# Medtronic Inc. (MDT) | 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)

Medtronic 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 9.43%
01 FCFF0 4,274
1 FCFF1 4,647  = 4,274  × (1 + 8.73%) 4,247
2 FCFF2 4,979  = 4,647  × (1 + 7.16%) 4,158
3 FCFF3 5,257  = 4,979  × (1 + 5.58%) 4,012
4 FCFF4 5,468  = 5,257  × (1 + 4.01%) 3,814
5 FCFF5 5,601  = 5,468  × (1 + 2.43%) 3,570
5 Terminal value (TV5) 82,039  = 5,601  × (1 + 2.43%) ÷ (9.43% – 2.43%) 52,287
Intrinsic value of 's capital 72,088
Less: Short-term borrowings (fair value) 3,274
Less: Long-term debt (fair value) 8,186
Intrinsic value of 's common stock 60,628

Intrinsic value of 's common stock (per share) \$59.15
Current share price \$49.89

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)

Medtronic Inc., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 51,139  0.82 10.79%
Short-term borrowings (fair value) 3,274  0.05 3.27% = 4.05% × (1 – 19.15%)
Long-term debt (fair value) 8,186  0.13 3.38% = 4.18% × (1 – 19.15%)

1 USD \$ in millions

2 Required rate of return on debt is after tax (estimated effective tax rate is 19.15%)

WACC = 9.43%

## FCFF Growth Rate (g)

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

Medtronic Inc., PRAT model

Average Apr 27, 2012 Apr 29, 2011 Apr 30, 2010 Apr 24, 2009 Apr 25, 2008 Apr 27, 2007
Selected Financial Data (USD \$ in millions)
Provision for income taxes   730  627  870  425  654  713
Net earnings   3,617  3,096  3,099  2,169  2,231  2,802
Tax rate1   16.79% 16.84% 21.92% 16.38% 22.67% 20.28%

Interest expense   349  450  402  217  255  228
Interest expense, after tax2   290  374  314  181  197  182
Add: Dividends to shareholders   1,021  969  907  843  565  504
Interest expense (after tax) and dividends   1,311  1,343  1,221  1,024  762  686

EBIT(1 – Tax Rate)3   3,907  3,470  3,413  2,350  2,428  2,984

Short-term borrowings   3,274  1,723  2,575  522  1,154  509
Long-term debt   7,359  8,112  6,944  6,772  5,802  5,578
Shareholders’ equity   17,113  15,968  14,629  12,851  11,536  10,977
Total capital   27,746  25,803  24,148  20,145  18,492  17,064
Ratios
Retention rate (RR)4   0.66 0.61 0.64 0.56 0.69 0.77
Return on invested capital (ROIC)5   14.08% 13.45% 14.13% 11.67% 13.13% 17.49%
Averages
RR 0.66
ROIC 13.29%

Growth rate of FCFF (g)6 8.73%

2012 Calculations

1 Tax rate = 100 × Provision for income taxes ÷ (Net earnings + Provision for income taxes)
= 100 × 730 ÷ (3,617 + 730) = 16.79%

2 Interest expense, after tax = Interest expense × (1 – Tax rate)
= 349 × (1 – 16.79%) = 290

3 EBIT(1 – Tax Rate) = Net earnings + Interest expense, after tax
= 3,617 + 290 = 3,907

4 RR = [EBIT(1 – Tax Rate) – Interest expense (after tax) and dividends] ÷ EBIT(1 – Tax Rate)
= [3,907 – 1,311] ÷ 3,907 = 0.66

5 ROIC = 100 × EBIT(1 – Tax Rate) ÷ Total capital
= 100 × 3,907 ÷ 27,746 = 14.08%

6 g = RR × ROIC
= 0.66 × 13.29% = 8.73%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (62,599 × 9.43% – 4,274) ÷ (62,599 + 4,274) = 2.43%

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

Medtronic Inc., H-model

Year Value gt
1 g1 8.73%
2 g2 7.16%
3 g3 5.58%
4 g4 4.01%
5 and thereafter g5 2.43%

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)
= 8.73% + (2.43% – 8.73%) × (2 – 1) ÷ (5 – 1) = 7.16%

g2 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 8.73% + (2.43% – 8.73%) × (3 – 1) ÷ (5 – 1) = 5.58%

g2 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 8.73% + (2.43% – 8.73%) × (4 – 1) ÷ (5 – 1) = 4.01%