# Walgreen Co. (WAG) | 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)

Walgreen Co., 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 11.40%
01 FCFE0 6,004
1 FCFE1 6,754  = 6,004 × (1 + 12.49%) 6,063
2 FCFE2 7,370  = 6,754 × (1 + 9.12%) 5,939
3 FCFE3 7,794  = 7,370 × (1 + 5.76%) 5,638
4 FCFE4 7,980  = 7,794 × (1 + 2.39%) 5,183
5 FCFE5 7,902  = 7,980 × (1 + -0.98%) 4,607
5 Terminal value (TV5) 63,247  = 7,902 × (1 + -0.98%) ÷ (11.40% – -0.98%) 36,871
Intrinsic value of 's common stock 64,301

Intrinsic value of 's common stock (per share) \$68.11
Current share price \$50.90

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 2.98% Expected rate of return on market portfolio2 E(RM) 13.16% Systematic risk (β) of 's common stock βWAG 0.83 Required rate of return on 's common stock3 rWAG 11.40%

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 rWAG = RF + βWAG [E(RM) – RF]
= 2.98% + 0.83 [13.16% – 2.98%]
= 11.40%

## FCFE Growth Rate (g)

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

Walgreen Co., PRAT model

Average Aug 31, 2012 Aug 31, 2011 Aug 31, 2010 Aug 31, 2009 Aug 31, 2008 Aug 31, 2007
Selected Financial Data (USD \$ in millions)
Dividends declared   848  685  570  471  394  326
Net earnings   2,127  2,714  2,091  2,006  2,157  2,041
Net sales   71,633  72,184  67,420  63,335  59,034  53,762
Total assets   33,462  27,454  26,275  25,142  22,410  19,314
Shareholders' equity   18,236  14,847  14,400  14,376  12,869  11,104
Ratios
Retention rate1   0.60 0.75 0.73 0.77 0.82 0.84
Profit margin2   2.97% 3.76% 3.10% 3.17% 3.65% 3.80%
Asset turnover3   2.14 2.63 2.57 2.52 2.63 2.78
Financial leverage4   1.83 1.85 1.82 1.75 1.74 1.74
Averages
Retention rate 0.78
Profit margin 3.41%
Asset turnover 2.63
Financial leverage 1.79

Growth rate of FCFE (g)5 12.49%

2012 Calculations

1 Retention rate = (Net earnings – Dividends declared) ÷ Net earnings
= (2,127 – 848) ÷ 2,127 = 0.60

2 Profit margin = 100 × Net earnings ÷ Net sales
= 100 × 2,127 ÷ 71,633 = 2.97%

3 Asset turnover = Net sales ÷ Total assets
= 71,633 ÷ 33,462 = 2.14

4 Financial leverage = Total assets ÷ Shareholders' equity
= 33,462 ÷ 18,236 = 1.83

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.78 × 3.41% × 2.63 × 1.79 = 12.49%

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (48,052 × 11.40% – 6,004) ÷ (48,052 + 6,004) = -0.98%

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

Walgreen Co., H-model

Year Value gt
1 g1 12.49%
2 g2 9.12%
3 g3 5.76%
4 g4 2.39%
5 and thereafter g5 -0.98%

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)
= 12.49% + (-0.98% – 12.49%) × (2 – 1) ÷ (5 – 1) = 9.12%

g2 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 12.49% + (-0.98% – 12.49%) × (3 – 1) ÷ (5 – 1) = 5.76%

g2 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 12.49% + (-0.98% – 12.49%) × (4 – 1) ÷ (5 – 1) = 2.39%