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# Marathon Oil Corp. (MRO) | 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)

Marathon Oil Corp., 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 %
01 FCFF0
1 FCFF1 = × (1 + %)
2 FCFF2 = × (1 + %)
3 FCFF3 = × (1 + %)
4 FCFF4 = × (1 + %)
5 FCFF5 = × (1 + %)
5 Terminal value (TV5) = × (1 + %) ÷ (% – %)
Intrinsic value of 's capital
Less: Long-term debt, including current portion (fair value)
Intrinsic value of 's common stock

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

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)

Marathon Oil Corp., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) %
Long-term debt, including current portion (fair value) % = % × (1 – %)

1 USD \$ in millions

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

WACC = %

## FCFF Growth Rate (g)

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

Marathon Oil Corp., PRAT model

Average Dec 31, 2011 Dec 31, 2010 Dec 31, 2009 Dec 31, 2008 Dec 31, 2007
Selected Financial Data (USD \$ in millions)
Provision for income taxes
Net income
Tax rate1   % % % % %

Interest expense, less income (loss) on interest rate swaps and interest capitalized
Interest expense, less income (loss) on interest rate swaps and interest capitalized, after tax2
Interest expense (after tax) and dividends

EBIT(1 – Tax Rate)3

Long-term debt due within one year
Long-term debt, excluding due within one year
Equity of Marathon Oil's stockholders
Total capital
Ratios
Retention rate (RR)4
Return on invested capital (ROIC)5   % % % % %
Averages
RR
ROIC %

Growth rate of FCFF (g)6 %

2011 Calculations

1 Tax rate = 100 × Provision for income taxes ÷ (Net income + Provision for income taxes)
= 100 × ÷ ( + ) = %

2 Interest expense, less income (loss) on interest rate swaps and interest capitalized, after tax = Interest expense, less income (loss) on interest rate swaps and interest capitalized × (1 – Tax rate)
= × (1 – %) =

3 EBIT(1 – Tax Rate) = Net income + Interest expense, less income (loss) on interest rate swaps and interest capitalized, after tax
= + =

4 RR = [EBIT(1 – Tax Rate) – Interest expense (after tax) and dividends] ÷ EBIT(1 – Tax Rate)
= [] ÷ =

5 ROIC = 100 × EBIT(1 – Tax Rate) ÷ Total capital
= 100 × ÷ = %

6 g = RR × ROIC
= × % = %

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × ( × % – ) ÷ ( + ) = %

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

Marathon Oil Corp., H-model

Year Value gt
1 g1 %
2 g2 %
3 g3 %
4 g4 %
5 and thereafter g5 %

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)
= % + (% – %) × (2 – 1) ÷ (5 – 1) = %

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

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