Present Value of Free Cash Flow to Equity (FCFE)

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company's asset base.


Intrinsic Stock Value (Valuation Summery)

Coca-Cola Co., free cash flow to equity (FCFE) forecast

USD $ in millions, except per share data

 
Year Value FCFEt or Terminal value (TVt) Calculation Present value at 7.78%
01 FCFE0 12,814 
1 FCFE1 14,601  = 12,814 × (1 + 13.95%) 13,548 
2 FCFE2 16,170  = 14,601 × (1 + 10.74%) 13,920 
3 FCFE3 17,388  = 16,170 × (1 + 7.54%) 13,889 
4 FCFE4 18,142  = 17,388 × (1 + 4.33%) 13,446 
5 FCFE5 18,346  = 18,142 × (1 + 1.13%) 12,616 
5 Terminal value (TV5) 279,068  = 18,346 × (1 + 1.13%) ÷ (7.78% – 1.13%) 191,905 
Intrinsic value of Coca-Cola's common stock 259,324 
Intrinsic value of Coca-Cola's common stock (per share) $59.20
Current share price $44.50

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

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Required Rate of Return (r)

 
Assumptions
Rate of return on LT Treasury Composite1 RF 2.80%
Expected rate of return on market portfolio2 E(RM) 13.45%
Systematic risk (β) of Coca-Cola's common stock βKO 0.47
Required rate of return on Coca-Cola's common stock3 rKO 7.78%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

Calculations

2 See Details »

3 rKO = RF + βKO [E(RM) – RF]
= 2.80% + 0.47 [13.45% – 2.80%]
= 7.78%

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FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Coca-Cola Co., PRAT model

 
Average Dec 31, 2013 Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009
Selected Financial Data (USD $ in millions)
Dividends 4,969  4,595  4,300  4,068  3,800 
Net income attributable to shareowners of The Coca-Cola Company 8,584  9,019  8,572  11,809  6,824 
Net operating revenues 46,854  48,017  46,542  35,119  30,990 
Total assets 90,055  86,174  79,974  72,921  48,671 
Equity attributable to shareowners of The Coca-Cola Company 33,173  32,790  31,635  31,003  24,799 
Ratios
Retention rate1 0.42 0.49 0.50 0.66 0.44
Profit margin2 18.32% 18.78% 18.42% 33.63% 22.02%
Asset turnover3 0.52 0.56 0.58 0.48 0.64
Financial leverage4 2.71 2.63 2.53 2.35 1.96
Averages
Retention rate 0.46
Profit margin 22.23%
Asset turnover 0.56
Financial leverage 2.44
Growth rate of FCFE (g)5 13.95%

2013 Calculations

1 Retention rate = (Net income attributable to shareowners of The Coca-Cola Company – Dividends) ÷ Net income attributable to shareowners of The Coca-Cola Company
= (8,584 – 4,969) ÷ 8,584 = 0.42

2 Profit margin = 100 × Net income attributable to shareowners of The Coca-Cola Company ÷ Net operating revenues
= 100 × 8,584 ÷ 46,854 = 18.32%

3 Asset turnover = Net operating revenues ÷ Total assets
= 46,854 ÷ 90,055 = 0.52

4 Financial leverage = Total assets ÷ Equity attributable to shareowners of The Coca-Cola Company
= 90,055 ÷ 33,173 = 2.71

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.46 × 22.23% × 0.56 × 2.44 = 13.95%

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FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (194,915 × 7.78% – 12,814) ÷ (194,915 + 12,814) = 1.13%

where:
Equity market value0 = current market value of Coca-Cola's common stock (USD $ in millions)
FCFE0 = last year Coca-Cola's free cash flow to equity (USD $ in millions)
r = required rate of return on Coca-Cola's common stock

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FCFE growth rate (g) forecast

Coca-Cola Co., H-model

 
Year Value gt
1 g1 13.95%
2 g2 10.74%
3 g3 7.54%
4 g4 4.33%
5 and thereafter g5 1.13%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 13.95% + (1.13% – 13.95%) × (2 – 1) ÷ (5 – 1) = 10.74%

g2 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 13.95% + (1.13% – 13.95%) × (3 – 1) ÷ (5 – 1) = 7.54%

g2 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 13.95% + (1.13% – 13.95%) × (4 – 1) ÷ (5 – 1) = 4.33%

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