# Alphabet Inc. (NASDAQ:GOOG)

## Present Value of Free Cash Flow to the Firm (FCFF)

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 the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

### Intrinsic Stock Value (Valuation Summary)

Alphabet 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 12.85%
01 FCFF0 31,202
1 FCFF1 35,462  = 31,202  × (1 + 13.65%) 31,423
2 FCFF2 39,956  = 35,462  × (1 + 12.67%) 31,372
3 FCFF3 44,627  = 39,956  × (1 + 11.69%) 31,049
4 FCFF4 49,407  = 44,627  × (1 + 10.71%) 30,459
5 FCFF5 54,215  = 49,407  × (1 + 9.73%) 29,616
5 Terminal value (TV5) 1,904,097  = 54,215  × (1 + 9.73%) ÷ (12.85%9.73%) 1,040,150
Intrinsic value of Alphabet Inc.’s capital 1,194,068
Less: Debt (fair value) 4,696
Intrinsic value of Alphabet Inc.’s common stock 1,189,372

Intrinsic value of Alphabet Inc.’s common stock (per share) \$1,748.66
Current share price \$1,604.26

Based on: 10-K (filing date: 2020-02-04).

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)

Alphabet Inc., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 1,091,159  1.00 12.90%
Debt (fair value) 4,696  0.00 2.42% = 2.89% × (1 – 16.10%)

Based on: 10-K (filing date: 2020-02-04).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 680,163,635 × \$1,604.26 = \$1,091,159,313,085.10

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
= (13.90% + 13.30% + 17.20% + 19.30% + 16.80%) ÷ 5 = 16.10%

WACC = 12.85%

### FCFF Growth Rate (g)

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

Alphabet Inc., PRAT model

Average Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Selected Financial Data (US\$ in millions)
Interest expense 100  114  109  124  104
Net income 34,343  30,736  12,662  19,478  16,348

Effective income tax rate (EITR)1 13.90% 13.30% 17.20% 19.30% 16.80%

Interest expense, after tax2 86  99  90  100  87
Add: Adjustment Payment to Class C capital stockholders —  —  —  —  47
Interest expense (after tax) and dividends 86  99  90  100  134

EBIT(1 – EITR)3 34,429  30,835  12,752  19,578  16,435

Short-term debt —  —  —  —  3,225
Long-term debt, excluding short-term portion 4,554  4,012  3,969  3,935  1,995
Stockholders’ equity 201,442  177,628  152,502  139,036  120,331
Total capital 205,996  181,640  156,471  142,971  125,551
Financial Ratios
Retention rate (RR)4 1.00 1.00 0.99 0.99 0.99
Return on invested capital (ROIC)5 16.71% 16.98% 8.15% 13.69% 13.09%
Averages
RR 0.99
ROIC 13.72%

FCFF growth rate (g)6 13.65%

Based on: 10-K (filing date: 2020-02-04), 10-K (filing date: 2019-02-05), 10-K (filing date: 2018-02-06), 10-K (filing date: 2017-02-03), 10-K (filing date: 2016-02-11).

2019 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 100 × (1 – 13.90%) = 86

3 EBIT(1 – EITR) = Net income + Interest expense, after tax
= 34,343 + 86 = 34,429

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [34,42986] ÷ 34,429 = 1.00

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 34,429 ÷ 205,996 = 16.71%

6 g = RR × ROIC
= 0.99 × 13.72% = 13.65%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (1,095,855 × 12.85%31,202) ÷ (1,095,855 + 31,202) = 9.73%

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

#### FCFF growth rate (g) forecast

Alphabet Inc., H-model

Year Value gt
1 g1 13.65%
2 g2 12.67%
3 g3 11.69%
4 g4 10.71%
5 and thereafter g5 9.73%

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)
= 13.65% + (9.73%13.65%) × (2 – 1) ÷ (5 – 1) = 12.67%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 13.65% + (9.73%13.65%) × (3 – 1) ÷ (5 – 1) = 11.69%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 13.65% + (9.73%13.65%) × (4 – 1) ÷ (5 – 1) = 10.71%