Vale S.A. (VALE) | 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)
Vale S.A., 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 14.35% |
|---|---|---|---|---|
| 01 | FCFF0 | 2,134 | ||
| 1 | FCFF1 | 2,335 | = 2,134 × (1 + 9.41%) | 2,042 |
| 2 | FCFF2 | 2,572 | = 2,335 × (1 + 10.14%) | 1,967 |
| 3 | FCFF3 | 2,851 | = 2,572 × (1 + 10.87%) | 1,907 |
| 4 | FCFF4 | 3,182 | = 2,851 × (1 + 11.60%) | 1,861 |
| 5 | FCFF5 | 3,574 | = 3,182 × (1 + 12.33%) | 1,828 |
| 5 | Terminal value (TV5) | 198,767 | = 3,574 × (1 + 12.33%) ÷ (14.35% – 12.33%) | 101,669 |
| Intrinsic value of 's capital | 111,274 | |||
| Less: Debt (fair value) | 33,149 | |||
| Intrinsic value of 's common stock | 78,125 | |||
| Intrinsic value of 's common stock (per share) | $14.56 | |||
| Current share price | $15.94 | |||
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.
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Weighted Average Cost of Capital (WACC)
Vale S.A., cost of capital
| Value1 | Weight | Required rate of return2 | Calculation | |
|---|---|---|---|---|
| Equity (fair value) | 85,523 | 0.72 | 17.99% | |
| Debt (fair value) | 33,149 | 0.28 | 4.94% | = 5.50% × (1 – 10.14%) |
1 USD $ in millions
2 Required rate of return on debt is after tax (estimated effective tax rate is 10.14%)
WACC = 14.35%
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FCFF Growth Rate (g)
FCFF growth rate (g) implied by PRAT model
Vale S.A., PRAT model
| Average | Dec 31, 2012 | Dec 31, 2011 | Dec 31, 2010 | Dec 31, 2009 | Dec 31, 2008 | ||
|---|---|---|---|---|---|---|---|
| Selected Financial Data (USD $ in millions) | |||||||
| Income taxes | (833) | 5,282 | 3,705 | 2,100 | 535 | ||
| Net income attributable to the Company's stockholders | 5,511 | 22,885 | 17,264 | 5,349 | 13,218 | ||
| Tax rate1 | -17.81% | 18.75% | 17.67% | 28.19% | 3.89% | ||
| Financial expenses | 2,414 | 2,465 | 2,646 | 1,558 | 1,765 | ||
| Financial expenses, after tax2 | 2,844 | 2,003 | 2,178 | 1,119 | 1,696 | ||
| Add: Dividends and interest attributed to stockholders' equity | 4,765 | 5,348 | 5,173 | 1,615 | 2,210 | ||
| Interest expense (after tax) and dividends | 7,609 | 7,351 | 7,351 | 2,734 | 3,906 | ||
| EBIT(1 – Tax Rate)3 | 8,355 | 24,888 | 19,442 | 6,468 | 14,914 | ||
| Short-term debt | – | 22 | 139 | 30 | – | ||
| Current portion of long-term debt | 3,468 | 1,495 | 2,823 | 2,933 | 633 | ||
| Long-term debt, excluding current portion | 26,799 | 21,538 | 21,591 | 19,898 | 17,535 | ||
| Company stockholders' equity | 74,241 | 77,715 | 68,899 | 56,935 | 42,556 | ||
| Total capital | 104,508 | 100,770 | 93,452 | 79,796 | 60,724 | ||
| Ratios | |||||||
| Retention rate (RR)4 | 0.09 | 0.70 | 0.62 | 0.58 | 0.74 | ||
| Return on invested capital (ROIC)5 | 7.99% | 24.70% | 20.80% | 8.11% | 24.56% | ||
| Averages | |||||||
| RR | 0.55 | ||||||
| ROIC | 17.23% | ||||||
| Growth rate of FCFF (g)6 | 9.41% | ||||||
2012 Calculations
1 Tax rate = 100 × Income taxes ÷ (Net income attributable to the Company's stockholders + Income taxes)
= 100 × -833 ÷ (5,511 + -833) = -17.81%
2 Financial expenses, after tax = Financial expenses × (1 – Tax rate)
= 2,414 × (1 – -17.81%) = 2,844
3 EBIT(1 – Tax Rate) = Net income attributable to the Company's stockholders + Financial expenses, after tax
= 5,511 + 2,844 = 8,355
4 RR = [EBIT(1 – Tax Rate) – Interest expense (after tax) and dividends] ÷ EBIT(1 – Tax Rate)
= [8,355 – 7,609] ÷ 8,355 = 0.09
5 ROIC = 100 × EBIT(1 – Tax Rate) ÷ Total capital
= 100 × 8,355 ÷ 104,508 = 7.99%
6 g = RR × ROIC
= 0.55 × 17.23% = 9.41%
FCFF growth rate (g) implied by single-stage model
g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (118,672 × 14.35% – 2,134) ÷ (118,672 + 2,134) = 12.33%
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
Vale S.A., H-model
| Year | Value | gt |
|---|---|---|
| 1 | g1 | 9.41% |
| 2 | g2 | 10.14% |
| 3 | g3 | 10.87% |
| 4 | g4 | 11.60% |
| 5 and thereafter | g5 | 12.33% |
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)
= 9.41% + (12.33% – 9.41%) × (2 – 1) ÷ (5 – 1) = 10.14%
g2 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 9.41% + (12.33% – 9.41%) × (3 – 1) ÷ (5 – 1) = 10.87%
g2 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 9.41% + (12.33% – 9.41%) × (4 – 1) ÷ (5 – 1) = 11.60%
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