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 Summary)

Adobe Inc., free cash flow to the firm (FCFF) forecast

US\$ in millions, except per share data

Year Value FCFFt or Terminal value (TVt) Calculation Present value at 11.99%
01 FCFF0 6,967
1 FCFF1 8,402 = 6,967 × (1 + 20.61%) 7,503
2 FCFF2 9,887 = 8,402 × (1 + 17.67%) 7,883
3 FCFF3 11,342 = 9,887 × (1 + 14.72%) 8,076
4 FCFF4 12,677 = 11,342 × (1 + 11.77%) 8,060
5 FCFF5 13,797 = 12,677 × (1 + 8.83%) 7,833
5 Terminal value (TV5) 475,496 = 13,797 × (1 + 8.83%) ÷ (11.99%8.83%) 269,967
Intrinsic value of Adobe Inc. capital 309,323
Less: Debt, including current portion (fair value) 4,290
Intrinsic value of Adobe Inc. common stock 305,033

Intrinsic value of Adobe Inc. common stock (per share) \$646.67
Current share price \$499.91

Based on: 10-K (reporting date: 2021-12-03).

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)

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 235,808 0.98 12.16%
Debt, including current portion (fair value) 4,290 0.02 2.27% = 2.67% × (1 – 15.16%)

Based on: 10-K (reporting date: 2021-12-03).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 471,700,000 × \$499.91
= \$235,807,547,000.00

Debt, including current portion (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

Required rate of return on debt. See details »

Required rate of return on debt is after tax.

Estimated (average) effective income tax rate
= (15.48% + 21.00% + 7.90% + 7.27% + 20.76% + 18.56%) ÷ 6
= 15.16%

WACC = 11.99%

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Average Dec 3, 2021 Nov 27, 2020 Nov 29, 2019 Nov 30, 2018 Dec 1, 2017 Dec 2, 2016
Selected Financial Data (US\$ in millions)
Interest expense 113  116  157  89  74  70
Net income 4,822  5,260  2,951  2,591  1,694  1,169

Effective income tax rate (EITR)1 15.48% 21.00% 7.90% 7.27% 20.76% 18.56%

Interest expense, after tax2 96  92  145  83  59  57
Interest expense (after tax) and dividends 96  92  145  83  59  57

EBIT(1 – EITR)3 4,918  5,352  3,096  2,674  1,753  1,226

Debt, current portion —  —  3,149  —  —  —
Debt, excluding current portion 4,123  4,117  989  4,125  1,881  1,902
Stockholders’ equity 14,797  13,264  10,530  9,362  8,460  7,425
Total capital 18,920  17,381  14,668  13,487  10,341  9,327
Financial Ratios
Retention rate (RR)4 0.98 0.98 0.95 0.97 0.97 0.95
Return on invested capital (ROIC)5 25.99% 30.79% 21.11% 19.82% 16.95% 13.15%
Averages
RR 0.97
ROIC 21.30%

FCFF growth rate (g)6 20.61%

Based on: 10-K (reporting date: 2021-12-03), 10-K (reporting date: 2020-11-27), 10-K (reporting date: 2019-11-29), 10-K (reporting date: 2018-11-30), 10-K (reporting date: 2017-12-01), 10-K (reporting date: 2016-12-02).

2021 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 113 × (1 – 15.48%)
= 96

3 EBIT(1 – EITR) = Net income + Interest expense, after tax
= 4,822 + 96
= 4,918

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [4,91896] ÷ 4,918
= 0.98

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 4,918 ÷ 18,920
= 25.99%

6 g = RR × ROIC
= 0.97 × 21.30%
= 20.61%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (240,098 × 11.99%6,967) ÷ (240,098 + 6,967)
= 8.83%

where:

Total capital, fair value0 = current fair value of Adobe Inc. debt and equity (US\$ in millions)
FCFF0 = the last year Adobe Inc. free cash flow to the firm (US\$ in millions)
WACC = weighted average cost of Adobe Inc. capital

FCFF growth rate (g) forecast

Year Value gt
1 g1 20.61%
2 g2 17.67%
3 g3 14.72%
4 g4 11.77%
5 and thereafter g5 8.83%

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)
= 20.61% + (8.83%20.61%) × (2 – 1) ÷ (5 – 1)
= 17.67%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 20.61% + (8.83%20.61%) × (3 – 1) ÷ (5 – 1)
= 14.72%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 20.61% + (8.83%20.61%) × (4 – 1) ÷ (5 – 1)
= 11.77%