# Pfizer Inc. (PFE) | 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)

Pfizer Inc., 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 9.34%
01 FCFE0 14,002
1 FCFE1 14,559  = 14,002 × (1 + 3.98%) 13,316
2 FCFE2 15,082  = 14,559 × (1 + 3.60%) 12,617
3 FCFE3 15,567  = 15,082 × (1 + 3.21%) 11,910
4 FCFE4 16,007  = 15,567 × (1 + 2.83%) 11,201
5 FCFE5 16,399  = 16,007 × (1 + 2.45%) 10,495
5 Terminal value (TV5) 243,838  = 16,399 × (1 + 2.45%) ÷ (9.34% – 2.45%) 156,054
Intrinsic value of 's common stock 215,592

Intrinsic value of 's common stock (per share) \$29.99
Current share price \$28.96

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 2.77% Expected rate of return on market portfolio2 E(RM) 13.09% Systematic risk (β) of 's common stock βPFE 0.64 Required rate of return on 's common stock3 rPFE 9.34%

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 rPFE = RF + βPFE [E(RM) – RF]
= 2.77% + 0.64 [13.09% – 2.77%]
= 9.34%

## FCFE Growth Rate (g)

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

Pfizer Inc., PRAT model

Average Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009 Dec 31, 2008
Selected Financial Data (USD \$ in millions)
Cash dividends declared, common stock   6,537  6,512  5,964  4,916  8,617
Cash dividends declared, preferred stock
Net income attributable to Pfizer Inc.   14,570  10,009  8,257  8,635  8,104
Revenues   58,986  67,425  67,809  50,009  48,296
Total assets   185,798  188,002  195,014  212,949  111,148
Total Pfizer Inc. shareholders' equity   81,260  82,190  87,813  90,014  57,556
Ratios
Retention rate1   0.55 0.35 0.28 0.43 -0.06
Profit margin2   24.70% 14.84% 12.17% 17.26% 16.77%
Asset turnover3   0.32 0.36 0.35 0.23 0.43
Financial leverage4   2.29 2.29 2.22 2.37 1.93
Averages
Retention rate 0.31
Profit margin 17.15%
Asset turnover 0.34
Financial leverage 2.22

Growth rate of FCFE (g)5 3.98%

2012 Calculations

1 Retention rate = (Net income attributable to Pfizer Inc. – Cash dividends declared, common stock – Cash dividends declared, preferred stock) ÷ (Net income attributable to Pfizer Inc. – Cash dividends declared, preferred stock)
= (14,570 – 6,537 – 3) ÷ (14,570 – 3) = 0.55

2 Profit margin = 100 × (Net income attributable to Pfizer Inc. – Cash dividends declared, preferred stock) ÷ Revenues
= 100 × (14,570 – 3) ÷ 58,986 = 24.70%

3 Asset turnover = Revenues ÷ Total assets
= 58,986 ÷ 185,798 = 0.32

4 Financial leverage = Total assets ÷ Total Pfizer Inc. shareholders' equity
= 185,798 ÷ 81,260 = 2.29

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.31 × 17.15% × 0.34 × 2.22 = 3.98%

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (208,195 × 9.34% – 14,002) ÷ (208,195 + 14,002) = 2.45%

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

Pfizer Inc., H-model

Year Value gt
1 g1 3.98%
2 g2 3.60%
3 g3 3.21%
4 g4 2.83%
5 and thereafter g5 2.45%

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)
= 3.98% + (2.45% – 3.98%) × (2 – 1) ÷ (5 – 1) = 3.60%

g2 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 3.98% + (2.45% – 3.98%) × (3 – 1) ÷ (5 – 1) = 3.21%

g2 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 3.98% + (2.45% – 3.98%) × (4 – 1) ÷ (5 – 1) = 2.83%