# Johnson & Johnson (JNJ) | 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)

Johnson & Johnson, 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 7.66%
01 FCFE0 10,305
1 FCFE1 11,447  = 10,305 × (1 + 11.08%) 10,632
2 FCFE2 12,494  = 11,447 × (1 + 9.15%) 10,779
3 FCFE3 13,395  = 12,494 × (1 + 7.22%) 10,735
4 FCFE4 14,103  = 13,395 × (1 + 5.28%) 10,498
5 FCFE5 14,576  = 14,103 × (1 + 3.35%) 10,078
5 Terminal value (TV5) 349,748  = 14,576 × (1 + 3.35%) ÷ (7.66% – 3.35%) 241,821
Intrinsic value of 's common stock 294,542

Intrinsic value of 's common stock (per share) \$105.37
Current share price \$88.46

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.

## Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.82% Expected rate of return on market portfolio2 E(RM) 13.10% Systematic risk (β) of 's common stock βJNJ 0.47 Required rate of return on 's common stock3 rJNJ 7.66%

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

3 rJNJ = RF + βJNJ [E(RM) – RF]
= 2.82% + 0.47 [13.10% – 2.82%]
= 7.66%

## FCFE Growth Rate (g)

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

Johnson & Johnson, PRAT model

Average Dec 30, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009 Dec 31, 2008
Selected Financial Data (USD \$ in millions)
Cash dividends paid   6,614  6,156  5,804  5,327  5,024
Net earnings attributable to Johnson & Johnson   10,853  9,672  13,334  12,266  12,949
Sales to customers   67,224  65,030  61,587  61,897  63,747
Total assets   121,347  113,644  102,908  94,682  84,912
Shareholders’ equity   64,826  57,080  56,579  50,588  42,511
Ratios
Retention rate1   0.39 0.36 0.56 0.57 0.61
Profit margin2   16.14% 14.87% 21.65% 19.82% 20.31%
Asset turnover3   0.55 0.57 0.60 0.65 0.75
Financial leverage4   1.87 1.99 1.82 1.87 2.00
Averages
Retention rate 0.50
Profit margin 18.56%
Asset turnover 0.63
Financial leverage 1.91

Growth rate of FCFE (g)5 11.08%

2012 Calculations

1 Retention rate = (Net earnings attributable to Johnson & Johnson – Cash dividends paid) ÷ Net earnings attributable to Johnson & Johnson
= (10,853 – 6,614) ÷ 10,853 = 0.39

2 Profit margin = 100 × Net earnings attributable to Johnson & Johnson ÷ Sales to customers
= 100 × 10,853 ÷ 67,224 = 16.14%

3 Asset turnover = Sales to customers ÷ Total assets
= 67,224 ÷ 121,347 = 0.55

4 Financial leverage = Total assets ÷ Shareholders’ equity
= 121,347 ÷ 64,826 = 1.87

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.50 × 18.56% × 0.63 × 1.91 = 11.08%

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (247,274 × 7.66% – 10,305) ÷ (247,274 + 10,305) = 3.35%

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

### FCFE growth rate (g) forecast

Johnson & Johnson, H-model

Year Value gt
1 g1 11.08%
2 g2 9.15%
3 g3 7.22%
4 g4 5.28%
5 and thereafter g5 3.35%

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)
= 11.08% + (3.35% – 11.08%) × (2 – 1) ÷ (5 – 1) = 9.15%

g2 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 11.08% + (3.35% – 11.08%) × (3 – 1) ÷ (5 – 1) = 7.22%

g2 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 11.08% + (3.35% – 11.08%) × (4 – 1) ÷ (5 – 1) = 5.28%