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 the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

Intrinsic Stock Value (Valuation Summary)
Weighted Average Cost of Capital (WACC)
FCFF Growth Rate (g)

EMC Corp., free cash flow to the firm (FCFF) forecast

US$ in millions, except per share data

Year	Value	FCFF_t or Terminal value (TV_t)	Calculation	Present value at 16.25%
0¹	FCFF₀	4,021
1	FCFF₁	4,337	= 4,021 × (1 + 7.86%)	3,731
2	FCFF₂	4,692	= 4,337 × (1 + 8.19%)	3,472
3	FCFF₃	5,092	= 4,692 × (1 + 8.52%)	3,241
4	FCFF₄	5,542	= 5,092 × (1 + 8.84%)	3,034
5	FCFF₅	6,051	= 5,542 × (1 + 9.17%)	2,849
5	Terminal value (TV₅)	93,248	= 6,051 × (1 + 9.17%) ÷ (16.25% – 9.17%)	43,914
Intrinsic value of EMC Corp. capital				60,242
Less: Debt (fair value)				6,298
Intrinsic value of EMC Corp. common stock				53,944

Intrinsic value of EMC Corp. common stock (per share)				$27.57
Current share price				$28.45

Based on: 10-K (reporting date: 2015-12-31).

¹ See details »

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.

EMC Corp., cost of capital

	Value¹	Weight	Required rate of return²	Calculation
Equity (fair value)	55,672	0.90	17.89%
Debt (fair value)	6,298	0.10	1.82%	= 2.34% × (1 – 22.30%)

Based on: 10-K (reporting date: 2015-12-31).

¹ US$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 1,956,842,060 × $28.45
= $55,672,156,607.00

Debt (fair value). See details »

² Required rate of return on equity is estimated by using CAPM. See details »

Required rate of return on debt. See details »

Required rate of return on debt is after tax.

Estimated (average) effective income tax rate
= (24.60% + 23.10% + 20.00% + 24.10% + 19.70%) ÷ 5
= 22.30%

WACC = 16.25%

FCFF growth rate (g) implied by PRAT model

EMC Corp., PRAT model

	Average	Dec 31, 2015	Dec 31, 2014	Dec 31, 2013	Dec 31, 2012	Dec 31, 2011
Selected Financial Data (US$ in millions)
Interest expense		164)	147)	156)	79)	170)
Net income attributable to EMC Corporation		1,990)	2,714)	2,889)	2,733)	2,461)

Effective income tax rate (EITR)¹		24.60%	23.10%	20.00%	24.10%	19.70%

Interest expense, after tax²		124)	113)	125)	60)	137)
Add: Cash dividends declared		909)	919)	628)	—)	—)
Interest expense (after tax) and dividends		1,033)	1,032)	753)	60)	137)

EBIT(1 – EITR)³		2,114)	2,827)	3,014)	2,793)	2,598)

Notes converted and payable		—)	—)	1,665)	—)	1,700)
Short-term debt		1,299)	—)	—)	—)	—)
Current portion of convertible debt		—)	—)	—)	1,652)	1,605)
Long-term debt		5,475)	5,495)	5,494)	—)	—)
Total EMC Corporation’s shareholders’ equity		21,140)	21,896)	22,301)	22,357)	18,959)
Total capital		27,914)	27,391)	29,460)	24,010)	22,264)
Financial Ratios
Retention rate (RR)⁴		0.51	0.63	0.75	0.98	0.95
Return on invested capital (ROIC)⁵		7.57%	10.32%	10.23%	11.63%	11.67%
Averages
RR	0.76
ROIC	10.28%

FCFF growth rate (g)⁶	7.86%

Based on: 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31), 10-K (reporting date: 2011-12-31).

¹ See details »

2015 Calculations

² Interest expense, after tax = Interest expense × (1 – EITR)
= 164 × (1 – 24.60%)
= 124

³ EBIT(1 – EITR) = Net income attributable to EMC Corporation + Interest expense, after tax
= 1,990 + 124
= 2,114

⁴ RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [2,114 – 1,033] ÷ 2,114
= 0.51

⁵ ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 2,114 ÷ 27,914
= 7.57%

⁶ g = RR × ROIC
= 0.76 × 10.28%
= 7.86%

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

g = 100 × (Total capital, fair value₀ × WACC – FCFF₀) ÷ (Total capital, fair value₀ + FCFF₀)
= 100 × (61,970 × 16.25% – 4,021) ÷ (61,970 + 4,021)
= 9.17%

where:

Total capital, fair value₀ = current fair value of EMC Corp. debt and equity (US$ in millions)
FCFF₀ = the last year EMC Corp. free cash flow to the firm (US$ in millions)
WACC = weighted average cost of EMC Corp. capital

FCFF growth rate (g) forecast

EMC Corp., H-model

Year	Value	g_t
1	g₁	7.86%
2	g₂	8.19%
3	g₃	8.52%
4	g₄	8.84%
5 and thereafter	g₅	9.17%

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 + (g₅ – g₁) × (2 – 1) ÷ (5 – 1)
= 7.86% + (9.17% – 7.86%) × (2 – 1) ÷ (5 – 1)
= 8.19%

g₃ = g₁ + (g₅ – g₁) × (3 – 1) ÷ (5 – 1)
= 7.86% + (9.17% – 7.86%) × (3 – 1) ÷ (5 – 1)
= 8.52%

g₄ = g₁ + (g₅ – g₁) × (4 – 1) ÷ (5 – 1)
= 7.86% + (9.17% – 7.86%) × (4 – 1) ÷ (5 – 1)
= 8.84%

EMC Corp. (NYSE:EMC)

Present Value of Free Cash Flow to the Firm (FCFF)

Intrinsic Stock Value (Valuation Summary)

Weighted Average Cost of Capital (WACC)

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

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

FCFF growth rate (g) forecast