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)

McKesson 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 9.66%
0¹	FCFF₀	3,238
1	FCFF₁	3,534	= 3,238 × (1 + 9.14%)	3,222
2	FCFF₂	3,796	= 3,534 × (1 + 7.42%)	3,157
3	FCFF₃	4,013	= 3,796 × (1 + 5.71%)	3,043
4	FCFF₄	4,173	= 4,013 × (1 + 4.00%)	2,886
5	FCFF₅	4,269	= 4,173 × (1 + 2.28%)	2,692
5	Terminal value (TV₅)	59,185	= 4,269 × (1 + 2.28%) ÷ (9.66% – 2.28%)	37,320
Intrinsic value of McKesson Corp. capital				52,319
Less: Debt (fair value)				8,607
Intrinsic value of McKesson Corp. common stock				43,712

Intrinsic value of McKesson Corp. common stock (per share)				$193.34
Current share price				$160.50

Based on: 10-K (reporting date: 2016-03-31).

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.

McKesson Corp., cost of capital

	Value¹	Weight	Required rate of return²	Calculation
Equity (fair value)	36,287	0.81	11.31%
Debt (fair value)	8,607	0.19	2.73%	= 3.86% × (1 – 29.33%)

Based on: 10-K (reporting date: 2016-03-31).

¹ US$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 226,086,960 × $160.50
= $36,286,957,080.00

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
= (27.94% + 30.67% + 35.40% + 30.28% + 26.89% + 30.89%) ÷ 6
= 29.33%

WACC = 9.66%

FCFF growth rate (g) implied by PRAT model

McKesson Corp., PRAT model

	Average	Mar 31, 2016	Mar 31, 2015	Mar 31, 2014	Mar 31, 2013	Mar 31, 2012	Mar 31, 2011
Selected Financial Data (US$ in millions)
Interest expense		353)	374)	303)	240)	251)	222)
Net income attributable to McKesson Corporation		2,258)	1,476)	1,263)	1,338)	1,403)	1,202)
Add: Net income attributable to noncontrolling interest		52)	67)	(5)	—)	—)	—)
Less: Income (loss) from discontinued operations, net of tax		(32)	(299)	(96)	—)	—)	72)
Add: Income tax expense		908)	815)	742)	581)	516)	505)
Earnings before tax (EBT)		3,250)	2,657)	2,096)	1,919)	1,919)	1,635)

Effective income tax rate (EITR)¹		27.94%	30.67%	35.40%	30.28%	26.89%	30.89%

Interest expense, after tax²		254)	259)	196)	167)	184)	153)
Add: Cash dividends declared		249)	226)	214)	192)	202)	188)
Interest expense (after tax) and dividends		503)	485)	410)	359)	386)	341)

EBIT(1 – EITR)³		2,544)	2,034)	1,555)	1,505)	1,587)	1,283)

Short-term borrowings		7)	135)	346)	—)	400)	—)
Current portion of long-term debt		1,612)	1,529)	1,424)	352)	508)	417)
Long-term debt, excluding current portion		6,535)	8,180)	8,949)	4,521)	3,072)	3,587)
Total McKesson Corporation stockholders’ equity		8,924)	8,001)	8,522)	7,070)	6,831)	7,220)
Total capital		17,078)	17,845)	19,241)	11,943)	10,811)	11,224)
Financial Ratios
Retention rate (RR)⁴		0.80	0.76	0.74	0.76	0.76	0.73
Return on invested capital (ROIC)⁵		14.90%	11.40%	8.08%	12.60%	14.67%	11.43%
Averages
RR	0.75
ROIC	12.18%

FCFF growth rate (g)⁶	9.14%

Based on: 10-K (reporting date: 2016-03-31), 10-K (reporting date: 2015-03-31), 10-K (reporting date: 2014-03-31), 10-K (reporting date: 2013-03-31), 10-K (reporting date: 2012-03-31), 10-K (reporting date: 2011-03-31).

2016 Calculations

¹ EITR = 100 × Income tax expense ÷ EBT
= 100 × 908 ÷ 3,250
= 27.94%

² Interest expense, after tax = Interest expense × (1 – EITR)
= 353 × (1 – 27.94%)
= 254

³ EBIT(1 – EITR) = Net income attributable to McKesson Corporation – Income (loss) from discontinued operations, net of tax + Interest expense, after tax
= 2,258 – -32 + 254
= 2,544

⁴ RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [2,544 – 503] ÷ 2,544
= 0.80

⁵ ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 2,544 ÷ 17,078
= 14.90%

⁶ g = RR × ROIC
= 0.75 × 12.18%
= 9.14%

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

g = 100 × (Total capital, fair value₀ × WACC – FCFF₀) ÷ (Total capital, fair value₀ + FCFF₀)
= 100 × (44,894 × 9.66% – 3,238) ÷ (44,894 + 3,238)
= 2.28%

where:

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

FCFF growth rate (g) forecast

McKesson Corp., H-model

Year	Value	g_t
1	g₁	9.14%
2	g₂	7.42%
3	g₃	5.71%
4	g₄	4.00%
5 and thereafter	g₅	2.28%

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)
= 9.14% + (2.28% – 9.14%) × (2 – 1) ÷ (5 – 1)
= 7.42%

g₃ = g₁ + (g₅ – g₁) × (3 – 1) ÷ (5 – 1)
= 9.14% + (2.28% – 9.14%) × (3 – 1) ÷ (5 – 1)
= 5.71%

g₄ = g₁ + (g₅ – g₁) × (4 – 1) ÷ (5 – 1)
= 9.14% + (2.28% – 9.14%) × (4 – 1) ÷ (5 – 1)
= 4.00%

McKesson Corp. (NYSE:MCK)

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