overcome this issue creating another opportunity within the aerospace sector for specialized materials producers such as Alcoa.

Threats

Energy Costs Some of Alcoa’s smelting sites are fueled by oil which has proven to be a substantial headwind in recent months however could become a significant negative if energy prices were to begin to climb back up to previous levels. We have forecasted that oil will likely remain near current levels in the 6-12 month time frame however we believe prices will rise towards $75- 80/barrel in the 12-24 month time horizon which would create a drag on upstream revenues on account of higher input and energy costs.

Currency Risk Alcoa reports that approximately 50% of their revenues are generated in foreign countries4 which leaves them exposed to an increasing currency risk as the U.S. dollar continues to strengthen and the Euro approaches parity with USD. It is likely that current exchange rates could create a low single digit percent drag on foreign revenues which could be further exacerbated over the next year if exchange rates do not begin to stabilize in the near term.

Revenue Decomposition

We forecasted Alcoa’s segment sales based on historical shipments in tons, and those segments’ revenue per ton. Our team believes that given Alcoa’s reduced smelting capacity and recent acquisitions of Firth Rixson and RTI Metals, their alumina shipments, as a percent of their total shipments, will decrease from 69.19% of shipments to 65.07% of shipments in 2017, after which the percentage holds constant. Their Global Rolled Products and Engineered Solutions segments will increase from 2014-2017 from 12.76% of shipments to 15.66%, and from 1.6% to 2.37% respectively. These growth rates are a results of Alcoa’s continuing focus on downstream production of value-added products. We expect Primary Metals’ shipments to first decrease from 16.46% to 15.81%, then to return back to 16.9% by 2017. This initial decrease will result from cut smelting capacity, then normalize as titanium sales increase and aluminum demand increases due to automotive OEM and aerospace growth.

Valuation Analysis

8 | P a g e Important disclosures appear on the last page of this report

We calculated a 5.18% CAGR over the next 7 years, with a CV growth rate of 2%. Our strong CAGR results from increasing demand for specialized metals and metal products, particularly in aerospace and automotive markets. Not only will the automotive market expand, but it will increase its dependence on aluminum products as OEMs continue to increase fuel efficiency. Alcoa already has contracts with Ford and Toyota to be their supplier of aluminum in 2017 (investor presentation).

Critical Assumptions

WACC We calculated Alcoa’s WACC at 9.88%. Their cost of equity under the CAPM is 13.41%, and cost of debt is 3.86%. The relatively high cost of debt is due to a low debt rating from Fitch and Morningstar of BB+ (Reuters, Morningstar). Their high cost of equity results from a high beta due to the stock price’s volatility over the past five years. We believe the WACC accurately represents Alcoa’s cost of capital, given their debt rating and historical volatility. Our team forecasts their WACC to remain constant over the next seven years as interest rates rise but their stock volatility stabilizes.

CV Growth We believe Alcoa’s terminal sales growth rate to be 2%. Over the next seven years, Alcoa will essentially capture market share from steel producers as OEMs and aerospace switch to high- quality aluminum and other metals. However, once their market share stabilizes and their growth rate is only due to industry expansion, they will grow with the economy. We expect stable economic growth at the end of our forecast horizon, so 2% tracks GDP at that point.

DCF/EP Valuation Our DCF model produces an intrinsic value of $20.80 per share. We believe this is on the upper limit of their potential stock price, and therefore based our target price range of $18-20 on this model. Alcoa will see strong free cash flow growth over the next seven years resulting from greater efficiency in upstream production and a focus on higher margin segments. This growth will result in consistent revenue growth and improving margins.

Dividend Discount Model Our DDM analysis returned a stock price of $14.47. Alcoa has had a historically low dividend payout ratio, and we forecast it to continue at 13.3%. Therefore, our team does not believe that Alcoa derives its value from paying dividends to shareholders, and this model does not represent their stock price.

Relative P/E The relative price-to-earnings analysis generated a price of $16.11. This is due to Alcoa trading at a P/E of 12.71, with an industry average of 15.34. Although our target price is higher, we believe this low P/E reflects Alcoa’s stock being undervalued. Alcoa’s current multiple represents pessimism and uncertainty regarding their ability to execute on their

restructuring moving forward. However, we believe that Alcoa should trade at a premium and are poised to outperform current market beliefs.

Sensitivity Analyses

Cost of Equity vs. CV Growth This table shows the sensitivity of our DCF model to changes in CV growth and cost of equity. It indicates that, given our valuation, the intrinsic price will stay above current prices even after a 2% increase in cost of equity and a 1.5% drop in terminal growth. In addition, if Alcoa is able to stabilize their cost of equity by reducing their volatility, or their mature growth rate is higher than anticipated, they could be even more undervalued than we currently believe.

CV Growth

20.81 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%

Cost of Equity 10% $ 28.26 $ 29.39 $ 30.72 $ 32.30 $ 34.21 $ 36.58 $ 39.58

10.50% $ 26.62 $ 27.59 $ 28.73 $ 30.06 $ 31.66 $ 33.62 $ 36.05

11% $ 25.12 $ 25.96 $ 26.93 $ 28.06 $ 29.41 $ 31.03 $ 33.03

11.50% $ 23.74 $ 24.47 $ 25.30 $ 26.27 $ 27.41 $ 28.76 $ 30.41

12% $ 22.48 $ 23.10 $ 23.82 $ 24.65 $ 25.61 $ 26.75 $ 28.12

12.50% $ 21.30 $ 21.85 $ 22.46 $ 23.17 $ 23.99 $ 24.96 $ 26.10

13% $ 20.21 $ 20.69 $ 21.22 $ 21.83 $ 22.53 $ 23.34 $ 24.30 13.41% $ 19.38 $ 19.80 $ 20.27 $ 20.81 $ 21.43 $ 22.14 $ 22.97 13.50% $ 19.20 $ 19.61 $ 20.07 $ 20.60 $ 21.19 $ 21.89 $ 22.69

14% $ 18.26 $ 18.62 $ 19.01 $ 19.46 $ 19.98 $ 20.56 $ 21.25 14.50% $ 17.38 $ 17.69 $ 18.03 $ 18.42 $ 18.86 $ 19.36 $ 19.93

15% $ 16.56 $ 16.82 $ 17.12 $ 17.45 $ 17.83 $ 18.25 $ 18.74

Cost of Equity vs. Dividend Yield Our team decided to test the sensitivity of our DCF price to dividend yield and cost of equity changes in order to analyze price effects from increasing cash returns to shareholders. Due to Alcoa’s low earning base, an increase in the dividend payout will not cause a significant change in price. Therefore, it may be feasible for Alcoa to begin paying dividends to shareholders in the near future.

Dividend Yield

20.81 0.25% 0.50% 0.76% 10.00% 20.00% 30.00% 40.00% Cost of Equity 10% $ 32.35 $ 32.32 $ 32.30 $ 31.44 $ 30.45 $ 29.38 $ 28.21

10.50% $ 30.10 $ 30.08 $ 30.06 $ 29.27 $ 28.35 $ 27.36 $ 26.28

11% $ 28.10 $ 28.08 $ 28.06 $ 27.33 $ 26.47 $ 25.55 $ 24.55

11.50% $ 26.31 $ 26.29 $ 26.27 $ 25.58 $ 24.79 $ 23.93 $ 23.00

12% $ 24.68 $ 24.66 $ 24.65 $ 24.00 $ 23.26 $ 22.46 $ 21.59

12.50% $ 23.20 $ 23.19 $ 23.17 $ 22.57 $ 21.88 $ 21.13 $ 20.32

13% $ 21.86 $ 21.84 $ 21.83 $ 21.27 $ 20.61 $ 19.91 $ 19.15

13.41% $ 20.84 $ 20.83 $ 20.81 $ 20.28 $ 19.66 $ 18.99 $ 18.27

13.50% $ 20.63 $ 20.61 $ 20.60 $ 20.07 $ 19.46 $ 18.80 $ 18.08

14% $ 19.49 $ 19.48 $ 19.46 $ 18.97 $ 18.39 $ 17.77 $ 17.10

14.50% $ 18.44 $ 18.43 $ 18.42 $ 17.95 $ 17.41 $ 16.83 $ 16.20

Cost of Equity vs. Cost of Debt We wanted to test these two variables because they are fundamental to Alcoa’s cost of capital. In addition, we forecast an increasing cost of debt as interest rates rise, but a falling cost of equity as Alcoa’s beta declines in the future. Their price is more sensitive to their cost of equity, given that equity is 67% of their enterprise value. This bodes well for Alcoa, as they can weather these interest rate hikes while still maintaining their WACC.

9 | P a g e Important disclosures appear on the last page of this report

Cost of Debt

20.81 2.50% 3% 3.50

3.86% 4.00% 5% Cost of Equity 10% $ 36.56 $ 34.89 $ 33.34 $ 32.29 $ 31.90 $ 30.56

10.50% $ 33.83 $ 32.36 $ 30.99 $ 30.06 $ 29.71 $ 28.50 11% $ 31.43 $ 30.12 $ 28.89 $ 28.06 $ 27.74 $ 26.66

11.50% $ 29.29 $ 28.12 $ 27.01 $ 26.26 $ 25.98 $ 25.00 12% $ 27.37 $ 26.32 $ 25.32 $ 24.64 $ 24.38 $ 23.50

12.50% $ 25.64 $ 24.69 $ 23.79 $ 23.17 $ 22.93 $ 22.12 13% $ 24.08 $ 23.21 $ 22.39 $ 21.82 $ 21.61 $ 20.87

13.41% $ 22.91 $ 22.10 $ 21.33 $ 20.81 $ 20.61 $ 19.91 14% $ 21.36 $ 20.63 $ 19.94 $ 19.46 $ 19.28 $ 18.65

14.50% $ 20.17 $ 19.50 $ 18.86 $ 18.42 $ 18.25 $ 17.67 15% $ 19.07 $ 18.45 $ 17.86 $ 17.45 $ 17.29 $ 16.75

2015 P/E Ratio vs. Industry Average P/E This table tests Alcoa’s relative P/E price to changes in their 2015 earnings, and fluctuations in industry average P/E ratios. If Alcoa posts even a five cent earnings beat, relative to our expected EPS, their stock price could see significant growth. This of course means an earnings miss could severely drop their price.

16.11 2015 EPS

0.9

0.95

1

1.05

1.1

1.15

1.2

1.25 Avg 2015 P/E 12.5 11.25 11.88 12.50 13.13 13.75 14.38 15.00 15.63

13 11.70 12.35 13.00 13.65 14.30 14.95 15.60 16.25

13.5 12.15 12.83 13.50 14.18 14.85 15.53 16.20 16.88

14 12.60 13.30 14.00 14.70 15.40 16.10 16.80 17.50

14.5 13.05 13.78 14.50 15.23 15.95 16.68 17.40 18.13

15 13.50 14.25 15.00 15.75 16.50 17.25 18.00 18.75

15.34 13.81 14.57 15.34 16.11 16.87 17.64 18.41 19.18

16 14.40 15.20 16.00 16.80 17.60 18.40 19.20 20.00

16.5 14.85 15.68 16.50 17.33 18.15 18.98 19.80 20.63

17 15.30 16.15 17.00 17.85 18.70 19.55 20.40 21.25

17.5 15.75 16.63 17.50 18.38 19.25 20.13 21.00 21.88

18 16.20 17.10 18.00 18.90 19.80 20.70 21.60 22.50

18.5 16.65 17.58 18.50 19.43 20.35 21.28 22.20 23.13

10 | P a g e Important disclosures appear on the last page of this report

Important Disclaimer

This report was created by students enrolled in the Applied Equity Valuation (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.

11 | P a g e Important disclosures appear on the last page of this report

References

1"Industry Reports." Market Research Reports. IBISworld, n.d. Web. 21 Apr. 2015.

2Factset.com

3"Thomson One." Thomson One. N.p., n.d. Web. 21 Apr. 2015.

4Alcoa 2014 10k, alcoa.com

5"Alcoa Investor Relations | NYSE:AA." Alcoa Investor Relations | NYSE:AA. N.p., n.d. Web. 21 Apr. 2015.

6Industry Snapshot, Aluminum, Morningstar.com

7http://quotes.morningstar.com/chart/stock/chart.action?t=GE&r egion=usa&culture=en-US

8"Gross Domestic Product." FRED. Federal Reserve Bank of St. Louis, 30 Jan. 2015. Web. 10 Feb. 2015.

9Wei, Lingling. "China Cuts Reserve Requirement Ratio." WSJ. Wall Street Journal, 4 Feb. 2015. Web. 5 Feb. 2015.

10"Real Trade Weighted U.S. Dollar Index: Major Currencies." FRED. Federal Reserve Bank of St. Louis, 2 Feb. 2015. Web. 10 Feb. 2015.

11Bloomberg L.P. “Commodities PPI Data for US 2009-2014.” (2014) Bloomberg database. University of Iowa Pomerantz Library Services, Iowa City, IA. 2 February, 2015.

12Bloomberg L.P. “PPI Graph - Industrial Commodities for US 2009-2015.” (2015) Bloomberg database. University of Iowa Pomerantz Library Services, Iowa City, IA. 3 February, 2015.

13Patton, Mike. "Strong Dollar And Weak Global Economy Could Cause U.S. Recession." Forbes. Forbes Magazine, 27 Jan. 2015. Web. 03 Feb. 2015.

14Ziobro, Paul, Josh Mitchell, and Theo Francis. "Strong Dollar Squeezes U.S. Firms." WSJ. Wall Street Journal, 27 Jan. 2015. Web. 03 Feb. 2015.

15Zumbrun, Josh, and Brian Baskin. "Oil Price Q&A: What the Plunge Means for Gas Prices, the Economy and Markets." Real Time Economics RSS. Wall Street Journal, 6 Jan. 2015. Web. 03 Feb. 2015.

16Factset. “GDP Graph for 2009-2014.” (2014) Factset database, Iowa City, IA. 3 February, 2015.

17Hayes, Adam. "Saudi Arabia: King Abdullah's Death and Oil's Fall." Investopedia. N.p., 31 Jan. 2015. Web. 04 Feb. 2015.

18Rubin, Richard. "Barclays Sees Euro Sliding to $1 by Year- End as Policies Diverge." Bloomberg.com. Bloomberg, n.d.

19ECB to Pump Money into Economy." - Castanet.net. The Canadian Press, n.d. Web. 04 Feb. 2015.

20Rubin, Richard. "Obama Wants a New Tax on U.S. Companies' Overseas Profits." Bloomberg.com. Bloomberg, n.d. Web. 03 Feb. 2015.

21"Danske Bank Cuts Its 6 and 12 Month EUR/USD Estimates." - Real-time Analysis & News Ltd. Ransquak, 19 Jan. 2015. Web. 04 Feb. 2015.

22Daily Commodity Futures Price Chart: March 2015." Light Crude Oil (Pit) : NYMEX. Bollinger Bands, 3 Feb. 2015. Web. 04 Feb. 2015.

23FOREX-Dollar Slips vs Euro on Short-covering Bounce, Greek Relief." Yahoo Finance. Yahoo Finance, 3 Feb. 2015. Web. 04 Feb. 2015.

24"Aluminum Avoids Metals Slump as Automaking Drives Demand." Bloomberg.com. Bloomberg, n.d. Web. 21 Apr. 2015.

25"Steel Prices Hit Rock Bottom, the Lowest Level since 2009." Yahoo Finance. Yahoo!, 25 Mar. 2015. Web. 21 Apr. 2015.

26"Employment Situation Summary." U.S. Bureau of Labor Statistics. U.S. Bureau of Labor Statistics, n.d. Web. 21 Apr. 2015.

27Alcoa 2013 10k, alcoa.com

12 | P a g e Important disclosures appear on the last page of this report

Alcoa Revenue Decomposition

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV (20xx) Revenue by Product Segment Primary Metals 10,309 9,217 9,731 9,538 9,712 9,964 10,762 11,623 12,204 12,509 Flat-Rolled Products 7,541 7,284 7,536 8,221 8,913 9,680 10,454 11,290 11,855 12,151 Engineered Solutions 5,525 5,733 6,006 6,903 7,756 8,826 9,532 10,294 10,809 11,079 Alumina 5,402 5,561 5,450 5,397 5,388 5,409 5,842 6,309 6,625 6,790 Adjustment (5,077) (4,763) (4,817) (4,958) (5,162) (5,409) (5,842) (6,309) (6,625) (6,790) Packaging and Consumer -- -- -- 0 0 0 0 0 0 0 Total 23,700 23,032 23,906 25,101 26,607 28,470 30,747 33,207 34,868 35,739 Segment % of Sales 5% 6% 7% 8% 8% 5% 2% Primary Metals 0.43 0.40 0.41 0.38 0.37 0.35 0.35 0.35 0.35 0.35 Flat-Rolled Products 0.32 0.32 0.32 0.33 0.34 0.34 0.34 0.34 0.34 0.34 Engineered Solutions 0.23 0.25 0.25 0.28 0.29 0.31 0.31 0.31 0.31 0.31 Alumina 0.23 0.24 0.23 0.22 0.20 0.19 0.19 0.19 0.19 0.19 Adjustment (0.21) (0.21) (0.20) (0.20) (0.19) (0.19) (0.19) (0.19) (0.19) (0.19) Packaging and Consumer 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV 20xx Shipments/Sales (in Metric Tons) Primary Metals 3,056 2,801 2,534 2,471 2,503 2,555 2,759 2,980 3,129 3,207 Flat-Rolled Products 1,867 1,905 1,964 2,086 2,206 2,367 2,556 2,761 2,899 2,971 Engineered Solutions 222 229 246 282 315 358 387 418 438 449 Alumina 9,295 9,966 10,652 10,794 10,166 9,835 10,622 11,472 12,045 12,346 Total 14,440 14,901 15,396 15,633 15,191 15,115 16,324 17,630 18,511 18,974 Revenue/Metric Ton (Thousands of $) Primary Metals 3.37 3.29 3.84 3.86 3.88 3.90 3.90 3.90 3.90 3.90 Flat-Rolled Products 4.04 3.82 3.84 3.94 4.04 4.09 4.09 4.09 4.09 4.09 Engineered Solutions 24.89 25.03 24.41 24.51 24.61 24.65 24.65 24.65 24.65 24.65 Alumina 0.58 0.56 0.51 0.50 0.53 0.55 0.55 0.55 0.55 0.55 Segment % of Shipments Primary Metals 21.16% 18.80% 16.46% 15.81% 16.48% 16.90% 16.90% 16.90% 16.90% 16.90% Flat-Rolled Products 12.93% 12.78% 12.76% 13.35% 14.52% 15.66% 15.66% 15.66% 15.66% 15.66% Engineered Solutions 1.54% 1.54% 1.60% 1.80% 2.07% 2.37% 2.37% 2.37% 2.37% 2.37% Alumina 64.37% 66.88% 69.19% 69.04% 66.92% 65.07% 65.07% 65.07% 65.07% 65.07%

Alcoa Balance Sheet

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E Balance Sheet Assets Cash 1,861 1,437 1,877 4,984 5,571 7,358 9,436 11,508 13,165 14,805 Short-Term Receivables 1,739 1,818 2,128 2,234 2,368 2,534 2,737 2,956 3,104 3,181 Inventories 2,825 2,705 3,082 3,058 3,242 3,469 3,746 4,046 4,248 4,355 Progress Payments & Other 263 581 - - - - - - - - Other Current Assets 1,275 1,009 1,182 1,156 1,226 1,311 1,416 1,530 1,606 1,646 Total Current Assets 7,700 6,969 8,269 11,433 12,407 14,673 17,336 20,040 22,123 23,987

Net Property, Plant & Equipment 18,947 17,639 16,426 16,054 15,816 15,802 15,936 16,134 16,353 16,549 Property, Plant & Equipment - Gross 38,137 36,866 35,728 36,329 37,183 38,484 40,077 41,798 43,606 45,458 Accumulated Depreciation 19,190 19,227 19,302 20,275 21,367 22,682 24,142 25,664 27,253 28,909

Total Investments and Advances 2,224 2,127 1,944 2,219 2,352 2,517 2,718 2,935 3,082 3,159 Long-Term Note Receivable 408 339 244 194 144 94 44 - - Net Goodwill 5,170 3,415 5,247 5,247 5,247 5,247 5,247 5,247 5,247 5,247 Net Other Intangibles 407 399 758 715 672 629 586 543 500 Deferred Tax Assets 3,790 3,184 2,754 2,254 1,754 1,254 754 254 - Other Assets 1,533 1,670 2,759 1,732 1,836 1,965 2,122 2,292 2,406 2,467 Total Assets 40,179 35,742 37,399 39,941 40,320 42,273 44,835 47,532 49,755 51,909

Liabilities & Shareholders' Equity ST Debt & Curr. Portion LT Debt 518 712 83 721 764 817 883 953 1,001 1,026 Accounts Payable 2,702 2,960 3,152 2,924 3,099 3,316 3,581 3,868 4,061 4,163 Income Tax Payable 366 376 348 147 166 185 214 246 266 306 Other Current Liabilities 2,356 2,057 1,958 2,237 2,371 2,537 2,740 2,959 3,107 3,185 Total Current Liabilities 5,942 6,105 5,541 6,028 6,400 6,856 7,418 8,026 8,436 8,679

Long-Term Debt 8,311 7,607 8,769 9,171 7,645 7,681 7,788 7,925 8,050 8,163 Provision for Risks & Charges 6,325 5,537 5,446 5,067 4,783 4,689 4,689 4,689 4,689 4,689 Deferred Tax Liabilities 460 - - - - - - - - - Other Liabilities 2,618 2,971 2,849 3,000 3,180 3,403 3,675 3,969 4,168 4,272 Total Liabilities 23,656 22,220 22,605 23,266 22,008 22,628 23,569 24,609 25,342 25,802

Preferred Stock (Carrying Value) 55 55 58 58 58 58 58 58 58 58 Common Stock Par/Carry Value/Additional Paid-I 8,738 8,687 10,588 10,644 10,700 10,757 10,813 10,869 10,925 10,948 Retained Earnings 11,689 9,272 9,379 10,485 11,796 13,260 14,949 16,891 18,996 21,410 Unrealized Gain/Loss Marketable Securities - - -- - - - - - - - Other Appropriated Reserves (3,402) (3,659) (4,677) (4,665) (4,665) (4,665) (4,665) (4,665) (4,665) (4,665) Treasury Stock (3,881) (3,762) (3,042) (2,956) (2,872) (3,290) (3,697) (4,342) (5,218) (6,070) Total Shareholders' Equity 13,199 10,593 12,306 13,566 15,018 16,119 17,458 18,811 20,096 21,681

Accumulated Minority Interest 3,324 2,929 2,488 3,108 3,295 3,525 3,807 4,112 4,317 4,425 Total Equity 16,523 13,522 14,794 16,674 18,312 19,644 21,266 22,923 24,413 26,107 Total Liabilities & Shareholders' Equity 40,179 35,742 37,399 39,941 40,320 42,273 44,835 47,532 49,755 51,909

Alcoa Income Statement

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV 20xx Income Statement Sales 23,682 23,058 23,906 25,101 26,607 28,470 30,747 33,207 34,868 35,739 COGS excluding D&A 20,484 19,286 19,136 19,994 21,088 22,473 24,176 26,014 27,219 27,443 Depreciation 1,380 1,348 1,289 1,323 1,355 1,402 1,460 1,523 1,588 1,656 Amortization of Intangibles 82 73 83 43 43 43 43 43 43 43 Gross Income 1,736 2,351 3,398 3,741 4,122 4,552 5,068 5,628 6,018 6,598 SG&A Expense 997 1,008 995 1,045 1,011 1,068 1,107 1,162 1,220 1,251 R&D Expense 197 192 218 251 333 427 461 498 523 536 EBIT (Operating Income) 542 1,151 2,185 2,445 2,778 3,057 3,500 3,967 4,274 4,811 Nonoperating Income - Net 315 (23) (47) -- -- -- -- -- -- -- Gross Interest Expense (581) (551) (473) (571) (589) (614) (681) (729) (763) (786) Unusual Expense - Net (45) (2,492) (1,168) (13) (13) (14) (15) (17) (17) (18) Pretax Income 324 (1,816) 497 1,862 2,176 2,430 2,804 3,222 3,494 4,007 Forecasted Income Tax Rate 31.5% 30.5% 30.5% 30.5% 30.5% 30.5% 30.5% Income Taxes 162 428 320 587 664 741 855 983 1,066 1,222 Consolidated Net Income 162 (2,244) 177 - - - - - - - Minority Interest (29) 41 (91) - - - - - - - Net Income 191 (2,285) 268 1,275 1,512 1,689 1,949 2,239 2,428 2,785 Preferred Dividends 2 2 21 - - - - - - - Net Income available to Common Shareholders 189 - - - - - - -

EPS (recurring) 0.20 (0.51) 0.90 1.05 1.25 1.41 1.65 1.94 2.16 2.55 Total Shares Outstanding 1067 1071 1217 1215 1214 1194 1178 1153 1122 1093 Dividends per Share 0.12 0.12 0.12 0.14 0.17 0.19 0.22 0.26 0.29 0.34 Payout Ratio - - - 13.30% 13.30% 13.30% 13.30% 13.30% 13.30% 13.30%

Alcoa Cash Flow Statement Forecast

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E 2021E Operating Activities Net Income 1,275 1,512 1,689 1,949 2,239 2,428 2,785 Adjustments for Non-Cash Operating Expenses Depreciation 973 1,092 1,314 1,460 1,523 1,588 1,656 Change in Receivables (106) (134) (166) (203) (219) (148) (78) Change in Inventory 24 (184) (227) (278) (300) (202) (106) Change in Other Current Assets 26 (69) (86) (105) (113) (76) (40) Change in Deferred Tax Assets 500 500 500 500 500 254 0 Change in Intangible Assets (758) 43 43 43 43 43 43 Change in A/P (228) 175 217 265 286 193 102 Income Tax Payable (201) 19 19 29 32 21 39 Change in Other Current Liabilities 279 134 166 203 219 148 78 Change in Provision for Risks and Charges (379) (284) (95) 0 0 0 0 Change in Other Long-Term Liabilities 151 180 223 272 294 198 104

Total ANCOE 280 1,473 1,909 2,187 2,265 2,019 1,798

Cash from Operating Activities 1,556 2,985 3,598 4,136 4,504 4,448 4,582

Investing Activities Change in Note Receivable (244) 50 50 50 50 44 0 Capital Expenditures (601) (854) (1,301) (1,594) (1,721) (1,807) (1,852) Change in LTA 1,027 (104) (129) (157) (170) (115) (60) Change in Investments and Advancements (275) (133) (165) (201) (217) (147) (77) Change in Minority Interest 620 186 231 282 305 206 108

Cash from Investing Activities 527 (855) (1,313) (1,620) (1,754) (1,819) (1,882)

Financing Activities Dividends (170) (201) (225) (259) (298) (323) (370) Change in ST Debt and Current Portion LTD 638 43 53 65 71 48 25 Change in LTD 402 (1,526) 36 107 137 124 113 Change in Common Stock 56 56 56 56 56 56 23 Share re-purchases/Issuances from Treasury 86 84 (418) (407) (645) (877) (852) Change in Other Appropriated Reserves 12 0 0 0 0 0 0 Cash from Financing Activities 1,025 (1,544) (497) (438) (679) (971) (1,061)

Change in Cash 3,107 587 1,787 2,078 2,072 1,657 1,640 Beginning Cash 1,877 4,984 5,571 7,358 9,436 11,508 13,165 Ending Cash 4,984 5,571 7,358 9,436 11,508 13,165 14,805

Alcoa Common Size Income Statement

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E Income Statement Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

COGS excluding D&A 86.50% 83.64% 80.05% 79.65% 79.26% 78.94% 78.63% 78.34% 78.06% 76.79% Depreciation 7.11% 7.11% 7.31% 7.85% 8.24% 8.56% 8.87% 9.16% 9.44% 9.71% Amortization of Intangibles 0.35% 0.32% 0.35% 0.17% 0.16% 0.15% 0.14% 0.13% 0.12% 0.12%

Gross Income 7.33% 10.20% 14.21% 12.33% 12.34% 12.35% 12.36% 12.37% 12.38% 13.38% SG&A Expense 4.21% 4.37% 4.16% 4.16% 3.80% 3.75% 3.60% 3.50% 3.50% 3.50% R&D Expense 0.83% 0.83% 0.91% 1.00% 1.25% 1.5% 1.5% 1.5% 1.5% 1.5% EBIT (Operating Income) 2.29% 4.99% 9.14% 7.17% 7.29% 7.10% 7.26% 7.37% 7.38% 8.38% Nonoperating Income - Net 1.33% -0.10% -0.20% - - - - - - - Gross Interest Expense -2.45% -2.39% -1.98% -2.27% -2.21% -2.16% -2.21% -2.19% -2.19% -2.20% Unusual Expense - Net -0.19% -10.81% -4.89% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% Pretax Income 1.37% -7.88% 2.08% 4.84% 5.02% 4.89% 5.00% 5.13% 5.14% 6.13% Income Taxes 0.68% 1.86% 1.34% -1.60% -0.13% -0.86% -0.50% -0.68% -0.59% -0.63% Consolidated Net Income 0.68% -9.73% 0.74% 3.25% 4.89% 4.03% 4.50% 4.45% 4.55% 5.50% Minority Interest -0.12% 0.18% -0.38% - - - - - - - Net Income 0.81% -9.91% 1.12% 3.25% 4.89% 4.03% 4.50% 4.45% 4.55% 5.50% Preferred Dividends 0.01% 0.01% 0.09% - - - - - - - Net Income available to Common Shareholders 0.80% 0.00% 0.00% - - - - - - -

Alcoa Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E Balance Sheet Assets Cash & Short-Term Investments 7.86% 6.23% 7.85% 19.86% 20.94% 25.84% 30.69% 34.65% 37.76% 41.42% Short-Term Receivables 7.34% 7.88% 8.90% 7.97% 7.97% 7.97% 7.97% 7.97% 7.97% 7.97% Inventories 11.93% 11.73% 12.89% 12.03% 12.03% 12.03% 12.03% 12.03% 12.03% 12.03% Progress Payments & Other 1.11% 2.52% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other Current Assets 5.38% 4.38% 4.94% 4.61% 4.61% 4.61% 4.61% 4.61% 4.61% 4.61% Total Current Assets 32.51% 30.22% 34.59% 44.46% 45.54% 50.45% 55.29% 59.26% 62.36% 66.03%

Net Property, Plant & Equipment 80.01% 76.50% 68.71% 63.96% 59.44% 55.50% 51.83% 48.59% 46.90% 46.31% Property, Plant & Equipment - Gross 161.04% 159.88% 149.45% 144.73% 139.75% 135.17% 130.34% 125.87% 125.06% 127.19% Accumulated Depreciation 81.03% 83.39% 80.74% 80.77% 80.31% 79.67% 78.52% 77.29% 78.16% 80.89%

Total Investments and Advances 9.39% 9.22% 8.13% 8.84% 8.84% 8.84% 8.84% 8.84% 8.84% 8.84% Long-Term Note Receivable 1.72% 1.47% 0.00% 0.97% 0.73% 0.51% 0.31% 0.13% 0.00% 0.00% Net Goodwill 21.83% 14.81% 21.95% 20.90% 19.72% 18.43% 17.06% 15.80% 15.05% 14.68% Net Other Intangibles 1.72% 1.73% 0.00% 3.19% 3.01% 2.81% 2.60% 2.39% 2.23% 2.12% Deferred Tax Assets 16.00% 13.81% 11.52% 13.87% 13.87% 13.87% 13.87% 13.87% 13.87% 13.87% Other Assets 6.47% 7.24% 11.54% 6.90% 6.90% 6.90% 6.90% 6.90% 6.90% 6.90% Total Assets 169.66% 155.01% 156.44% 163.09% 158.05% 157.31% 156.70% 155.78% 156.15% 158.75%

Liabilities & Shareholders' Equity ST Debt & Curr. Portion LT Debt 2.19% 3.09% 0.35% 2.87% 2.87% 2.87% 2.87% 2.87% 2.87% 2.87% Accounts Payable 11.41% 12.84% 13.18% 11.65% 11.65% 11.65% 11.65% 11.65% 11.65% 11.65% Income Tax Payable 1.55% 1.63% 1.46% 0.58% 0.62% 0.65% 0.70% 0.74% 0.76% 0.85% Other Current Liabilities 9.95% 8.92% 8.19% 8.91% 8.91% 8.91% 8.91% 8.91% 8.91% 8.91% Total Current Liabilities 25.09% 26.48% 23.18% 24.01% 24.05% 24.08% 24.12% 24.17% 24.19% 24.28%

Long-Term Debt 35.09% 32.99% 36.68% 36.54% 28.73% 26.98% 25.33% 23.87% 23.09% 22.84% Provision for Risks & Charges 26.71% 24.01% 22.78% 25.15% 25.15% 25.15% 25.15% 25.15% 25.15% 25.15% Deferred Tax Liabilities 1.94% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other Liabilities 11.05% 12.88% 11.92% 11.95% 11.95% 11.95% 11.95% 11.95% 11.95% 11.95% Total Liabilities 99.89% 96.37% 94.56% 97.65% 89.88% 88.16% 86.55% 85.13% 84.38% 84.22%

Preferred Stock (Carrying Value) 0.23% 0.24% 0.24% 0.23% 0.22% 0.20% 0.19% 0.17% 0.17% 0.16% Common Stock Par/Carry Value/Additional Paid-In Capital/Capi 36.90% 37.67% 44.29% 42.41% 40.22% 37.78% 35.17% 32.73% 31.33% 30.63% Retained Earnings 49.36% 40.21% 39.23% 41.77% 44.33% 46.57% 48.62% 50.86% 54.48% 59.91% Unrealized Gain/Loss Marketable Securities 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other Appropriated Reserves -14.37% -15.87% -19.56% -16.60% -16.60% -16.60% -16.60% -16.60% -16.60% -16.60% Treasury Stock -16.39% -16.32% -12.72% -11.77% -10.79% -11.56% -12.02% -13.07% -14.97% -16.98% Total Shareholders' Equity 55.73% 45.94% 51.48% 56.03% 57.37% 56.41% 55.35% 54.10% 54.41% 57.12%

Accumulated Minority Interest 14.04% 12.70% 10.41% 12.38% 12.38% 12.38% 12.38% 12.38% 12.38% 12.38% Total Equity 69.77% 58.64% 61.88% 68.41% 69.76% 68.79% 67.73% 66.48% 66.80% 69.50% Total Liabilities & Shareholders' Equity 169.66% 155.01% 156.44% 166.06% 159.64% 156.95% 154.29% 151.61% 151.17% 153.72%

Alcoa Value Driver Estimation

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E Assumptions/other info: Cost of debt 5.55% 2008 PV of Leases 304 WACC 0.10 NOPLAT Revenue 23,682 23,058 23,906 25,101 26,607 28,470 30,747 33,207 34,868 35,739 COGS 20,484 19,286 19,136 19,994 21,088 22,473 24,176 26,014 27,219 27,443 Depreciation 1,380 1,348 1,289 1,323 1,355 1,402 1,460 1,523 1,588 1,656 SG&A Expense 997 1,008 995 1,045 1,011 1,068 1,107 1,162 1,220 1,251 R&D Expense 197 192 218 251 333 427 461 498 523 536 Plus Implied Interest on Operating Leases 55 52 42 42 43 44 44 43 43 42 EBITA 679 1,276 2,310 2,530 2,864 3,144 3,587 4,054 4,360 4,896 Provision for Tax Expense 162 428 320 587 664 741 855 983 1,066 1,222 Tax Shield on Interest Expense 203 191 153 180 180 187 208 222 233 240 Unusual Income (Expense) Tax (Shield) 16 865 377 4 4 4 5 5 5 5 Tax Shield on Operating Lease Interest 19 18 14 13 13 13 13 13 13 13 Change in Deferred Taxes (179) (606) (329) 500 500 500 500 500 254 0 Marginal Tax Rate 35% 35% 32% 32% 31% 31% 31% 31% 31% 31% Adjusted Taxes 400 1,502 864 784 861 946 1,081 1,223 1,317 1,480

NOPLAT 900 2,172 2,845 2,247 2,504 2,698 3,006 3,330 3,297 3,416

Invested Capital Calculation Operating Assets Short-Term Receivables

1,739

1,818

2,128

2,234

2,368

2,534

2,737

2,956

3,104

3,181 Inventories 2,825 2,705 3,082 3,058 3,242 3,469 3,746 4,046 4,248 4,355 "Normal Cash" 474 461 478 502 532 569 615 664 697 715 Other Current Assets (Less: Derivatives Contracts) Less: Operating Liabilities

1,275 1,009 1,182 1,156 1,226 1,311 1,416 1,530 1,606 1,646

Accounts Payable 2,702 2,960 3,152 2,924 3,099 3,316 3,581 3,868 4,061 4,163 Income Tax Payable 366 376 348 147 166 185 214 246 266 306 Other Current Liabilities 2,356 2,057 1,958 2,237 2,371 2,537 2,740 2,959 3,107 3,185 Operating Working Capital 889 600 1,412 1,644 1,732 1,846 1,980 2,123 2,221 2,244

Add: Net PPE 18,947 17,639 16,426 16,054 15,816 15,802 15,936 16,134 16,353 16,549 Add: Other Long Term Operating Assets 1,533 1,670 2,759 1,732 1,836 1,965 2,122 2,292 2,406 2,467 Net Intangibles (excluding goodwill) 407 399 0 758 715 672 629 586 543 500 PV of Operating Leases 938 762 718 760 778 790 790 784 774 764 Environmental Remediation 458 461 473 363 375 389 401 417 411 404 Deferred Revenue 108 101 93 116 113 110 108 107 107 108 Other 259 247 230 256 255 249 242 248 247 247 Total Invested Capital 21,889 20,261 20,519 20,213 20,134 20,325 20,705 21,146 21,532 21,765 ROIC 4.23% 9.92% 14.04% 10.95% 12.39% 13.40% 14.79% 16.09% 15.59% 15.86% FCF 301 3,800 2,587 2,553 2,583 2,507 2,626 2,890 2,912 3,183 EP (1,203) 10 844 220 507 710 999 1,285 1,209 1,289

Alcoa Weighted Average Cost of Capital (WACC) Estimation Cost of Equity Risk Free Rate 2.51% Risk Premium 4.26% Beta 1.61 Cost of Equity 13.41%

Cost of Debt 22-yr bond yield 5.55% Tax Rate 30.50% After Tax 3.86%

Weights Total Equity 16,376,292,877.06 # shares 1,216,663,661.00 $/share 13.46 Total Debt 9,612,283,209.55 Total Value 25,988,576,086.61 Weight of Equity 63.01% Weight of Debt 36.99%

WACC 9.88%

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

Key Inputs: CV Growth 2.50% CV ROIC 15.86% WACC 9.88% Cost of Equity 0.13 Weight of Debt 36.99% Weight of Equity 63.01% After Tax Cost of Debt 3.86% Operating Cash % of Sales 2% Annual Dividend Yield 0.76% Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E 2021E

DCF Model FCF 2,553 2,583 2,507 2,626 2,890 2,912 3,183 CV 39,009 Periods to discount 1.00 2.00 3.00 4.00 5.00 6.00 6.00 WACC 10% 10% 10% 10% 10% 10% 10% PV of CF 2,323 2,139 1,890 1,802 1,804 1,655 22,168 Sum of PV 33,781 Non-Operating Assets Excess Cash 1,399 Total Investments and Advances 1,944 ESOP (186) Less PV of OP Leases (708) Less Short Term Debt (83) Less Long Term Debt (8,769) Less Provision for Risks and Charges (5,446) Plus Minority Interest 2,488 Non-Operating Assets (9,362) DCF 24,420 Shares Outstanding 1,217 Intrinsic Value per Share 20.07 W/ PY Adj. 20.81 EP Model 2015 2016 2017 2018 2019 2020 2021 EP 220 507 710 999 1,285 1,209 1,289 Periods to Discount 1.00 2.00 3.00 4.00 5.00 6.00 6.00 CV 17,477 PV of EP 201 420 535 685 803 687 9932 Sum of PV 13,263 Beg IC 20,519 VOA 33,781 Total Investments and Advances 1944 Excess Cash 1,399 ESOP (186) Less PV of OP Leases (708) Less Short Term Debt (83) Less Long Term Debt (8,769) Less Provision for Risks and Charges (5,446) Plus Minority Interest 2,488 Non-Operating Assets (9,362) DCF 24,420 Shares Outstanding 1,217 Intrinsic Value per Share 20.07 With Partial Year Adjustment 20.81

Today

4/21/2015

Next FYE 12/31/2015 Last FYE 12/31/2014 Days in FY 365 Days to FYE 254 Elapsed Fraction 0.696 Fraction of Fiscal Year Elapsed 0.304

Alcoa Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31

2015E

2016E

2017E

2018E

2019E

2020E

2021E

EPS

1.05 1.25 1.41 1.65 1.94 2.16 2.55 Key Assumptions CV growth 2.50% CV ROE 10.67% Cost of Equity 13.41% Retention Ratio 86.70% Future Cash Flows

P/E Multiple (CV Year) 10.87 EPS (CV Year) 2.55 Future Stock Price 13.01 14.75 16.73 18.98 21.52 24.41 27.68 Dividends Per Share 0.14 0.17 0.19 0.22 0.26 0.29 0.34

28.02 Periods to Discount 1.00 2.00 3.00 4.00 5.00 6.00 6.00

Discounted Cash Flows 0.12 0.13 0.13 0.13 0.14 0.14 13.17

Intrinsic Value 13.96 W/ Partial Year Adjustment 14.47 Share Count 1,093

Alcoa Relative Valuation Models EP

EP

Est. 5yr

Ticker Company Price 2015E 2016E P/E 15 P/E 16 EPS

PEG 1

PEG 16 CENX Century Aluminum Co. 14.12 2.40 2.60 5.88 5.43 7.00 0.84 0.78

KALU Kaiser Aluminum Corp 77.04 4.50 5.30 17.12 14.54 15.00 1.14 0.97 CCK Crown Holdings Inc. 54.16 3.50 3.90 15.47 13.89 8.30 1.86 1.67 CSTM Constellium 19.45 1.50 2.00 12.97 9.73 47.00 0.28 0.21 FCX Freeport-McMoran Inc. 18.97 1.20 2.40 15.81 7.90 36.30 0.44 0.22 Average 15.34 11.51 0.93 0.77 AA

Alcoa

13.34

1.05

1.25

12.71

10.71

13.10

0.97

0.82

Implied Value: Relative P/E

PS15) 16.11

Relative P/E

PS16) 14.34 PEG Ratio

S15) 12.77

PEG Ratio (

S16) 12.50

Alcoa Key Management Ratios

Fiscal Years Ending Dec. 31

2012

2013

2014

2015E

2016E

2017E

2018E

2019E

2020E

2021E

Liquidity Ratios Current Ratio 1.30 1.14 1.49 1.90 1.94 2.14 2.34 2.50 2.62 2.76 Quick Ratio 0.82 0.70 0.94 1.39 1.43 1.63 1.83 1.99 2.12 2.26

Activity or Asset-Management Ratios Inventory Turnover 7.16 6.98 6.61 6.51 6.69 6.70 6.70 6.68 6.56 6.38 Receivable Turnover 8.74 8.58 7.87 7.61 7.63 7.66 7.68 7.68 7.61 7.55 Fixed Asset Turnover 1.23 1.26 1.40 1.55 1.67 1.80 1.94 2.07 2.15 2.17

Financial Leverage Ratios Debt-to-Equity Ratio 1.43 1.64 1.53 1.40 1.20 1.15 1.11 1.07 1.04 0.99 Interest Coverage Ratio 1.17 2.32 4.88 4.43 4.86 5.12 5.27 5.56 5.71 6.23 Debt Ratio 0.59 0.62 0.60 0.58 0.55 0.54 0.53 0.52 0.51 0.50

Profitability Ratios Profit Margin 13.50% 16.36% 19.95% 20.35% 20.74% 21.06% 21.37% 21.66% 21.94% 23.21% Return on Assets 0.48% -6.39% 0.72% 3.19% 3.75% 3.99% 4.35% 4.71% 4.88% 5.36% Return on Equity 1.16% -16.90% 1.81% 7.65% 8.26% 8.60% 9.16% 9.77% 9.95% 10.67%

Payout Policy Ratios Dividend Payout Ratio 13.30% 13.30% 13.30% 13.30% 13.30% 13.30% 13.30%

CV Growth

20.81 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0%

Cost of Equity 10% $ 28.26 $ 29.39 $ 30.72 $ 32.30 $ 34.21 $ 36.58 $ 39.58 $ 43.51 $ 48.89

10.50% $ 26.62 $ 27.59 $ 28.73 $ 30.06 $ 31.66 $ 33.62 $ 36.05 $ 39.18 $ 43.33

11% $ 25.12 $ 25.96 $ 26.93 $ 28.06 $ 29.41 $ 31.03 $ 33.03 $ 35.54 $ 38.81

11.50% $ 23.74 $ 24.47 $ 25.30 $ 26.27 $ 27.41 $ 28.76 $ 30.41 $ 32.46 $ 35.05

12% $ 22.48 $ 23.10 $ 23.82 $ 24.65 $ 25.61 $ 26.75 $ 28.12 $ 29.80 $ 31.89

12.50% $ 21.30 $ 21.85 $ 22.46 $ 23.17 $ 23.99 $ 24.96 $ 26.10 $ 27.48 $ 29.19

13% $ 20.21 $ 20.69 $ 21.22 $ 21.83 $ 22.53 $ 23.34 $ 24.30 $ 25.45 $ 26.85

13.41% $ 19.38 $ 19.80 $ 20.27 $ 20.81 $ 21.43 $ 22.14 $ 22.97 $ 23.96 $ 25.15

13.50% $ 19.20 $ 19.61 $ 20.07 $ 20.60 $ 21.19 $ 21.89 $ 22.69 $ 23.65 $ 24.80

14% $ 18.26 $ 18.62 $ 19.01 $ 19.46 $ 19.98 $ 20.56 $ 21.25 $ 22.05 $ 23.00

14.50% $ 17.38 $ 17.69 $ 18.03 $ 18.42 $ 18.86 $ 19.36 $ 19.93 $ 20.60 $ 21.40

15% $ 16.56 $ 16.82 $ 17.12 $ 17.45 $ 17.83 $ 18.25 $ 18.74 $ 19.30 $ 19.96

15.50% $ 15.78 $ 16.01 $ 16.27 $ 16.55 $ 16.87 $ 17.24 $ 17.65 $ 18.12 $ 18.67

16% $ 15.06 $ 15.25 $ 15.47 $ 15.72 $ 15.99 $ 16.30 $ 16.65 $ 17.04 $ 17.50

Dividend Yield

20.81 0.25% 0.50% 0.76% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% Cost of Equity 10% $ 32.35 $ 32.32 $ 32.30 $ 31.44 $ 30.45 $ 29.38 $ 28.21 $ 26.92 $ 25.47

10.50% $ 30.10 $ 30.08 $ 30.06 $ 29.27 $ 28.35 $ 27.36 $ 26.28 $ 25.08 $ 23.74

11% $ 28.10 $ 28.08 $ 28.06 $ 27.33 $ 26.47 $ 25.55 $ 24.55 $ 23.44 $ 22.20

11.50% $ 26.31 $ 26.29 $ 26.27 $ 25.58 $ 24.79 $ 23.93 $ 23.00 $ 21.97 $ 20.81

12% $ 24.68 $ 24.66 $ 24.65 $ 24.00 $ 23.26 $ 22.46 $ 21.59 $ 20.63 $ 19.56

12.50% $ 23.20 $ 23.19 $ 23.17 $ 22.57 $ 21.88 $ 21.13 $ 20.32 $ 19.42 $ 18.42

13% $ 21.86 $ 21.84 $ 21.83 $ 21.27 $ 20.61 $ 19.91 $ 19.15 $ 18.31 $ 17.37

13.41% $ 20.84 $ 20.83 $ 20.81 $ 20.28 $ 19.66 $ 18.99 $ 18.27 $ 17.47 $ 16.59

13.50% $ 20.63 $ 20.61 $ 20.60 $ 20.07 $ 19.46 $ 18.80 $ 18.08 $ 17.30 $ 16.42

14% $ 19.49 $ 19.48 $ 19.46 $ 18.97 $ 18.39 $ 17.77 $ 17.10 $ 16.36 $ 15.54

14.50% $ 18.44 $ 18.43 $ 18.42 $ 17.95 $ 17.41 $ 16.83 $ 16.20 $ 15.50 $ 14.73

15% $ 17.48 $ 17.46 $ 17.45 $ 17.01 $ 16.50 $ 15.95 $ 15.36 $ 14.70 $ 13.97

15.50% $ 16.58 $ 16.57 $ 16.55 $ 16.14 $ 15.66 $ 15.14 $ 14.58 $ 13.96 $ 13.27

16% $ 15.74 $ 15.73 $ 15.72 $ 15.32 $ 14.87 $ 14.38 $ 13.85 $ 13.27 $ 12.62 Cost of Debt

20.81 1.50% 2% 2.50% 3% 3.50% 3.86% 4.00% 5% 5.00% Cost of Equity 10% $ 40.33 $ 38.37 $ 36.56 $ 34.89 $ 33.34 $ 32.29 $ 31.90 $ 30.56 $ 29.30

10.50% $ 37.13 $ 35.42 $ 33.83 $ 32.36 $ 30.99 $ 30.06 $ 29.71 $ 28.50 $ 27.38

11% $ 34.34 $ 32.83 $ 31.43 $ 30.12 $ 28.89 $ 28.06 $ 27.74 $ 26.66 $ 25.65

11.50% $ 31.88 $ 30.54 $ 29.29 $ 28.12 $ 27.01 $ 26.26 $ 25.98 $ 25.00 $ 24.08

12% $ 29.69 $ 28.49 $ 27.37 $ 26.32 $ 25.32 $ 24.64 $ 24.38 $ 23.50 $ 22.66

12.50% $ 27.73 $ 26.66 $ 25.64 $ 24.69 $ 23.79 $ 23.17 $ 22.93 $ 22.12 $ 21.36

13% $ 25.97 $ 25.00 $ 24.08 $ 23.21 $ 22.39 $ 21.82 $ 21.61 $ 20.87 $ 20.16

13.41% $ 24.66 $ 23.76 $ 22.91 $ 22.10 $ 21.33 $ 20.81 $ 20.61 $ 19.91 $ 19.26

14% $ 22.93 $ 22.13 $ 21.36 $ 20.63 $ 19.94 $ 19.46 $ 19.28 $ 18.65 $ 18.05

14.50% $ 21.61 $ 20.87 $ 20.17 $ 19.50 $ 18.86 $ 18.42 $ 18.25 $ 17.67 $ 17.11

15% $ 20.40 $ 19.72 $ 19.07 $ 18.45 $ 17.86 $ 17.45 $ 17.29 $ 16.75 $ 16.23

15.50% $ 19.28 $ 18.66 $ 18.06 $ 17.48 $ 16.93 $ 16.55 $ 16.41 $ 15.90 $ 15.42

16% $ 18.25 $ 17.67 $ 17.12 $ 16.58 $ 16.07 $ 15.72 $ 15.58 $ 15.11 $ 14.66

2015 EPS 16.11 0.9 0.95 1 1.05 1.1 1.15 1.2 1.25

Avg 2015 P/E 12.5 11.25 11.88 12.50 13.13 13.75 14.38 15.00 15.63 13 11.70 12.35 13.00 13.65 14.30 14.95 15.60 16.25 13.5 12.15 12.83 13.50 14.18 14.85 15.53 16.20 16.88 14 12.60 13.30 14.00 14.70 15.40 16.10 16.80 17.50 14.5 13.05 13.78 14.50 15.23 15.95 16.68 17.40 18.13 15 13.50 14.25 15.00 15.75 16.50 17.25 18.00 18.75 15.34 13.81 14.57 15.34 16.11 16.87 17.64 18.41 19.18 16 14.40 15.20 16.00 16.80 17.60 18.40 19.20 20.00 16.5 14.85 15.68 16.50 17.33 18.15 18.98 19.80 20.63 17 15.30 16.15 17.00 17.85 18.70 19.55 20.40 21.25 17.5 15.75 16.63 17.50 18.38 19.25 20.13 21.00 21.88 18 16.20 17.10 18.00 18.90 19.80 20.70 21.60 22.50 18.5 16.65 17.58 18.50 19.43 20.35 21.28 22.20 23.13 19 17.10 18.05 19.00 19.95 20.90 21.85 22.80 23.75 19.5 17.55 18.53 19.50 20.48 21.45 22.43 23.40 24.38 20 18.00 19.00 20.00 21.00 22.00 23.00 24.00 25.00