Important disclosures appear on the last page of this report.

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Krause Fund Research

Spring 2018

Materials Recommendation: BUY

Analysts

Xincheng Guo

xincheng-guo@uiowa.edu

Yuxuan Huang

yuxuan-huang@uiowa.edu

Company Overview Alcoa is a vertically integrated aluminum company, comprised of technology, mining, refining, smelting, fabricating and recycling. This complete system helped the corporation to have high production efficiency among its competitors. Alcoa also has the advance alumina refining technology which improves the purity process of alumina. The main products of Alcoa are Bauxite, Alumina, Aluminum, cast product, rolled product and energy. Alcoa is the sixth largest aluminum corporation in the world. The corporation is located in Pittsburgh, although their business covered in ten countries, the primary market is still in the United States, and the sale is more than 50% in the United States.

Stock Performance Highlights 52 week High 57.50

52 week Low 29.55

Beta Value 0.89

Average Daily Volume 4.21 m

Share Highlights Market Capitalization 10.477B

Shares Outstanding 185.2 m

Book Value per share

EPS 1.18

P/E Ratio 14.97

Dividend Yield

Dividend Payout Ratio

Company Performance Highlights ROA 3.2%

ROE 3.19%

Sales $ 9.32 B

Financial Ratios Current Ratio 1.30

Debt to Equity 21%

Alcoa Corp. (NYSE: AA)

April 16, 2018

Current Price $55.03

Target Price $64.00 - 68.00

Key Investment Highlights

Government Policy: In 2018, President Trump raised tariffs on Chinese aluminum imports and announced sanctioned by Russia aluminum industry. Under this economic condition, U. S. local aluminum company can gain benefit from it in terms of both demand and price. Aluminum demand increase: Accompany the technology development; most people would pay more attention to aluminum materials, because aluminum is lighter than steel, so it used in aerospace, automobile production, and many other industries. The ever-increasing demand for cars and airplanes made it possible for Alcoa to increase their aluminum supply in the short term. Market price increase: The price of Aluminum reach the peak price over five years, it is 2300 USD/t, which is 15% higher than 2017. According to our data and forecast of the market environment, we believe the price will continue to grow in the short run until the end of 2018.

Expanding mining sites:

Material corporations deeply rely on the material price and mining sites. Alcoa expanding its businesses and mining sites overseas makes it possible to be more competitive in the market, and more enduring for the price change.

One Year Stock Performance

Source: Yahoo Finance

Alcoa did not pay dividends

in 2017 or in 2016 (10K)

Important disclosures appear on the last page of this report.

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ECONOMIC ANALYSIS

GROSS DOMESTIC PRODUCT Gross domestic product (GDP) is the total value of all the finished goods and services produced in a specific region and period. GDP can measure the economic activity of a particular area in a selected period. GDP can reflect the broad health condition of the United States. The health condition of U.S may also affect the Material section.

The chart shown below is the Real GDP growth of the United States from 1990 to 2017. The Real GDP growth is adjusted and take the U.S. dollar value of 2009 as standard. Before the financial crises, the 8 year average real GDP growth from 1992 to 1999 is 3.81%. The 8 year average real GDP growth from 2000 to 2007 drop to 2.66%, with a high of 4.1% and a low of 1%. After the financial crises. The eight-year average real GDP growth from 2010 to 2017 2.16%, with a high of 2.9% and a low of 1.5%, which below the average figure before the financial crises.

source: statista @2017

S&P Aluminum Index and Metals & Mining Index are both not highly correlated with the S&P 500 for the past ten years, and S&P Metals & Mining Select Industry didn’t outperform the economy as a whole during 2015 and 2017. However, With the stable real GDP growth, we expect that the aluminum sector can gain benefit from the continuous growth of the economy, and the aluminum price and demand will increase in the next two years. The real GDP growth for the past eight years has a lower growth rate compared to 2000 to 2007, we expect the U.S real GDP and Metals & Mining Industry to keep the current growth rate for the next two years, and we believe U.S. has a healthy condition of current real GDP growth rate.

S&P Metals & Mining Select Industry Index

Source: spindices@2018

S&P 500

Source: spindices@2018

INTEREST RATES Metals & Mining Industrial are also fear of the hiking interest rate. For a capital-intensive company like Alcoa Corporation. A significant portion of the company capital expenditure is Mining machine. Doesn’t like buildings, mining machine requires not only a massive capital expenditure but also a considerable amount of depreciation each year. The company need debt and financing more than most other industries.

When interest rate decrease, the market will gain more money to spend and increased spending throughout the economy. With lower interest rates, people have more opportunities to do or start new businesses due to the low cost of borrowing. In this case, cost of debt and WACC are two prominent figures for the market as a whole, and for the most of time, the economy prefers lower interest rate. At the same time, mining industry can also benefit from the lower interest rate, with a lower cost of debt.

We believe both in short-term ( 6 months) and long-term, the 30 Yr Yield will be stable at 3.00% while the economy continued to grow. Material and Mining industry is fear of the hiking interest rate. We believe this industry will not gain benefit from the increasing interest rate. However, even 3.00% isn’t the best yield for Mining industry according to recent years’ industry. It will not hurt the industry as long as the government keeps the current yield.

The current yield is 3.03%. We do not see any harmful impact for Alcoa in the future since the expected yield is still 3.00% and

Important disclosures appear on the last page of this report.

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this is considered as a reasonable and low figure for the current economic status.

U.S Treasury Bond Interest Rate as of April 2018

Source: U.S. DEPARTMENT OF THE TREASURY @2018

GOVERNMENT CHANGES

Trump administration’s Policy

Trump administration withdrew from Trans-Pacific Partnership (TPP) on January 23, 2017. (Presidential Memorandum Regarding) TPP is a regional trade agreement between U.S. and 11 Asian-Pacific countries that together comprise about 40% of global economic output. CFRA researcher expected to affect 30% of imported steels come from TPP countries. (Miller) The influence is partially limited because most U.S. metal trade was made with Canada and Mexico which are also involved in the North American Free Trade Agreement (NAFTA). However, some other materials still face foreign competition.1

Since metals and mining industry is sensitive to the GDP growth, especially aluminum as a consumer-driven sub-sector, the U.S. domestic demand growth will follow the expected GDP growth rate around 2 - 3% in the long run ( 2-3 years).

President Trump signed “Buy American, Hire American” executive order on April 18, 2017. (Presidential Executive Order) The order will promote domestic metals & mining market and domestically manufactured steel and aluminum products. 2

Trump administration impose a tariff on aluminum import (Lloyd-Smith), as well as increasing amount of antidumping suits of aluminum, the price of aluminum is expected to continue to rise. One example is Russian stocks crashed on April 15th, while aluminum prices increase after the United States add tax for aluminum against Russia. Local Mining corporations like Alcoa can gain huge benefit from tariff imposed on foreign countries while the price of Aluminum will increase and demand Alcoa will also be increasing.3

Government regulation

Both federal and local Government regulation may affect Mining corporations. City government like Boonville publish a new law in 2017 which limit the expansion of Alcoa Corporation’s Coal mining in that area. Coal mining and other material mining process require explosion, vast land, and giant mining machine. All these factors affect the local environment around the mining site. A single regulation published by city or federal government will have a substantial effect on how the mining site will perform. 4

Government Changes in other countries and global impacts

China joined WTO in 2001 its aluminum production raise from 14% to 54% of the total production globally, however since 2015, Chinese government restrained aluminum producing pace due to overcapacity. This supply reduction makes the global aluminum price rise 20% in the past year 2017.

8% will oversupply overcapacity of aluminum in China in 2020 predicted by Bank of America Merrill Lynch. The amount of oversupply will have a possibility of flooding the Aluminum price and harm Alcoa in the Long run.5

However, we still believe the price of the aluminum sub-sector will be rise around 30 - 40%, until the supply and demand close to being balanced in 2020.6

Source: London Metal Exchange@2018

LME, Aluminum Price

EXCHANGE RATES Alcoa corporation is one of the leaders of the global production of Bauxite, Alumina and Aluminum products. And it also has One of the most significant bauxite mining portfolios worldwide. As a company buy and sell products globally, it faces a risk of change in exchange rates.7 If U.S. dollar appreciates among target customer regions, Alcoa’s profit will boost in the short term before target region’s

Important disclosures appear on the last page of this report.

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INDUSTRY ANALYSIS

demand shift to other suppliers, which leads to a drop in sales in the end. For this reason, Mining and Material industries prefer fix or slightly lower exchange rates in the long run. However, dollar appreciation can help Alcoa purchase more raw materials or machines overseas with less U.S dollar. Thus no matter exchange rates increase or decrease; it has both benefit and side effect for Alcoa. Nearly 50% of Alcoa’s global sales are from Spain and Australia. Take the significant customer Australia as an example; we believe AUD will slightly appreciate towards USD. Currently, AUD/USD is 0.78. We expect it will be stable at between 0.78 and 0.80. Minor change in exchange rates will not hurt Alcoa. We believe in the short term, USD will depreciate due to the trade war fear and other reasons. But the U.S exchange rate will not be volatile and hurt Alcoa in the long run (one to two years).

Source: statista@2017

Breakdown of Alcoa's global sales in FY 2017, by region

MARKET OUTLOOK We believe Metals & Mining industry in the U.S is in a good shape and we recommend our client to invest Alcoa Corporation. As mentioned, from the perspective of U.S. economy, the U.S real GDP is continuously growing, and this trend increase the overall consuming and spending in the country, thus benefit most industries. Aluminum as a consumer-driven sub-sector can even outperform the market with GDP growth. On top of that, Stock market (S&P 500) even reach the all-time high this January In the short run (less than one year), we see a possibility of a slight increase in the interest rate, higher cost of debt or even the risk of changing exchange rates. While these only have a minor effect on Metals & Mining industry since we expect a low rate of change.

The government policy play as an essential role as for how Alcoa will perform in the short run, such as “Buy American, Hire American” and “trade war - impose a tariff on aluminum import” all benefit Alcoa. We also believe Alcoa will outperform the market in the long run due to the continuously increasing demand for Materials, such as the construction need in the U.S and even globally.

ALUMINUM INDUSTRY OVERVIEW

Metals and Mining supply for various sectors such as construction, automotive, aerospace, and telecommunications. Alcoa is the leading Aluminum Corporation in this industry. While extraction is becoming more difficult, companies put a significant portion of funds on advanced technology. This industry has high demand from western countries and the ever-increasing demand from developing countries. Increasing middle-class demand more commodities, expanding infrastructures all require the aluminum products. Alcoa has one of the largest bauxite mining portfolios among other competitors. Bauxite is the primary commercial ore of aluminum. Thus Alcoa is also one of the largest Aluminum producers globally. Alcoa has customers for a variety of products produced from Bauxite, 14% of Bauxite sold to the third party. Alumina was smelting from Bauxite and 67% sold to the third party. Aluminum was purifying from Alumina, and 100% was sold to third party. 8 Holding the largest mining portfolios in the world, the cost of producing Aluminum still consist less than 40% of the total cost. The Alumina refining and Aluminum smelting process need a huge amount of cost including energy, machining, and other materials.

Important disclosures appear on the last page of this report.

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Source: investors.alcoa.

Industry Trend

Mining Industry with new technology If we look at the previous data of mining industry, we find the stock price is volatile, because the economic situation changes every year, and the corresponding trend will affect the entire industry. However, we think 2018 will be a good year for the whole mining industry. Aluminum price in 2018 First, in 2018, the mining industry will go into the digital mine, just as Deloitte Global’s 10th annual report says: “Tracking the trends 2018, which explores the key trends facing the modern mining industry as more and more mining organizations turn towards the digital mine.” 9 In the future, most people will look forward to mining industry reforming, because the digital mine will solve people’s misunderstanding of the mining industry, and accompany the data updating, the manager can easily control the pollution that from the mining process.

Source: infomine@2018

After we discussed the impact of technology on the mining industry, we should move on the aluminum market. The above picture shows the price from 2017 Oct. 2 to 2018 Mar. 23. In the beginning, the price of aluminum was 2075 USD/T, but by March 23, 2018, the price fell by 1975 USD/T. This trend may make investor depressed, but we have to think the reason behind the price. According to the current events, we know that the U.S. government announced that it would stop importing China’s aluminum at the end of March. This event will explain why aluminum prices have plummeted. Customers do not purchase a large number of aluminum mines, this will make the price fell straightly. However, this phenomenon is only temporary because stopping imports means U. S. local mining companies earn more opportunities; this will be a great opportunity for Alcoa to expand its company. As we continually look at the chart, we will find that the price of aluminum reached its peak in April 2018, reaching 2250 USD/T. This will prove that our forecast is correct.

Source: statista

Aluminum market in the whole world

Important disclosures appear on the last page of this report.

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The U. S. Aluminum’s profitability is through increasing its own company’s production, but what is the situation in the aluminum mining industry in the world? According to the data from Statista website, we found the general demand for aluminum in the world comes from China. The chart below represents the data from 2010-2017, so if we want to forecast industry trend of aluminum, we have to analysis aluminum policy in China, because Chinese decision-making will affect the aluminum market throughout the world. “There have been policy announcements regarding construction projects that will increase demand for raw materials in 2018. The most publicized policy is China's One Belt One Road project.” (Maximilian Court) This shows that the current aluminum industry is a good shape. China, as a leader in the aluminum industry, not only produces large quantities of aluminum but also imports a significant amount of aluminum. China influences the global price a lot, and increase the rate for the past two years.

Source: spglobal However Chinese development of the mining industry has also brought with it environment problems. The figures above are the 2017 China Air index, at the end of the year, the air quality is bad, the Chinese government also recognize this problem. So in the 2017 winter government limited the development of the mining industry. This policy also reflects why the aluminum price had significantly reduced at the end of 2017. But at the same time. We believe that also will be an opportunity for the U. S. mining industry. U. S. mining companies can produce more mines to fill up the gaps and generate higher profits. Demand of Aluminum After analyzing the market, we will discuss the aluminum demand in of many other industries.

Source: traderscommunity

In 2017, the demand of aluminum grew by 5.8 percent10, the growth of motor vehicle production exceeds the average level, because more automobile manufacturers will choose to use lighter materials to manufacture automobiles so that this industry will become the largest aluminum consumer. In addition, food packaging also grew in recent year because many countries are developing rapidly, most people are willing to pay more attention to their health. Packaging foods with aluminum foil can greatly reduce bacteria and increase thermal insulation. Therefore, compared with growth of 5.8% in 2017, we believed it would increase by 6-8%.

COMPETITIVE ANALYSIS

The following chart shows the key financial metrics of the leading Aluminum Corporations in the World. Aluminum Corporation Of China Limited (Chalco), world’s second largest Alumina producer, with 180.08 billion dollars revenue in 2017, only has 0.77% profit margin. Though Alcoa’s profit margin 1.86% is significantly lower than other market leaders United Company RUSAL (Rusal) and Rio Tinto (Rio).

United Company RUSAL

Rusal was shut out of the western market and its stock price drop from 4.64 HKD on April 10th to 1.43 HKD today, the recent price is only 30.8% of the price one week ago. At the same time, Aluminum Hits Highest Since 2011 because Rusal was forced to cut production. This also indicates how buyer power defined by Porter’s 5-Forces can affect corporation performance. 11

Revenue 9.97B 40.03B

180.08B 11.65B

MKT CAP 21.57B 91.68B

9.05B 10.25 B

Profit Margin

12.26%

21.89%

0.77% 1.86%

Important disclosures appear on the last page of this report.

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COMPANY ANALYSIS

The perform of Rusal gives Alcoa an opportunity to expand their market and gain higher revenue and profit margin with a high price in the short term.

However, Rusal is only one significant competitor of Alcoa. Stock prices for Rio and Chalco also increase a lot for the previous week. And along with Porter’s 5-Forces. Alcoa face risk from several different perspectives.

Rio Tinto

Rio is the word largest producer of bauxite, alumina, and aluminum. This includes the purchased Canadian company Alcan and Rio Tinto. As the largest bauxite producer in the world, Rio operates its mining sites for bauxite in Australia, Brazil, and Africa. They also refineries materials in Europe, North & South America, and Australia. Rio is one strong competitive profit margin, mining sites, refineries operations and overall production compare to Alcoa. 12

Aluminum Corporation Of China Limited

Total Alumina production in the world in 2017 is 130.5 million tons, consume 130.32 million tons, increasing by 7.7%, and 6.6% compared to 2016. In China, production is 70.25 million tons and consume 72.49 million tons, increase by 16.8% and 12.56% according to 2016. Chinese Alumina production and consumption outperform the global market, produce and consume 53.8% and 55.6% of the global amount.

Maximum Alumina price is 484 dollars per ton with an average of 354 dollars per ton. Increase by 39% for 2016. As Chinese Alumina market outperform the global market, Chalco did not harm by the previously reductions of production in Shanxi Province.13

Chalco also continuously investing various types of mining sites and capitals overseas. Including the recent investment in Peru copper mine.14

KEY FACTORS DRIVEN THE INDUSTRY

Advanced Equipment The technology development of mining industry, such as the drilling technology is becoming more advanced in recent years. More advanced technology can help corporations reduce the cost and make mining process more efficient and outcompete its competitors. Raw Material and Final Product Corporations of Metals and Mining industry prefer to locate their mining operation closer to the target customers to lower the production and transportation cost. This is one of the reason Alcoa owns global mining sites and assets.

As mentioned in the industry overview, Corporations in this industry prefer this producing model to achieve the upstream vertical integration state, and hence lower the cost since they mine and produce raw materials for their final product. Government Policy and Global Energy Price The mining industry is sensitive to the government policy. For example, the U.S. mining industry will go forward if the Chinese government would decrease the production of a particular mineral. And the recent tariff on foreign materials also benefits the U.S. mining industry. Nation’s Economic Situation As a nation's economy grows, investments increase in the infrastructure sector and increasing the demand for mining metals.

Company overview Alcoa is a global leader in the mining industry; its main business products are Bauxite, Alumina, and Aluminum. It has 40 operating firms in 10 countries. Then Alcoa has the largest bauxite mining portfolios worldwide, that will increase the speed and benefit from mining, they also have an advance global alumina refining, which will improve the purity of alumina. Also, Alcoa has its innovation in product casting and marketing network, a combination of various products will enhance the commercial and market value for Alcoa Company. Secondly, Alcoa main product is still the primary aluminum trade, the revenue from aluminum is $6,168M in 2017 60, where the main market for Alcoa is the United States, followed by Spain, Australia, Brazil, and Canada. In the United States, Alcoa income reached $5,370M that was 50% of total revenue. Also, Alcoa’s aluminum products are mainly sold to Construction, Transport and packing industry. Independent Company On November 1, 2016, Alcoa announced its separation from Arcoinc 60, and became an independent public company. After the establishment of Alcoa, it will hold the Arcoinc’s bauxite, alumina, Aluminum products, and energy business; they also have the parent company rolling mill business in Warwick, Indiana, and Arcoinc in Saudi Arabia 25.1% equity. Financial Summary The current stock price of Alcoa is $54.96 is a relatively high price, and it is a sustainable increase. The chart above shows the 5-year stock price of Alcoa. We found that stock in the whole year of 2016 was between $20-$30. This

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shows the Alcoa was very depressed in 2016, but the situation has improved after Alcoa became an independent company. When we discussed industry trend, we already said that the beginning of 2018 and now would be a good time for the Alcoa. This is because the Chinese aluminum market production dropped in the winter, so at the beginning of 2018 and now, the stock price of Alcoa is in the peak, and there will be a continuous rise.

Source: Yahoo Finance

According to Alcoa’s statement. In 2016, Alcoa’s adjusted EBITADA was $1108M, but in 2017, EBITDA had risen to $2352M, EBITADA doubled within a year, this phenomenon not only indicates that Alcoa had a very good operation in 2017, that also represents the market condition for mining industry has an improvement. Products and Market Alcoa has 6 main operating products, they are60:

1. Bauxite 2. Alumina 3. Aluminum 4. Cast Products 5. Rolled products 6. Energy

Among them, Bauxite, Alumina, and Aluminum is two major products of Alcoa. At first, we will focus on these three products. Bauxite Segment In 2017, the production of Bauxite was 45.8mdmt, which increased 20.5mdmt compared with 2016. This was mainly due to the increase of production in Brazil and Australia. Alcoa should have more Bauxite production in 2017, but due to drought and heavy rain, several mines was interrupted, and the boke mines suffered civil war, so the operation stoped60. Bauxite third-party sales increased by $18M in 2016, because Alcoa expanded sales for the third-party, its total sale in 2017 increased by 17% compared to the 2016. The price adjustment also led to higher prices for Bauxite, the 2017 EBITDA increased by $52M over 201, because of rising market prices, reduced transportation costs and changes in the exchange rate with U. S. dollar.

Finally, According to the official report from Alcoa, we believed that the output of Bauxite in 2018 would continue to increase because the production of the Huntly and Juruti mines will increase. Alumina Segment This segment is entire company refining system, the Bauxite will be processed into alumina, which will be sold to other chemical companies for Aluminum smelting, its main sales channels are third parties sales, and the residual alumina will be used by the company itself. By the way, this segment also contains 25.1% share of Saudi Arabia. According to the Alcoa 10-K statement, we found the alumina production in 2017 was decreased by 155kmt compare to 2016, But the EBITADA was increasing $991M in 2017, so the main reason is Point comfort refinery production decreased due to some reasons. In 2017, the price of bauxite decreased, and due to the adjustment of the exchange rate between US dollar and Australian dollar, it led to an increase of $911M in 2017. Finally, in 2018, we believe that the price of alumina will remain balanced, because the price of Bauxite will increase, even though, the price of alumina keep rise in 2018, but the cost and revenue will be a balance level. Aluminum Segment Alcoa’s aluminum is mainly used for external sales, and just a few of aluminum was lost during the production process. The aluminum produced is used for Transportation, construction, packing and other manufacturing operations, by the way, this sector also contained 25.1% share of Saudi Arabia. According to the Alcoa 10-K statement60, we found aluminum production in 2017 was decreased by 400,000 tons compared to 2016. The main problem was Australia production declined, so the manager had to stop a product line, but the situation was restored in mid-2017. Third-party sales increase by 23% during 2017, because the company expanded its business, and EBITADA in 2017 was $284M higher than 2016 because the aluminum prices have increased by the end of 2018. In 2018, we believe that will be the best opportunity for Alcoa because President Trump has stopped importing Chinese aluminum, and recently he imposed economic sanctions on Russia. Under this economic environment, the local aluminum company will earn more opportunity to expand their production, so we are very optimistic for the Alcoa in 2018. Cast product Alcoa cast product is a global leader15, because they have advanced product development and research team. In 2016, Alcoa creates a SUSTANA product line; this new product line will reuse sustainability materials, so that will reduce environmental pollution and resources waste. Then, Alcoa cast product

Important disclosures appear on the last page of this report.

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VALUATION ANALYSIS

includes aluminum billet, foundry ingot, rolling slab, rod, power, high purity and p1020, this product will improve the competition for this segment. In 2017, the revenue decreased 12% than 2016, so the reason is the cost of aluminum was increased, and then, we found the third-party sales also decline $1060M compare to 2016, so we think the company has reduced the size of this segment. So we predict that in 2018, the cast product revenue will continue to decline, but SUSTANA product line will be maturity in the future, so we expect sale will increase in the next three years. Energy Alcoa energy segment manages 4.5GW electricity power, and its electricity production capacity is about 1.7GW. These electricity power are using to company operating, and they will sell the excess power to get the revenue. In this segment, 61% of Alcoa’s electricity production comes from hydropower, which will achieve Alcoa sustainable development goals. In 2017, Alcoa revenue through the electricity power was $331M; it decreased 20% compared 2016. This due to Alcoa expansion mining business and led to more internal consumption. Rolled-Product Rolled product segment is very important to Alcoa because accompany the technology development, more vehicles will need lighter materials, and aluminum sheets will match the times. These sheets are used for packing, automotive and aerospace. Therefore, in recent years, rolled-product segments will become Alcoa’s second largest industry. In this industry, Alcoa has an advantage that is obtaining primary aluminum at a very low price. As we expected, in 2017, the total sale of Alcoa rolled product was $1170M, which was $101M more than 2016. However, there are more new materials influence the price, such as carbon fiber, so we also think in recent years, aluminum sheet price will lightly decline. Then, more industry like packing industry will recognize aluminum sheets are healthy, so in the future, the price will increase.

S.W.O.T Strengths Alcoa is a global company with 40 operating point in 10 countries. This business model will allow company always have enough inventory, and they will meet most of demands that from every countries. In addition, Alcoa has an integrated aluminum industry chain. From the mining, smelting and processing of aluminum, this system will greatly reduce the cost. Then, as we mentioned above, Alcoa owns a SUSTANA product line. This product line will make sure that Alcoa recycle all waste materials, thus will maintain a sustainable development strategy.60 Weakness

The first disadvantage of Alcoa is that mineral resources are limited, and long-term mining will result in fewer mineral reserves, so recycling is the most critical problem for Alcoa. Alcoa will break the ecological balance; there have two aspects: first, Mining will destruct soil layer. Second, Mining machines will cause air pollution. The final problem is mining industry will depend on the policy, so their income will be uncertainty. Opportunity First, in 2018, President Trump’s policy was very beneficial to Alcoa because he stopped importing aluminum mines from China, and also he imposed economic sanctions on Russia aluminum industry, so if Alcoa expands in 2018, they will earn a lot of money than before. Accompany technology development; more industry will need aluminum products, because its lightness and heat insulation, so in the long-run, this will be another opportunity for Alcoa company. Threat As we mentioned before, some Alcoa’s mines are in countries with war, so aluminum output and safety of these mines are very uncertain. Then China is the first aluminum export and import countries so that Chinese market will affect the aluminum price. Finally, President Trump’s economic policies on other countries may cause the exchange rate of the U. S. dollar to go down; this might cause loss of exchange rates.

We recommend a BUY rating on Alcoa. For the DCF and EP model we built, the intrinsic value of Alcoa by the end of 2017 is $66.12, which indicate the Alcoa is undervalued by $12.25. However, our DDM model shows the recent intrinsic value is $55.55, which is considered much lower than DCF and EP. Given by the Alcoa 10K, the company has no dividend paid either in 2017 or 2016. Thus the DDM model is not our key model. Revenue Decomposition Alcoa’s revenue depends on six segments; they are Bauxite, Alumina, Aluminum, cast products, and energy. Therefore, if we want a deep understanding of the Alcoa company revenue, we have to analyze each segment, because each department growth rate will differ when the market environment change. Based on our previous analysis, we found that in 2017, the Alcoa total segment sale is $19244M60, and it increased 29.92% compared to 2016, so we are very optimistic about the revenue growth in 2018, and the growth rate will reach 10.35%60 Bauxite

Important disclosures appear on the last page of this report.

10

According to our company analysis, we mentioned that Alcoa had expanded its third-party bauxite business. There has been a great increase in third-party sale in 2017, so we believe that expansion will continue, then, Some of Alcoa’s mines are not reached the maximum output for some reason, but as the 10-K statement says60, these mines will resume average production in 2018, Bauxite production will increase in 2018. Base on the above information, we believed Bauxite segment sale would reach $1376 in 2018.60 Alumina Alumina is a semi-finished product of Alcoa for smelting aluminum. The production of 2017 decreased 155KMT compared to 201660, but EBITADA increased in 2017, the main reason is alumina price became high in 2017. So our group believes in this economic environment, all segment will increase their revenue in 2018, except energy segment. But when we look at growth rate between 2017 and 2016, we are surprised find the rate is 35.9%, but we think that growth rate is not stable because Alcoa just recovered their market in 2017, and even economic environment improves, it will not increase like 35.9%, we think Alumina segment will increase 26.31% in 2018.60 Aluminum Aluminum segment is a most important division of Alcoa, although, the production of Aluminum segment was decrease in early 2017, but it recovered in the mid-year. Secondly, Aluminum segment also expanded the scale of third-party, and the sales growth reached 23%. In 2018, we believe the growth will continue because of Trump trade policy, therefore, this segment of Alcoa will be the most profitable segment of Alcoa, because in 2017, the aluminum segment was increase 120% revenue compare to 2016, we think even though it will rise in 2018, but that will not too much, so we think the growth rate is 14.10% Cast product and Rolled product Because these two segments are not the primary segment, we decide to put them together to analysis. First of all, we found cast product and roll product segments are both have negative revenue growth rate in 2017 compare to 2016, we think the same reason is an aluminum price increase. Then we found the cast product segment reduce the size of third-party sales, so we believe the cast product segment profitability is low, we predict cast product segment growth rate will continue to below zero. Secondly, according our analysis in company analyze, we find rolled product segment have so many competitors, so we are not optimistic about the development of this department in recent years. For these two segment, we think that in 2018, cast product segment will decrease by 20% and rolled product will reduce by 14.09%. Energy

Our team believes the growth rate of the energy segment will continue decrease, because the energy segment will support electricity for whole company, and the remaining electricity will be sold out. We can see in 2017, the income of the segment company of Alcoa increased by 29.92%, but the revenue growth rate of the energy segment has decreased. Therefore, the energy segment revenue decline means entire company’s turnover increase, finally, we think the energy segment will continue to decline, and the rate of decline will be -17% in 2018. Cost of Goods Sold and SGA Firstly, both COGS and SGA are estimated by growth ratio of sales. We calculated the average growth rate of 5 years sales; it was 4.9%. However, this method suits the SGA because we found the COGS has grown too high. According to Alcoa official news, the manager already started reducing COGS spending in 2016, and we also found that the proportion of total COGS was decreased over the years, therefore, from 2017, we will cut our spending by 0.5% annually to complete our forecast of COGS. Weighted Average Cost of Capital First, we calculated the weight of equity and weight of debt according to Alcoa 10-k table, which was 82.92% and 17.08%. Then we use 21% marginal tax rate to calculate the pre-tax cost of debt is 4.05%, and use the CAMP formula to calculate the cost of equity. Finally, we use the WACC formula to calculate WACC equal to 5.90%. Cost of Equity & Cost of Debt When calculating the cost of equity, we used the capital asset pricing formula. First, we found Alcoa beta was 0.89 at Yahoo Finance. Then we predict future market risk premium is 4.18%; then we found 10 years treasury yield to use as the risk-free rate. Finally, we calculated the cost of Equity equals 6.46% by using CAPM formula. Yahoo finance While 30-year bond not found, so we looking for the Damodaran's Industry Cost of Debt. Apply it to the latest marginal tax rate 21%, we got after-tax cost of debt as 4.05%.61

Discounted Cash Flow & Economic Profit & Dividend Discount Model The adjusted target price calculated by Both DCF and EP model is $66.12 as of 11/29/17, which is higher than the current price $44.12. A large number of CV growth brings the higher intrinsic value. After adjusting the price, we target the price to $67.21. Compare to the DDM model, DCF and EP model predicted to be $11.81 higher. We believe DCF and EP model to be a better prediction

Important disclosures appear on the last page of this report.

11

SENSITIVITY ANALYSIS

because the calculation includes NOPLAT and IC, Invested Capital can help investors predict capital gain in the future rather than the dividend.

There are certain numbers of variables affect Alcoa stock price. We choose some of the key variables / assumptions to conduct different sets of sensitivity analysis to find how stock price react to the change of different sets of key assumptions. Beta vs. Risk Premium This comparison shows how stock price influence by Beta and risk premium. As we observe, Beta increase will led to stock price decrease. Under 4.65% risk premium, when beta increase 0.1 the price decrease $10.82. And under 0.8 beta when risk premium increase 0.05%, the price just decrease $0.64. So compare beta and risk premium, beta changes will be more sensitive for the stock price. NOPLAT CV Growth vs. ROIC CV Both factors are represent asset of a company, and NOPLAT and ROIC increase will cause a lot of cash flow. So increase each one will lead to price increase. Under ROIC CV equal 11.67%, when NOPLAT increase 0.1%, the price will increase $0.96, and then under 0.69% NOPLAT CV Growth, when ROIC CV increase 1%, the price increase $0.66. So according to the compare, the NOPLAT CV Growth will more sensitive for the stock price, and keeping high NOPLAT CV Growth will more efficient than ROIC CV. Marginal Tax Rate vs. Risk Free Rate While the marginal tax rate has dropped to 21%, we believe it is important to analyze the Marginal Tax Rate. The drop in the tax rate would increase FCF. However, if we compare it with the Risk-Free Rate, the rising risk-free rate would increase the cost of equity. They have a reverse relationship. As we can see, the change of tax rate doesn’t have as much power as the change of risk-free rate affecting the price. WACC vs. CV Growth rate In this comparison, we believe the WACC will more sensitive than CV Growth rate, because company leverage are rely on WACC, and when we look at our data table, we found the fact just same as our expect. Accompany WACC increase 1%, under CV Growth rate was 0.69%, the price will decrease $23.1. When the WACC equal 5.97%, CV Growth rate increase 0.1% will lead price increase $0.69. So WACC is more sensitive than CV Growth rate, thus when Alcoa want keep our maximum benefit, Alcoa should maintain the WACC at a low leverage.

Risk Free Rate vs Risk Premium

As mentioned before, when the risk premium increase, the price will decrease. We can see a clearly more change of price when we compare the risk premium with the risk free rate. This analysis yielded from $36.66 to $92.18

Important disclosures appear on the last page of this report.

12

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.

References

1 Solís, M. (2017, May 10). Trump withdrawing from the Trans-Pacific Partnership. Retrieved April 17, 2018, from https://www.brookings.edu/blog/unpacked/2017/03/24/trump-withdrawing-from-the-trans-pacific-partnership/

2 Buy American, Hire American. (n.d.). Retrieved April 17, 2018, from https://www.uscis.gov/legal-resources/buy-american-hire-american-putting-american-workers-first

3 Imbert, F. (2018, April 09). Russian stocks crash on new sanctions; aluminum prices soar on penalties to global producer Rusal. Retrieved April 17, 2018, from https://www.cnbc.com/2018/04/09/russian-stocks-crash-on-new-sanctions-aluminum-prices-soar-on-penalties-to-global-producer-rusal.html

4 Martin, J. (2017, December 14). Alcoa still plans smelter restart, but concerned about Boonville coal regulations. Retrieved April 17, 2018, from https://www.courierpress.com/story/news/2017/12/14/alcoa-still-plans-smelter-restart-but-concerned-boonville-coal-regulations/949553001/

5 How Chinese overcapacity hits American workers. (2017, June 15). Retrieved April 17, 2018, from https://www.economist.com/news/finance-and-economics/21723404-risk-donald-trump-has-wrong-solution-how-chinese-overcapacity-hits

6 https://www.bloomberg.com/news/articles/2018-01-25/goldman-warns-trump-will-probably-slap-tariff-on-aluminum-trade

7 WHO WE ARE. (n.d.). Retrieved April 17, 2018, from http://www.alcoa.com/global/en/who-we-are/default.asp 8 http://www.alcoa.com/global/en/who-we-are/default.asp 9 Dale Benton. (2018, January 31). Predicting the disruptors of tomorrow's mining industry: Deloitte's tracking the trends 2018. Retrieved April 17, 2018, from http://www.miningglobal.com/operations/predicting-disruptors-tomorrows-mining-industry-deloittes-tracking-trends-2018 10 World Aluminum. (n.d.). Retrieved April 17, 2018, from https://www.freedoniagroup.com/industry-study/world-aluminum-3070.htm

11 Aluminum Hits Highest Since 2011 With Rusal Supply Seen At Risk. (2018, April 16). Retrieved April 17, 2018, from https://finance.yahoo.com/m/6b059941-db65-31fd-b234-f89355eb53f0/aluminum-hits-highest-since.html

12 (n.d.). Retrieved April 17, 2018, from https://web.archive.org/web/20070714160103/http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20070712/alcan_deal_070712/20070712?hub=TopStories

13

http://www.chalco.com.cn/chalcoen/rootfiles/2018/03/23/1521753091090096-1521753091092886.pdf

14 Sanderson, H. (2017, April 05). Chinalco to ramp up investment in Peru copper mine. Retrieved April 17, 2018, from https://www.ft.com/content/3c7b1df6-04dd-374e-aa9b-8588e8222802

15(n.d.). Retrieved April 17, 2018, from https://marketrealist.com/2014/11/why-revenue-drivers-for-alcoas-rolled-products-important

Additional sources

60 10-K 61 Yahoo Finance

Alcoa Corporation (AA)Key Assumptions of Valuation Model

Ticker Symbol AACurrent Share Price $55.03Current Model Date 4/16/2018FY End (month/day) Dec. 31

Pre-Tax Cost of Debt 7.80%Beta 0.89Risk-Free Rate 2.48%Equity Risk Premium 5%CV Growth of NOPLAT 0.69%CV Growth of EPS 20.37%Current Dividend Yield 0.00%Marginal Tax Rate 21%Effective Tax Rate 31.80%wacc 5.97%CV ROIC 11.76%Dividend Payout Ratio N.AForward P/E 16.25914334

Alcoa Corporation (AA)Revenue Decomposition

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023EBauxite:Bauxite production (million bone dry metric tons) 45 45 46 56 66 70 75 73 75Third-party sales 71 315 333 407 482 509 542 531 548Intersegment sales 1160 751 875 1069 1266 1339 1424 1394 1441Depreciation, depletion, and amortization 94 77 82 100 119 125 133 131 135Third Party Shipments (mdbmt) 2 6 8 10 12 12 13 13 13Third Party Sale Price (per mbdmt) 36 53 42 42 42 42 42 42 42Total Bauxite revenue 1137 989 1126 1376 1629 1722 1832 1794 1854Bauxite segment growth -13.02% 13.85% 22.17% 18.45% 5.71% 6.38% -2.10% 3.37%

Alumina:Alumina production (million bone dry metric tons) 15720 13251 13096 16542 19377 20890 22674 23733 24590Third-party sales 3343 2300 3133 3957 4636 4998 5424 5678 5883Intersegment sales 1687 1307 1723 2176 2549 2748 2983 3122 3235Depreciation, depletion, and amortization 202 186 207 261 306 330 358 375 389Third Party Shipments (kmt) 10755 9071 8345 10541 11226 11417 11348 11469 11728Third Party Sale Price per metric ton 311 254 375 375 413 438 478 495 502Total Alumina revenue 4828 3421 4649 5872 6879 7416 8049 8425 8729Alumina segment growth -29.14% 35.90% 26.31% 17.14% 7.81% 8.54% 4.67% 3.61%

AluminumTotal Aluminum Sales 5106 3763 5208 5942 6329 6436 6398 6466 6611Aluminum production (million bone dry metric tons) 2811 2423 2328 2656 2829 2877 2860 2890 2955Third-party sales 14 9 21 24 26 26 26 26 27Intersegment sales 5092 3754 8027 9159 9754 9920 9860 9966 10190Depreciation, depletion, and amortization 311 295 419 478 509 518 515 520 532Aluminum Production (mt) 2811 2423 2714 3097 3298 3354 3334 3370 3445Aluminum Sale price per metric ton 1816 1553 1919 2190 2332 2371 2357 2382 2436Total Aluminum revenue 4795 3468 7629 8705 9270 9428 9372 9472 9685Aluminum segment growth -27.67% 119.98% 14.10% 6.50% 1.70% -0.60% 1.07% 2.25%

Cast product:Third-party Alumiunm shipments(kmt) 2957 2793 2224 2008 2042 2065 2021 2068 2132Third-party sales 6186 5201 4141 3739 3803 3845 3764 3851 3970Intersegment sales 46 316 252 227 231 234 229 234 241Depreciation, depletion, and amortization 42 42 33 30 31 31 30 31 32Aluminum Shipments (kmt) 2957 2793 2713 2450 2491 2519 2466 2523 2601Cast products price per metric ton 2092 1862 1526 1378 1402 1417 1387 1419 1463Total Cast product revenue 6190 5475 4359 3936 4003 4047 3962 4053 4179Cast product segment growth -11.55% -20.38% -9.70% 1.70% 1.10% -2.10% 2.30% 3.10%

Energy*:Third-party sales(GWH) 6604 7101 5654 4710 3713 3906 4127 4364 4578Third-party sales 426 280 223 186 146 154 163 172 181Intersegment sales 297 168 134 111 88 92 98 103 108Depreciation, depletion, and amortization 61 57 45 38 30 31 33 35 37Energy Production (GWh) 6604 7101 7790 6489 5115 5381 5686 6013 6308Third-Party Sales price per GWh 0.06 0.04 0.03 0.02 0.02 0.02 0.02 0.02 0.02Total energy revenue 662 391 311 259 204 215 227 240 252Engergy segment growth -40.94% -20.38% -16.70% -21.17% 5.20% 5.67% 5.74% 4.91%

Rolled product:Total sales 993 1069 1170 1087 1049 1071 1105 1117 1146Third-party Alumiunm shipments(kmt) 266 354 282 262 253 258 266 269 276Third-party sales -32 -40 -32 -30 -29 -29 -30 -30 -31Depreciation, depletion, and amortization 23 23 18 17 16 17 17 17 18Aluminum Shipments (kmt) 266 354 451 419 404 413 426 431 442Rolled Products Price per metric ton 3733 3020 2594 2594 2594 2594 2594 2594 2594Rolled product segment growth -19.11% -14.09% -7.07% -3.54% 2.12% 3.14% 1.14% 2.56%

Total segment sales 18605 14813 19244 21235 23035 23900 24547 25102 25845Sales Growth -20.38% 29.92% 10.35% 8.47% 3.75% 2.71% 2.26% 2.96%

* Energy is defined by Alcoa as one major product.

Alcoa Corporation (AA)Balance Sheet

Fiscal Years Ending Dec. 31 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023EAssetsCurrent AssetsCash & cash equivalents 266 557 853 1358 1698 1794 1958 2033 2087 2136Receivables from customers 474 380 668 811 1014 1071 1169 1214 1247 1275Other receivables 238 124 166 232 290 307 334 347 357 365Inventories 1501 1172 1160 1453 1817 1920 2095 2175 2234 2285Prepaid expenses & other current assets 438 333 334 384 441 508 584 671 771 887Total current assets 2917 2566 3181 4238 5261 5599 6140 6440 6696 6948

Properties, plants, & equipment, gross 23708 21634 22052 23046 24085 25170 26305 27491 28730 30025Less: accumulated depreciation, depletion, & amortization 12942 12728 13225 13908 14528 15349 16749 17391 17859 18271Properties, plants, & equipment, net 11326 9390 9325 9138 9557 9822 9556 10100 10871 11753Goodwill 160 152 - - - - - - - -Investments 1777 1472 1358 1410 1448 1488 1528 1570 1612 1656Deferred income taxes 1065 589 741 814 -94 -99 -108 -113 -116 -118Fair value of derivative contracts 146 997 468 128 160 169 185 192 197 201Other noncurrent assets 1289 1247 1668 1719 2150 2271 2478 2573 2642 2703Total assets 18680 16413 16741 17447 18482 19249 19778 20762 21903 23144

LiabilitiesCurrent LiabilitiesAccounts payable, trade 1740 1379 1455 1898 2188 2424 2657 2911 3148 3367Accrued compensation & retirement costs 372 313 456 459 529 586 643 704 761 814Taxes, including income taxes 141 136 147 282 353 373 407 422 433 444Other current liabilities 453 558 742 412 515 544 594 617 633 648Long-term debt due within one year 29 18 21 16 18 22 26 25 29 19Total current liabilities 2735 2404 2821 3252 3603 3949 4326 4678 5005 5292

Long-term debt, less amount due within one year 313 207 1424 1388 1736 1834 2001 2078 2134 2183Accrued pension benefits 417 359 1851 2335 2102 1891 1702 1532 1379 1241Accrued other postretirement benefits 93 78 1166 1100 990 891 802 722 650 585Asset retirement obligations 572 539 604 617 772 815 890 924 948 970Environmental remediation 125 207 264 258 323 341 372 386 397 406Noncurrent income taxes 424 508 310 318 398 420 458 476 489 500Other noncurrent liabilities & deferred credits 928 598 604 279 349 369 402 418 429 439Total liabilities 5607 4900 9044 10652 10271 10510 10953 11213 11429 11615

EquityParent company net investment & Common equity 11915 11042 9531 9590 7258 7393 6906 7348 8045 8863Retained deficit - - -104 113 -749 -597 -264 -303 -445 -626Accumulated other comprehensive income (loss) -1316 -1600 -3775 -5185 -6484 -6850 -7475 -7762 -7970 -8154Total net parent investment and other comprehensive loss 10599 9442 5654 4520 5652 5972 6516 6766 6948 7109Noncontrolling interests 2474 2071 2043 2275 2533 2821 3141 3498 3895 4338Total equity 13073 11513 7697 6795 8211 8738 8825 9549 10474 11529Total liabilities and equity 18680 16413 16741 17447 18482 19249 19778 20762 21903 23144

Alcoa Corporation (AA)Income Statement

Fiscal Years Ending Dec. 31 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023ETotal sales 12573 13147 11199 9318 11652 12310 13434 13948 14323 14654 14858Cost of goods sold 11040 10548 9039 7898 9072 9585 10391 10740 10957 11137 11218Selling, general administrative, & other expenses 406 383 353 359 284 349 410 497 575 655 737Research & development expenses 86 95 69 33 32 39 46 56 65 74 83Provision for depreciation, depletion, & amortization 1026 954 780 718 750 701 698 673 730 786 641Impairment of goodwill 1731 - - - - - - - - - -Restructuring & other charges 712 863 983 318 309 342 361 393 410 425 439Interest expense 305 309 270 243 109 134 157 191 221 251 283Other expenses, net 14 58 42 -89 -58 -71 -84 -101 -117 -134 -150Total costs & expenses 15320 13210 11536 9480 10493 11079 11979 12448 12840 13195 13250Income (loss) before income taxes -2747 -63 -337 -162 1159 1232 1454 1501 1483 1459 1608Current income taxes 133 334 316 230 282 353 373 407 422 433 444Deferred income taxes -10 -50 86 -46 814 -94 -99 -108 -113 -116 -118Provision for income taxes 123 284 402 184 600 259 273 298 310 318 325Net income (loss) -2870 -347 -739 -346 559 973 1181 1203 1174 1141 1283Less: Net income (loss) attributable to noncontrolling interest -39 91 -124 -54 -342 -428 -452 -493 -512 -526 -538Net income (loss) attributable to Alcoa Upstream Corporation -2909 -256 -863 -400 217 545 729 709 662 616 745Basic EPS - (1.41) (4.74) (2.19) 1.18 2.96 3.94 3.81 3.56 3.29 3.96 Total share outstanding - 182 182 183 184 184 185 186 186 187 188

Alcoa Corporation (AA)Cash Flow Statement

Fiscal Years Ending Dec. 31 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023ENet income (loss) -2909 -256 -863 -400 217 545 729 709 662 616 745Depreciation, depletion, & amortization 1026 954 780 718 750 701 698 673 730 786 641Deferred income taxes -10 -50 86 -46 176 -94 -99 -108 -113 -116 -118Equity income, net of dividends 77 97 158 48 9 11 12 13 13 14 14Impairment of goodwill 1731 - - - - - - - - - -Restructuring & other charges 712 863 983 318 309 380 446 471 443 406 407Net gain from investing activities - asset sales -13 -34 -32 -164 -116 -123 -134 -139 -143 -146 -148Net period pension benefit cost 122 77 67 66 111 139 147 160 166 171 175Stock based compensation 33 39 35 28 24 30 32 35 36 37 38Other -26 15 41 -16 32 40 42 46 48 49 50Decrease (increase) in receivables -62 -91 130 -234 -118 -261 -74 -126 -58 -42 -37Decrease (increase) in inventories 36 -126 212 1 -238 -364 -103 -175 -80 -58 -52Decrease (increase) in prepaid expenses & other current assets -1 -21 58 -52 43 -57 -66 -76 -87 -100 -115(Decrease) increase in accounts payable, trade 219 110 -156 6 377 290 236 233 254 237 220(Decrease) in accrued expenses -393 -404 -311 -320 -563 70 57 56 61 57 53(Decrease) increase in taxes, including incomes taxes 96 -67 -32 -148 111 80 22 38 18 13 11Pension contributions -128 -154 -69 -66 -106 -133 -140 -153 -159 -163 -167(Increase) in noncurrent assets -185 -32 -356 -184 -99 -431 -121 -207 -95 -69 -61Increase in noncurrent liabilities 88 13 20 80 -39 70 20 34 15 11 10Net cash flows from operating activities 452 842 875 -311 1224 894 1704 1485 1712 1702 1666

Financing activitiesNet transfers from (to) parent company 561 -332 -34 802 - - - - - - -Cash provided at separation to parent company - - - -1072 -247 -309 -326 -356 -370 -380 -388Net change in short-term borrowings (original maturities of three months or less) 6 - - -4 7Additoons & Payments on debt (original maturities greater than three months) -40 -35 -24 -34 -60 -40 -65 -75 -49 -28 -34Proceeds from exercise of employee stock options - - - 10 43Contributions from noncontrolling interest 9 43 2 48 80 100 106 115 120 123 126Distributions to noncontrolling interest -107 -120 -106 -233 -342 -428 -452 -493 -512 -526 -538Net cash flows from financing activities 429 -444 -162 -483 -506 -676 -737 -809 -811 -810 -835

Investing activitiesCapital expenditures -567 -444 -391 -404 -405 -506 -535 -584 -606 -623 -637Proceeds from the sale of assets & businesses 8 223 70 112 245 306 324 353 367 377 385Additions to investments -242 -145 -63 -3 -66 -83 -87 -95 -99 -101 -104Sale of investments - 28 - 146 - -Net change in restricted cash - - - 1226 -Other -1 - - - -Net cash flows from investing activities -802 -338 -384 1077 -226 -283 -299 -326 -338 -347 -355

Effect of exchange rate changes on cash & cash equivalents -14 -7 -38 13 13 406 -572 -186 -488 -490 -427Net change in cash & cash equivalents 65 53 291 296 505 340 96 164 75 55 48Cash & cash equivalents at beginning of year 148 213 266 557 853 1358 1698 1794 1958 2033 2087Cash & cash equivalents at end of year 213 266 557 853 1358 1698 1794 1958 2033 2087 2136

Alcoa Corporation (AA)Common Size Income Statement

Fiscal Years Ending Dec. 31 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023ETotal sales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%Cost of goods sold 87.81% 80.23% 80.71% 84.76% 77.86% 77.86% 77.35% 77.00% 76.50% 76.00% 75.50%Selling, general administrative, & other expenses 3.23% 2.91% 3.15% 3.85% 2.44% 2.84% 3.05% 3.56% 4.01% 4.47% 4.96%Research & development expenses 0.68% 0.72% 0.62% 0.35% 0.27% 0.32% 0.34% 0.40% 0.45% 0.50% 0.56%Provision for depreciation, depletion, & amortization 8.16% 7.26% 6.96% 7.71% 6.44% 5.69% 5.20% 4.82% 5.10% 5.36% 4.31%Impairment of goodwill 13.77% - - - - - - - - - -Restructuring & other charges 5.66% 6.56% 8.78% 3.41% 2.65% 2.78% 2.69% 2.82% 2.86% 2.90% 2.95%Interest expense 2.43% 2.35% 2.41% 2.61% 0.94% 1.09% 1.17% 1.37% 1.54% 1.72% 1.90%Other expenses, net 0.11% 0.44% 0.38% -0.96% -0.50% -0.58% -0.62% -0.73% -0.82% -0.91% -1.01%Total costs & expenses 121.85% 100.48% 103.01% 101.74% 90.05% 89.99% 89.17% 89.24% 89.64% 90.04% 89.18%Income (loss) before income taxes -21.85% -0.48% -3.01% -1.74% 9.95% 10.01% 10.83% 10.76% 10.36% 9.96% 10.82%Current income taxes 1.06% 2.54% 2.82% 2.47% 2.42% 2.86% 2.77% 2.91% 2.95% 2.96% 2.98%Deferred income taxes -0.08% -0.38% 0.77% -0.49% 6.99% -0.76% -0.74% -0.78% -0.79% -0.79% -0.80%Provision for income taxes 0.98% 2.16% 3.59% 1.97% 5.15% 2.10% 2.03% 2.14% 2.16% 2.17% 2.19%Net income (loss) -22.83% -2.64% -6.60% -3.71% 4.80% 7.90% 8.79% 8.62% 8.19% 7.79% 8.64%Less: Net income (loss) attributable to noncontrolling interest -0.31% 0.69% -1.11% -0.58% -2.94% -3.47% -3.36% -3.53% -3.57% -3.59% -3.62%Net income (loss) attributable to Alcoa Upstream Corporation -23.14% -1.95% -7.71% -4.29% 0.00% 4.43% 5.43% 5.09% 4.62% 4.20% 5.02%

Alcoa Corporation (AA)Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023EAssetsCurrent AssetsCash & cash equivalents 2.02% 4.97% 9.15% 11.65% 13.79% 13.36% 14.04% 14.19% 14.24% 14.37%Receivables from customers 3.61% 3.39% 7.17% 6.96% 8.24% 7.98% 8.38% 8.48% 8.51% 8.58%Other receivables 1.81% 1.11% 1.78% 1.99% 2.36% 2.28% 2.40% 2.42% 2.43% 2.46%Inventories 11.42% 10.47% 12.45% 12.47% 14.76% 14.29% 15.02% 15.19% 15.24% 15.38%Prepaid expenses & other current assets 3.33% 2.97% 3.58% 3.30% 3.59% 3.78% 4.18% 4.68% 5.26% 5.97%Total current assets 22.19% 22.91% 34.14% 37.61% 42.73% 41.68% 44.02% 44.96% 45.69% 46.76%

Properties, plants, & equipment, gross 180.33% 193.18% 236.66% 197.79% 195.64% 187.37% 188.59% 191.93% 196.05% 202.07%Less: accumulated depreciation, depletion, & amortization 98.44% 113.65% 141.93% 119.36% 118.01% 114.26% 120.08% 121.42% 121.86% 122.97%Properties, plants, & equipment, net 86.15% 83.85% 100.08% 78.42% 77.63% 73.11% 68.51% 70.51% 74.18% 79.10%Goodwill 1.22% 1.36% - - - - - - - -Investments 13.52% 13.14% 14.57% 12.10% 11.77% 11.07% 10.96% 10.96% 11.00% 11.15%Deferred income taxes 8.10% 5.26% 7.95% 6.99% -0.76% -0.74% -0.78% -0.79% -0.79% -0.80%Fair value of derivative contracts 1.11% 8.90% 5.02% 1.10% 1.30% 1.26% 1.32% 1.34% 1.34% 1.35%Other noncurrent assets 9.80% 11.13% 17.90% 14.75% 17.46% 16.91% 17.77% 17.97% 18.03% 18.19%Total assets 142.09% 146.56% 179.66% 149.73% 150.13% 143.29% 141.80% 144.95% 149.46% 155.77%

LiabilitiesCurrent LiabilitiesAccounts payable, trade 13.23% 12.31% 15.61% 16.29% 17.77% 18.05% 19.05% 20.32% 21.48% 22.66%Accrued compensation & retirement costs 2.83% 2.79% 4.89% 3.94% 4.30% 4.36% 4.61% 4.91% 5.19% 5.48%Taxes, including income taxes 1.07% 1.21% 1.58% 2.42% 2.86% 2.77% 2.91% 2.95% 2.96% 2.98%Other current liabilities 3.45% 4.98% 7.96% 3.54% 4.19% 4.05% 4.26% 4.31% 4.32% 4.36%Long-term debt due within one year 0.22% 0.16% 0.23% 0.14% 0.15% 0.16% 0.19% 0.17% 0.20% 0.13%Total current liabilities 20.80% 21.47% 30.27% 27.91% 29.27% 29.40% 31.02% 32.66% 34.15% 35.62%

Long-term debt, less amount due within one year 2.38% 1.85% 15.28% 11.91% 14.10% 13.65% 14.35% 14.51% 14.56% 14.69%Accrued pension benefits 3.17% 3.21% 19.86% 20.04% 17.07% 14.08% 12.20% 10.70% 9.41% 8.35%Accrued other postretirement benefits 0.71% 0.70% 12.51% 9.44% 8.04% 6.63% 5.75% 5.04% 4.43% 3.93%Asset retirement obligations 4.35% 4.81% 6.48% 5.30% 6.27% 6.07% 6.38% 6.45% 6.47% 6.53%Environmental remediation 0.95% 1.85% 2.83% 2.21% 2.62% 2.54% 2.67% 2.70% 2.71% 2.73%Noncurrent income taxes 3.23% 4.54% 3.33% 2.73% 3.23% 3.13% 3.29% 3.32% 3.34% 3.37%Other noncurrent liabilities & deferred credits 7.06% 5.34% 6.48% 2.39% 2.83% 2.74% 2.88% 2.92% 2.93% 2.95%Total liabilities 42.65% 43.75% 97.06% 91.42% 83.43% 78.24% 78.53% 78.29% 77.99% 78.17%

EquityParent company net investment & Common equity 90.63% 98.60% 102.31% 82.30% 58.96% 55.03% 49.51% 51.30% 54.90% 59.65%Retained deficit - - -1.12% 0.97% -6.08% -4.44% -1.89% -2.11% -3.04% -4.21%Accumulated other comprehensive income (loss) -10.01% -14.29% -40.51% -44.50% -52.67% -50.99% -53.59% -54.19% -54.39% -54.88%Total net parent investment and other comprehensive loss 80.62% 84.31% 60.68% 38.79% 45.91% 44.45% 46.72% 47.24% 47.41% 47.84%Noncontrolling interests 18.82% 18.49% 21.93% 19.52% 20.58% 21.00% 22.52% 24.42% 26.58% 29.19%Total equity 99.44% 102.80% 82.60% 58.32% 66.70% 65.05% 63.27% 66.66% 71.47% 77.59%Total liabilities and equity 142.09% 146.56% 179.66% 149.73% 150.13% 143.29% 141.80% 144.95% 149.46% 155.77%

Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015)

Operating Operating OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases2018 94 2017 101 2016 902019 72 2018 94 2017 982020 58 2019 73 2018 782021 47 2020 58 2019 622022 15 2021 47 2020 47Thereafter 21 Thereafter 15 Thereafter 74Total Minimum Payments 307 Total Minimum Payments 388 Total Minimum Payments 449Less: Interest 37 Less: Interest 48 Less: Interest 66PV of Minimum Payments 270 PV of Minimum Payments 340 PV of Minimum Payments 383

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

Pre-Tax Cost of Debt 5.07% Pre-Tax Cost of Debt 5.07% Pre-Tax Cost of Debt 5.07%Number Years Implied by Year 6 Payment 1.4 Number Years Implied by Year 6 Payment 1.0 Number Years Implied by Year 6 Payment 1.6

Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment1 94 89.5 1 101 96.1 1 90 85.72 72 65.2 2 94 85.1 2 98 88.83 58 50.0 3 73 62.9 3 78 67.24 47 38.6 4 58 47.6 4 62 50.95 15 11.7 5 47 36.7 5 47 36.76 & beyond 15 15.5 6 & beyond 15 11.1 6 & beyond 47 54.2PV of Minimum Payments 270.4 PV of Minimum Payments 339.6 PV of Minimum Payments 383.5

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

Operating OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases2015 205 2014 1982016 172 2015 1652017 131 2016 1352018 101 2017 1032019 79 2018 80Thereafter 765 Thereafter 244Total Minimum Payments 1453 Total Minimum Payments 925Less: Interest 382 Less: Interest 151PV of Minimum Payments 1071 PV of Minimum Payments 774

Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 5.07% Pre-Tax Cost of Debt 5.07%Number Years Implied by Year 6 Payment 9.7 Number Years Implied by Year 6 Payment 3.1

Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment1 205 195.1 1 198 188.42 172 155.8 2 165 149.53 131 112.9 3 135 116.44 101 82.9 4 103 84.55 79 61.7 5 80 62.56 & beyond 79 463.1 6 & beyond 80 172.5PV of Minimum Payments 1071.5 PV of Minimum Payments 773.8

Alcoa Corporation (AA)Key Management Ratios

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023EFormula

Liquidity RatiosCurrent Ratio CA/CL 1.07 1.13 1.30 1.46 1.42 1.42 1.38 1.34 1.31Quick Ratio ( Cash + Recievables ) / CL 0.44 0.60 0.74 0.83 0.80 0.80 0.77 0.74 0.71Cash Ratio Cash / CL 0.23 0.30 0.42 0.47 0.45 0.45 0.43 0.42 0.40

Activity or Asset-Management RatiosReceivables Turnover Sales / Receivables 22.22 11.17 11.17 9.44 9.75 9.28 9.17 9.14 9.06Days' Receivables 365 / Receivables Turnover 16.43 32.67 32.67 38.67 37.44 39.35 39.79 39.93 40.30Inventory Turnover ( COGS / Avg. inv.) 6.76 6.77 6.94 5.86 5.56 5.35 5.13 5.05 4.97Days' Inventory Turnover ( 365 / Inventory Turnover ) 53.97 53.89 52.57 62.26 65.63 68.21 71.12 72.24 73.51Asset Turnover ( Sales / Total Assets ) 0.68 0.56 0.67 0.67 0.70 0.71 0.69 0.67 0.64

Financial Leverage RatiosDebt-to-Equity Total Debt / Total Equity 2% 19% 21% 21% 21% 23% 22% 21% 19%Debt-to-Assets Total Debt / Total Assets 1% 9% 8% 9% 10% 10% 10% 10% 10%Equity Multiplier Total Assets / Total Equity 1.43 2.18 2.57 2.25 2.20 2.24 2.17 2.09 2.01

Profitability RatiosReturn on Assets Net Income / Total Assets -4.50% -2.07% 3.20% 5.26% 6.14% 6.08% 5.65% 5.21% 5.54%Return on Equity Net Income / Equity -7.50% -5.20% 3.19% 6.64% 8.35% 8.04% 6.93% 5.88% 6.46%Gross Profit Margin Sales-COGS / Sales 19.29% 15.24% 22.14% 22.14% 22.65% 23.00% 23.50% 24.00% 24.50%

Alcoa Corporation (AA)Value Driver Estimation

Fiscal Years Ending Dec. 31 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023ENOPLATNet Sales 12573 13147 11199 9318 11652 12310 13434 13948 14323 14654 14858 - COGS 11040 10548 9039 7898 9072 9585 10391 10740 10957 11137 11394 - Depreciation, depletion, & amortization 1026 954 780 718 750 701 698 673 730 786 641 - Selling, general administrative, & other expenses 406 383 353 359 284 349 410 497 575 655 737 - Research & development expenses 86 95 69 33 32 39 46 -56 65 74 83 + Implied Interest on Operating Leases 39 54 19 17 14 29 27 21 22 22 24EBITA 54 1221 977 327 1528 1665 1916 2116 2018 2024 2027

Less: Adjusted taxes (35% tax) (21% since 2017)Provision for Income Taxes 123 284 402 184 600 259 273 298 310 318 325Tax shield on restructuring and other charges 249 302 344 111 154 146 133 112 83 79 70Tax shield on interest expense 107 108 95 85 74 59 53 46 40 34 29Tax shield on operating lease interest 14 19 7 6 8 7 6 4 4 4 3Total Adjusted Taxes 493 713 847 386 836 471 465 460 436 435 427

Plus: Change in Deferred Tax (DT) LiabilitesDeffered income taxes -10 -50 86 -46 814 -94 -99 -108 -113 -116 -118change in deferred taxes 0 0 -476 152 860 -48 -5 -9 -4 -3 -3NOPLAT -438 508 -346 93 1552 1147 1445 1646 1577 1586 1597

Investment CapitalNormal Cash (2.02% of sales) 254 266 226 188 235 249 271 282 289 296 300Receivables from customers 474 380 668 811 1014 1071 1169 1214 1247 1275Other receivables 238 124 166 232 290 307 334 347 357 365Inventories 1501 1172 1160 1453 1817 1920 2095 2175 2234 2285Prepaid expenses & other current assets 438 333 334 384 441 508 584 671 771 887Operating current assets 2917 2235 2516 3115 3811 4077 4464 4697 4904 5112

Accounts payable, trade 1740 1379 1455 1898 2188 2424 2657 2911 3148 3367Accrued compensation & retirement costs 372 313 456 459 529 586 643 704 761 814Taxes, including income taxes 141 136 147 282 347 407 493 571 651 732Other current liabilities 453 558 742 412 506 594 720 834 951 1069Operating current liabilities 2706 2386 2800 3051 3570 4011 4513 5020 5510 5982

Operating Working Capital 182 162 360 250 246 262 288 269 274 282Properties, plants, & equipment, net 11326 9390 9325 9138 9557 9822 9556 10100 10871 11753Present value of operating leases 378 314 376 270 282 354 327 361 358 377Other noncurrent assets 1289 1247 1668 1719 2150 2271 2478 2573 2642 2703 - Other noncurrent liabilities & deferred credits 928 598 604 279 620 541 526 506 565 551Total invested Capital 12247 10515 11125 11098 11614 12168 12122 12797 13581 14565

NOPLAT 508 -346 93 1552 1147 1445 1646 1577 1586 1597/Beg. Invested Capital N.A 12247 10515 11125 11125 11614 12168 12122 12797 13581ROIC N.A -2.82% 0.88% 0.00% 10.31% 12.44% 13.53% 13.01% 12.40% 11.76%

Beg. Invested Capital N.A 12247 10515 11125 11125 11614 12168 12122 12797 13581*Spread ( ROIC - WACC ) N.A -8.80% -5.09% -5.97% 4.33% 6.47% 7.56% 7.04% 6.42% 5.79%EP N.A -1077 -535 -664 482 751 919 853 822 786

NOPLAT 508 -346 93 1552 1147 1445 1646 1577 1586 1597 - CapEx (change in IC) N.A -1732 610 -27 516 553 -45 674 784 984FCF N.A 1386 -517 1579 630 892 1692 903 802 613

Alcoa CorporationWeighted Average Cost of Capital (WACC) Estimation

Cost of Equ(CAPM)2.48%4.65%4.18%

0.896.20%

7.80%21%

6.16%

185.244.96$

8,326.59$

1,404 16 345

1,765

8,372$ 82.92%17.08%

6.20%6.16%

82.92%17.08%

5.97%

Cost of EquityCost of DebtWeight of EquityWeight of DebtWACC

Total Market ValueWeight of EquityWeight of debt

WACC

Long-Term DebtCurrent Portion of Long-Term DebtPv of Operating LeasesBook Value of Debt(Approx.MV)

WeightsTotal Common Share OutstandingCommon Share PriceValue of equity

Cost of DebtPre-Tax Cost of DebtMarginal Tax RateAfter-Tax Cost of Debt

Risk-Free RateEquity Market ReturnMarket Risk premiumBetaCost of Equity

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

Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E 2022E 2023CV

EPS 2.96 3.94 3.81 3.56 3.29 3.96

Key AssumptionsCV Growth 0.69%CV ROE 7.11%Cost of Equity 6.20%

Future Cash FlowsP/E Multiple (CV Year) 18.51EPS (CV Year) 1.39Future Stock Price 72.18$

Discount Period 1 2 3 4 5 5Dividend Per Share 2.96 3.94 3.81 3.56 3.29 3.96CF to Discount 0.24 0.25 0.26 0.26 0.27 71.94145638PV of Cash Flows 0.23 0.25 0.26 0.26 0.27 53.25

Intrinsic Value 54.52$

Stock Price as of 12/31/17 54.52Model Date 4/16/2018Next FYE 12/31/2018Last FYE 12/31/2017Days in FY 365.00Days to FYE 106R*e (Cost of Equity) 6.48%Elapsed Fraction 0.29Adjusted Target Price 55.55$

Alcoa CorporationDiscounted Cash Flow (DCF) and Economic Profit (EP) Valuation ModelsScale: (in Millions)

Key Inputs: CV Growth noplat 0.69% CV ROIC 11.76% WACC 5.97% Cost of Equity 6.20%

Fiscal Years Ending Dec. 31 2018E 2019 E 2020E 2021E 2022E 2023CV

DCF ModelDiscount Period 1 2 3 4 5 5NOPLAT 93 1552 1147 1445 1646 1577FCF 630 892 1692 903 802 613Continuing Value 28111Cash Flows to Discount 511 919 1504 903 738 18963PV of Free Cash Flows 482 818 1264 716 552 14189

PV of Operating Assets 18,021 Excess Cash 271.6Fair Value of Derivative Contracts 160Investments 1448Plus, Value of Non-Operating Assets: 1879.6

Value of Non-Equity Claims:Current portion of long-term debt 16Long-term debt 1404ESOP 62PV Operating Leases 345Accrued pension benefits 2335Accrued other postretirement benefits 1100Other Non

‐

Current Liabilities 279Asset retirement obligations 772Environmental remediation 323Noncontroling interest 1020Minus, Value of Non-Equity Claims 7656

Value of Equity 12,245 Shares Outstanding 185.2Intrinsic Value of Alcoa 12/29/17 66.12 Adjusted Target Price 67.38

EP ModeDiscount Period 1 2 3 4 5 5NOPLAT 93 1552 1147 1445 1646 1577Begin IC 10515 11125 11125 11614 12168 12122Economic Profit 482 751 919 853 822 786Continuing Value 15031roic 0.88% 0.00% 10.31% 12.44% 13.53% 13.01%Cash Flows to Discount 123 377 437 480 432 7305PV of Cash Flows 116 336 367 377 320 5407

PV of Economic Profit 6923Initial Invested Capital 11098PV of Operating Assets 18021

Excess Cash 271.6Fair Value of Derivative Contracts 160Investments 1448Plus, Value of Non-Operating Assets: 1879.6

Value of Non-Equity Claims:Current portion of long-term debt 16Long-term debt 1404ESOP 62PV Operating Leases 345Accrued pension benefits 2335Accrued other postretirement benefits 1100Other Non

‐

Current Liabilities 279Asset retirement obligations 772Environmental remediation 323Noncontroling interest 1020Minus, Value of Non-Equity Claims 7656

Value of Equity 12,245 Shares Outstanding 185.2Intrinsic Value of Alcoa 12/29/17 66.12

Stock Price as of 12/29/17 53.87US$ Model Date 4/16/2018Next FYE 12/31/2018Last FYE 12/29/2017Days in FY 365.00Days to FYE 108R*e (Cost of Equity) 6.48%Elapsed Fraction 0.30Adjusted Target Price 67.38$

Alcoa CorporationRelative Valuation Models

EPS EPSTicker Company Price 2018E 2019E P/E 18 P/E 19NEM Newmont Mining Corporation $39.07 $0.26 $0.26 152.02 148.56 GG Goldcorp Inc. $13.82 $0.78 $0.80 17.71 17.24 TECK Teck Resources Limite $25.76 $4.57 $4.70 5.64 5.49 ABX Barrick Gold Corporation $12.45 $1.26 $1.30 9.86 9.59 FPMB.TI Freeport-Mcmoran $14.65 $1.28 $1.32 11.41 11.11 RIO Rio Tinto plc $51.53 $5.04 $5.17 10.23 9.96 VALE Vale S.A. $12.72 $1.39 $1.42 9.17 8.93 BHP BHP Billiton Limited $44.43 $1.13 $1.16 39.18 38.14

Average 16.26 15.83

AA Alcoa $44.96 $1.21 $1.25 37.2 36.0

Implied Relative Value: P/E (EPS18) $ 19.67 P/E (EPS19) 19.79$

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol AACurrent Stock Price $44.96Risk Free Rate 2.74%Current Dividend Yield 0.00%Annualized St. Dev. of Stock Returns 3.15%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 2687107 25.48 5.82 23.24$ 62,437,140$ Total 2687107 25.48$ 5.82 23.24$ 62,437,140$

2,687,1075.82

461,702

$25.488.93%

$55.03

2018E 2019E 2020E 2021E 2022E 2023E461,702 461,702 461,702 461,702 461,702 461,702

25.48$ 25.49$ 25.49$ 25.49$ 25.49$ 25.49$ 11,764,173 11,768,790 11,768,790 11,768,790 11,768,790 11,768,790

0 0 0 0 0 044.12$ 48.65$ 51.91$ 57.10$ 62.01$ 63.15$ - - - - - -

50,000,000 50,461,702 50,923,404 51,385,107 51,846,809 52,308,511461,702 461,702 461,702 461,702 461,702 461,702

- - - - - -50,461,702 50,923,404 51,385,107 51,846,809 52,308,511 52,770,213

Number of Shares Repurchased:

Shares Outstanding (beginning of the year)Plus: Shares Issued Through ESOLess: Shares Repurchased in TreasuryShares Outstanding (end of the year)

Current Stock Price:

Increase in Shares Outstanding:Average Strike Price:Increase in Common Stock Account:

Change in Treasury StockExpected Price of Repurchased Shares:

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

Number of Options Outstanding (shares):Average Time to Maturity (years):Expected Annual Number of Options Exercised

Current Average Strike Price:Cost of Equity:

Beta66.12$ 0.50 0.60 0.70 0.80 0.90 1.00 1.104.50% 95.77 84.96 75.83 68.02 61.25 55.34 50.134.55% 95.12 84.31 75.18 67.38 60.63 54.73 49.544.60% 94.47 83.66 74.54 66.74 60.01 54.13 48.95

Risk Premium 4.65% 93.84 83.02 73.90 66.12 59.40 53.53 48.374.70% 93.20 82.38 73.27 65.50 58.80 52.95 47.804.75% 92.58 81.75 72.65 64.89 58.20 52.37 47.244.80% 91.96 81.13 72.04 64.29 57.61 51.80 46.69

NOPLAT CV Growth66.12$ 0.39% 0.49% 0.59% 0.69% 0.79% 0.89% 0.99%8.76% 63.09 63.53 64.00 64.48 64.98 65.50 66.049.76% 63.44 63.98 64.55 65.14 65.75 66.38 67.04

10.76% 63.73 64.35 65.00 65.67 66.37 67.10 67.85ROIC CV 11.76% 63.96 64.65 65.37 66.12 66.89 67.69 68.53

12.76% 64.16 64.91 65.68 66.49 67.32 68.19 69.1013.76% 64.33 65.13 65.95 66.81 67.70 68.62 69.5814.76% 64.48 65.32 66.19 67.09 68.02 68.99 70.00

Marginal Tax Rate66.12$ 12% 15% 18% 21% 24% 27% 30%1.58% 99.50 99.31 99.12 98.93 98.61 98.29 97.961.88% 87.72 87.51 87.36 87.16 86.88 86.59 86.232.18% 77.50 77.26 77.02 76.80 76.52 76.24 75.98

Risk Free Rate 2.48% 66.78 66.52 66.31 66.12 65.98 65.74 65.512.78% 60.45 60.21 59.99 59.78 59.57 59.31 59.033.08% 52.73 52.52 52.30 52.14 51.97 51.65 51.283.38% 50.02 48.83 48.61 48.46 48.16 47.89 47.53

WACC66.12$ 2.97% 3.97% 4.97% 5.97% 6.97% 7.97% 8.97%0.39% 177.40 118.46 85.28 64.01 49.21 38.33 29.990.49% 183.20 120.98 86.55 64.70 49.60 38.55 30.110.59% 189.48 123.64 87.88 65.42 50.01 38.78 30.23

CV Growth Rate 0.69% 196.32 126.47 89.26 66.12 50.42 39.01 30.360.79% 203.79 129.47 90.72 66.94 50.85 39.25 30.490.89% 211.97 132.67 92.25 67.74 51.30 39.50 30.630.99% 220.98 136.08 93.85 68.58 51.76 39.76 30.77

Risk Free Rate66.12$ 1.58% 1.88% 2.18% 2.48% 2.78% 3.08% 3.38%4.50% 75.94 78.18 81.64 84.51 86.78 89.46 92.184.55% 69.48 72.94 75.46 78.34 81.45 84.51 87.654.60% 63.78 66.48 69.64 72.06 75.15 78.19 81.64

Risk Premium 4.65% 56.97 60.46 63.45 66.12 69.24 72.16 74.994.70% 50.34 53.97 56.48 59.98 62.49 65.37 68.464.75% 42.49 45.15 48.16 51.64 54.88 58.01 61.454.80% 36.66 39..57 42.76 45.76 48.15 51.42 54.84