## Present Value of Free Cash Flow to Equity (FCFE)

Intermediate level

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 Summary)

Adobe Inc., free cash flow to equity (FCFE) forecast

US\$ in thousands, except per share data

Year Value FCFEt or Terminal value (TVt) Calculation Present value at 12.55%
01 FCFE0 4,027,334
1 FCFE1 4,678,399  = 4,027,334 × (1 + 16.17%) 4,156,693
2 FCFE2 5,361,864  = 4,678,399 × (1 + 14.61%) 4,232,697
3 FCFE3 6,061,683  = 5,361,864 × (1 + 13.05%) 4,251,531
4 FCFE4 6,758,449  = 6,061,683 × (1 + 11.49%) 4,211,627
5 FCFE5 7,430,064  = 6,758,449 × (1 + 9.94%) 4,113,828
5 Terminal value (TV5) 312,539,298  = 7,430,064 × (1 + 9.94%) ÷ (12.55%9.94%) 173,044,651
Intrinsic value of Adobe Inc.’s common stock 194,011,027

Intrinsic value of Adobe Inc.’s common stock (per share) \$402.40
Current share price \$351.37

Based on: 10-K (filing date: 2020-01-21).

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 2.07% Expected rate of return on market portfolio2 E(RM) 11.21% Systematic risk of Adobe Inc.’s common stock βADBE 1.15 Required rate of return on Adobe Inc.’s common stock3 rADBE 12.55%

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).

= 2.07% + 1.15 [11.21%2.07%]
= 12.55%

### FCFE Growth Rate (g)

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

Average Nov 29, 2019 Nov 30, 2018 Dec 1, 2017 Dec 2, 2016 Nov 27, 2015 Nov 28, 2014
Selected Financial Data (US\$ in thousands)
Net income 2,951,458  2,590,774  1,693,954  1,168,782  629,551  268,395
Revenue 11,171,297  9,030,008  7,301,505  5,854,430  4,795,511  4,147,065
Total assets 20,762,400  18,768,682  14,535,556  12,707,114  11,726,472  10,785,829
Stockholders’ equity 10,530,155  9,362,114  8,459,869  7,424,835  7,001,580  6,775,905
Financial Ratios
Retention rate1 1.00 1.00 1.00 1.00 1.00 1.00
Profit margin2 26.42% 28.69% 23.20% 19.96% 13.13% 6.47%
Asset turnover3 0.54 0.48 0.50 0.46 0.41 0.38
Financial leverage4 1.97 2.00 1.72 1.71 1.67 1.59
Averages
Retention rate 1.00
Profit margin 19.65%
Asset turnover 0.46
Financial leverage 1.78

FCFE growth rate (g)5 16.17%

Based on: 10-K (filing date: 2020-01-21), 10-K (filing date: 2019-01-25), 10-K (filing date: 2018-01-22), 10-K (filing date: 2017-01-20), 10-K (filing date: 2016-01-19), 10-K (filing date: 2015-01-20).

2019 Calculations

1 Company does not pay dividends

2 Profit margin = 100 × Net income ÷ Revenue
= 100 × 2,951,458 ÷ 11,171,297 = 26.42%

3 Asset turnover = Revenue ÷ Total assets
= 11,171,297 ÷ 20,762,400 = 0.54

4 Financial leverage = Total assets ÷ Stockholders’ equity
= 20,762,400 ÷ 10,530,155 = 1.97

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 1.00 × 19.65% × 0.46 × 1.78 = 16.17%

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (169,406,361 × 12.55%4,027,334) ÷ (169,406,361 + 4,027,334) = 9.94%

where:
Equity market value0 = current market value of Adobe Inc.’s common stock (US\$ in thousands)
FCFE0 = the last year Adobe Inc.’s free cash flow to equity (US\$ in thousands)
r = required rate of return on Adobe Inc.’s common stock

#### FCFE growth rate (g) forecast

Year Value gt
1 g1 16.17%
2 g2 14.61%
3 g3 13.05%
4 g4 11.49%
5 and thereafter g5 9.94%

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)
= 16.17% + (9.94%16.17%) × (2 – 1) ÷ (5 – 1) = 14.61%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 16.17% + (9.94%16.17%) × (3 – 1) ÷ (5 – 1) = 13.05%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 16.17% + (9.94%16.17%) × (4 – 1) ÷ (5 – 1) = 11.49%