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)

Advanced Micro Devices 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 22.62%
01 FCFF0 801
1 FCFF1 867 = 801 × (1 + 8.13%) 707
2 FCFF2 967 = 867 × (1 + 11.61%) 643
3 FCFF3 1,113 = 967 × (1 + 15.08%) 604
4 FCFF4 1,320 = 1,113 × (1 + 18.56%) 584
5 FCFF5 1,610 = 1,320 × (1 + 22.03%) 581
5 Terminal value (TV5) 333,418 = 1,610 × (1 + 22.03%) ÷ (22.62%22.03%) 120,266
Intrinsic value of Advanced Micro Devices Inc. capital 123,385
Less: Debt (fair value) 642
Intrinsic value of Advanced Micro Devices Inc. common stock 122,743

Intrinsic value of Advanced Micro Devices Inc. common stock (per share) \$101.64
Current share price \$136.88

Based on: 10-K (reporting date: 2020-12-26).

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)

Advanced Micro Devices Inc., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 165,298 1.00 22.69%
Debt (fair value) 642 0.00 5.74% = 7.54% × (1 – 23.90%)

Based on: 10-K (reporting date: 2020-12-26).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 1,207,610,455 × \$136.88
= \$165,297,719,080.40

Debt (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
= (21.00% + 11.83% + 21.00% + 30.65% + 35.00%) ÷ 5
= 23.90%

WACC = 22.62%

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Advanced Micro Devices Inc., PRAT model

Average Dec 26, 2020 Dec 28, 2019 Dec 29, 2018 Dec 30, 2017 Dec 31, 2016
Selected Financial Data (US\$ in millions)
Interest expense 47  94  121  126  156
Net income (loss) 2,490  341  337  43  (497)

Effective income tax rate (EITR)1 21.00% 11.83% 21.00% 30.65% 35.00%

Interest expense, after tax2 37  83  96  87  101
Interest expense (after tax) and dividends 37  83  96  87  101

EBIT(1 – EITR)3 2,527  424  433  130  (396)

Short-term debt, net —  —  136  70  —
Long-term debt, net, less current portion 330  486  1,114  1,325  1,435
Stockholders’ equity 5,837  2,827  1,266  611  416
Total capital 6,167  3,313  2,516  2,006  1,851
Financial Ratios
Retention rate (RR)4 0.99 0.80 0.78 0.33
Return on invested capital (ROIC)5 40.98% 12.79% 17.19% 6.50% -21.37%
Averages
RR 0.72
ROIC 11.22%

FCFF growth rate (g)6 8.13%

Based on: 10-K (reporting date: 2020-12-26), 10-K (reporting date: 2019-12-28), 10-K (reporting date: 2018-12-29), 10-K (reporting date: 2017-12-30), 10-K (reporting date: 2016-12-31).

2020 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 47 × (1 – 21.00%)
= 37

3 EBIT(1 – EITR) = Net income (loss) + Interest expense, after tax
= 2,490 + 37
= 2,527

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [2,52737] ÷ 2,527
= 0.99

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 2,527 ÷ 6,167
= 40.98%

6 g = RR × ROIC
= 0.72 × 11.22%
= 8.13%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (165,940 × 22.62%801) ÷ (165,940 + 801)
= 22.03%

where:

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

FCFF growth rate (g) forecast

Year Value gt
1 g1 8.13%
2 g2 11.61%
3 g3 15.08%
4 g4 18.56%
5 and thereafter g5 22.03%

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)
= 8.13% + (22.03%8.13%) × (2 – 1) ÷ (5 – 1)
= 11.61%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 8.13% + (22.03%8.13%) × (3 – 1) ÷ (5 – 1)
= 15.08%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 8.13% + (22.03%8.13%) × (4 – 1) ÷ (5 – 1)
= 18.56%