# Schlumberger Ltd. (SLB) | 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)

Schlumberger Ltd., 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 14.63%
01 FCFF0 2,357
1 FCFF1 2,609  = 2,357  × (1 + 10.68%) 2,276
2 FCFF2 2,898  = 2,609  × (1 + 11.08%) 2,205
3 FCFF3 3,230  = 2,898  × (1 + 11.48%) 2,145
4 FCFF4 3,614  = 3,230  × (1 + 11.88%) 2,093
5 FCFF5 4,058  = 3,614  × (1 + 12.28%) 2,050
5 Terminal value (TV5) 193,501  = 4,058  × (1 + 12.28%) ÷ (14.63% – 12.28%) 97,764
Intrinsic value of 's capital 108,533
Less: Debt (fair value) 12,021
Intrinsic value of 's common stock 96,512

Intrinsic value of 's common stock (per share) \$72.66
Current share price \$75.58

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)

Schlumberger Ltd., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 100,390  0.89 16.10%
Debt (fair value) 12,021  0.11 2.36% = 2.99% × (1 – 21.06%)

1 USD \$ in millions

2 Required rate of return on debt is after tax (estimated effective tax rate is 21.06%)

WACC = 14.63%

## FCFF Growth Rate (g)

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

Schlumberger Ltd., PRAT model

Average Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009 Dec 31, 2008
Selected Financial Data (USD \$ in millions)
Taxes on income   1,723  1,545  890  770  1,430
Net income attributable to Schlumberger   5,490  4,997  4,267  3,134  5,435
Tax rate1   23.89% 23.62% 17.26% 19.72% 20.83%

Interest expense   340  298  207  221  247
Interest expense, after tax2   259  228  171  177  196
Add: Dividends declared   1,463  1,347  1,076  1,006  1,006
Interest expense (after tax) and dividends   1,722  1,575  1,247  1,183  1,202

EBIT(1 – Tax Rate)3   5,749  5,225  4,438  3,311  5,631

Short-term borrowings   958  336  381  360  459
Convertible debentures, current portion   321
Long-term debt, current portion   1,163  1,041  2,214  444  1,139
Convertible debentures, excluding current portion   321
Long-term debt, excluding current portion   9,509  8,556  5,517  4,355  3,372
Total Schlumberger stockholders' equity   34,751  31,263  31,226  19,120  16,863
Total capital   46,381  41,196  39,338  24,600  22,154
Ratios
Retention rate (RR)4   0.70 0.70 0.72 0.64 0.79
Return on invested capital (ROIC)5   12.39% 12.68% 11.28% 13.46% 25.42%
Averages
RR 0.71
ROIC 15.05%

Growth rate of FCFF (g)6 10.68%

2012 Calculations

1 Tax rate = 100 × Taxes on income ÷ (Net income attributable to Schlumberger + Taxes on income)
= 100 × 1,723 ÷ (5,490 + 1,723) = 23.89%

2 Interest expense, after tax = Interest expense × (1 – Tax rate)
= 340 × (1 – 23.89%) = 259

3 EBIT(1 – Tax Rate) = Net income attributable to Schlumberger + Interest expense, after tax
= 5,490 + 259 = 5,749

4 RR = [EBIT(1 – Tax Rate) – Interest expense (after tax) and dividends] ÷ EBIT(1 – Tax Rate)
= [5,749 – 1,722] ÷ 5,749 = 0.70

5 ROIC = 100 × EBIT(1 – Tax Rate) ÷ Total capital
= 100 × 5,749 ÷ 46,381 = 12.39%

6 g = RR × ROIC
= 0.71 × 15.05% = 10.68%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (112,411 × 14.63% – 2,357) ÷ (112,411 + 2,357) = 12.28%

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

Schlumberger Ltd., H-model

Year Value gt
1 g1 10.68%
2 g2 11.08%
3 g3 11.48%
4 g4 11.88%
5 and thereafter g5 12.28%

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 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 10.68% + (12.28% – 10.68%) × (2 – 1) ÷ (5 – 1) = 11.08%

g2 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 10.68% + (12.28% – 10.68%) × (3 – 1) ÷ (5 – 1) = 11.48%

g2 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 10.68% + (12.28% – 10.68%) × (4 – 1) ÷ (5 – 1) = 11.88%