# Home Depot Inc. (HD) | Present Value of Free Cash Flow to the Firm (FCFF)

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 Summery)

Home Depot Inc., free cash flow to the firm (FCFF) forecast

USD \$ in millions, except per share data

Year Value FCFFt or Terminal value (TVt) Calculation Present value at 8.61%
01 FCFF0 6,002
1 FCFF1 6,374  = 6,002  × (1 + 6.19%) 5,869
2 FCFF2 6,729  = 6,374  × (1 + 5.57%) 5,704
3 FCFF3 7,061  = 6,729  × (1 + 4.95%) 5,511
4 FCFF4 7,367  = 7,061  × (1 + 4.32%) 5,294
5 FCFF5 7,640  = 7,367  × (1 + 3.70%) 5,055
5 Terminal value (TV5) 161,479  = 7,640  × (1 + 3.70%) ÷ (8.61% – 3.70%) 106,845
Intrinsic value of 's capital 134,278
Less: Debt (fair value) 12,698
Intrinsic value of 's common stock 121,580

Intrinsic value of 's common stock (per share) \$81.84
Current share price \$76.86

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.

## Weighted Average Cost of Capital (WACC)

Home Depot Inc., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 114,177  0.90 9.18%
Debt (fair value) 12,698  0.10 3.46% = 5.40% × (1 – 35.88%)

1 USD \$ in millions

2 Required rate of return on debt is after tax (estimated effective tax rate is 35.88%)

WACC = 8.61%

## FCFF Growth Rate (g)

### FCFF growth rate (g) implied by PRAT model

Home Depot Inc., PRAT model

Average Feb 3, 2013 Jan 29, 2012 Jan 30, 2011 Jan 31, 2010 Feb 1, 2009 Feb 3, 2008
Selected Financial Data (USD \$ in millions)
Provision for income taxes   2,686  2,185  1,935  1,362  1,278  2,410
Net earnings   4,535  3,883  3,338  2,661  2,260  4,395
Tax rate1   37.20% 36.01% 36.70% 33.86% 36.12% 35.42%

Interest expense   632  606  530  676  624  696
Interest expense, after tax2   397  388  336  447  399  450
Add: Cash dividends   1,743  1,632  1,569  1,525  1,521  1,709
Interest expense (after tax) and dividends   2,140  2,020  1,905  1,972  1,920  2,159

EBIT(1 – Tax Rate)3   4,932  4,271  3,674  3,108  2,659  4,845

Short-term debt   1,747
Current installments of long-term debt   1,321  30  1,042  1,020  1,767  300
Long-term debt, excluding current installments   9,475  10,758  8,707  8,662  9,667  11,383
Stockholders’ equity   17,777  17,898  18,889  19,393  17,777  17,714
Total capital   28,573  28,686  28,638  29,075  29,211  31,144
Ratios
Retention rate (RR)4   0.57 0.53 0.48 0.37 0.28 0.55
Return on invested capital (ROIC)5   17.26% 14.89% 12.83% 10.69% 9.10% 15.56%
Averages
RR 0.46
ROIC 13.39%

Growth rate of FCFF (g)6 6.19%

2013 Calculations

1 Tax rate = 100 × Provision for income taxes ÷ (Net earnings + Provision for income taxes)
= 100 × 2,686 ÷ (4,535 + 2,686) = 37.20%

2 Interest expense, after tax = Interest expense × (1 – Tax rate)
= 632 × (1 – 37.20%) = 397

3 EBIT(1 – Tax Rate) = Net earnings + Interest expense, after tax
= 4,535 + 397 = 4,932

4 RR = [EBIT(1 – Tax Rate) – Interest expense (after tax) and dividends] ÷ EBIT(1 – Tax Rate)
= [4,932 – 2,140] ÷ 4,932 = 0.57

5 ROIC = 100 × EBIT(1 – Tax Rate) ÷ Total capital
= 100 × 4,932 ÷ 28,573 = 17.26%

6 g = RR × ROIC
= 0.46 × 13.39% = 6.19%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (126,875 × 8.61% – 6,002) ÷ (126,875 + 6,002) = 3.70%

where:
Total capital, fair value0 = current fair value of 's debt and equity (USD \$ in millions)
FCFF0 = last year 's free cash flow to the firm (USD \$ in millions)
WACC = weighted average cost of 's capital

### FCFF growth rate (g) forecast

Home Depot Inc., H-model

Year Value gt
1 g1 6.19%
2 g2 5.57%
3 g3 4.95%
4 g4 4.32%
5 and thereafter g5 3.70%

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)
= 6.19% + (3.70% – 6.19%) × (2 – 1) ÷ (5 – 1) = 5.57%

g2 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 6.19% + (3.70% – 6.19%) × (3 – 1) ÷ (5 – 1) = 4.95%

g2 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 6.19% + (3.70% – 6.19%) × (4 – 1) ÷ (5 – 1) = 4.32%