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Present Value of Free Cash Flow to Equity (FCFE)

Difficulty: Intermediate

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)

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

USD $ in millions, except per share data

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Year Value FCFEt or Terminal value (TVt) Calculation Present value at 16.58%
01 FCFE0 10,595 
1 FCFE1 11,377  = 10,595 × (1 + 7.38%) 9,759 
2 FCFE2 12,227  = 11,377 × (1 + 7.47%) 8,996 
3 FCFE3 13,151  = 12,227 × (1 + 7.56%) 8,300 
4 FCFE4 14,156  = 13,151 × (1 + 7.64%) 7,663 
5 FCFE5 15,250  = 14,156 × (1 + 7.73%) 7,081 
5 Terminal value (TV5) 185,608  = 15,250 × (1 + 7.73%) ÷ (16.58% – 7.73%) 86,189 
Intrinsic value of Amgen's common stock 127,988 
Intrinsic value of Amgen's common stock (per share) $193.42
Current share price $194.88

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)

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Assumptions
Rate of return on LT Treasury Composite1 RF 2.93%
Expected rate of return on market portfolio2 E(RM) 12.37%
Systematic risk (β) of Amgen's common stock βAMGN 1.45
Required rate of return on Amgen's common stock3 rAMGN 16.58%

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

2 See Details »

3 rAMGN = RF + βAMGN [E(RM) – RF]
= 2.93% + 1.45 [12.37% – 2.93%]
= 16.58%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Amgen Inc., PRAT model

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Average Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Selected Financial Data (USD $ in millions)
Dividends 3,487  3,120  2,548  1,995  1,521 
Net income 1,979  7,722  6,939  5,158  5,081 
Product sales 21,795  21,892  20,944  19,327  18,192 
Total assets 79,954  77,626  71,576  69,009  66,125 
Stockholders' equity 25,241  29,875  28,083  25,778  22,096 
Ratios
Retention rate1 -0.76 0.60 0.63 0.61 0.70
Profit margin2 9.08% 35.27% 33.13% 26.69% 27.93%
Asset turnover3 0.27 0.28 0.29 0.28 0.28
Financial leverage4 3.17 2.60 2.55 2.68 2.99
Averages
Retention rate 0.36
Profit margin 26.42%
Asset turnover 0.28
Financial leverage 2.80
Growth rate of FCFE (g)5 7.38%

2017 Calculations

1 Retention rate = (Net income – Dividends) ÷ Net income
= (1,9793,487) ÷ 1,979 = -0.76

2 Profit margin = 100 × Net income ÷ Product sales
= 100 × 1,979 ÷ 21,795 = 9.08%

3 Asset turnover = Product sales ÷ Total assets
= 21,795 ÷ 79,954 = 0.27

4 Financial leverage = Total assets ÷ Stockholders' equity
= 79,954 ÷ 25,241 = 3.17

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.36 × 26.42% × 0.28 × 2.80 = 7.38%


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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (128,953 × 16.58% – 10,595) ÷ (128,953 + 10,595) = 7.73%

where:
Equity market value0 = current market value of Amgen's common stock (USD $ in millions)
FCFE0 = last year Amgen's free cash flow to equity (USD $ in millions)
r = required rate of return on Amgen's common stock


FCFE growth rate (g) forecast

Amgen Inc., H-model

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Year Value gt
1 g1 7.38%
2 g2 7.47%
3 g3 7.56%
4 g4 7.64%
5 and thereafter g5 7.73%

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)
= 7.38% + (7.73% – 7.38%) × (2 – 1) ÷ (5 – 1) = 7.47%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 7.38% + (7.73% – 7.38%) × (3 – 1) ÷ (5 – 1) = 7.56%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 7.38% + (7.73% – 7.38%) × (4 – 1) ÷ (5 – 1) = 7.64%