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

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


Intrinsic Stock Value (Valuation Summary)

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

USD $ in millions, except per share data

 
Year Value FCFFt or Terminal value (TVt) Calculation Present value at 14.00%
01 FCFF0 52,380 
1 FCFF1 62,494  = 52,380  × (1 + 19.31%) 54,821 
2 FCFF2 72,861  = 62,494  × (1 + 16.59%) 56,067 
3 FCFF3 82,966  = 72,861  × (1 + 13.87%) 56,004 
4 FCFF4 92,217  = 82,966  × (1 + 11.15%) 54,606 
5 FCFF5 99,992  = 92,217  × (1 + 8.43%) 51,940 
5 Terminal value (TV5) 1,947,974  = 99,992  × (1 + 8.43%) ÷ (14.00% – 8.43%) 1,011,852 
Intrinsic value of Apple's capital 1,285,289 
Less: Commercial paper and long-term debt (fair value) 118,077 
Intrinsic value of Apple's common stock 1,167,212 
Intrinsic value of Apple's common stock (per share) $230.04
Current share price $177.84

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.

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Weighted Average Cost of Capital (WACC)

Apple Inc., cost of capital

 
Value1 Weight Required rate of return2 Calculation
Equity (fair value) 902,362  0.88 15.49%
Commercial paper and long-term debt (fair value) 118,077  0.12 2.60% = 3.50% × (1 – 25.68%)

1 USD $ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 5,074,013,000 × $177.84 = $902,362,471,920.00

   Commercial paper and long-term 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
= (24.60% + 25.60% + 26.40% + 26.10% + 26.20% + 25.20%) ÷ 6 = 25.68%

WACC = 14.00%

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FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Apple Inc., PRAT model

 
Average Sep 30, 2017 Sep 24, 2016 Sep 26, 2015 Sep 27, 2014 Sep 28, 2013 Sep 29, 2012
Selected Financial Data (USD $ in millions)
Interest expense 2,323  1,456  733  384  136 
Net income 48,351  45,687  53,394  39,510  37,037  41,733 
Effective income tax rate (EITR)1 24.60% 25.60% 26.40% 26.10% 26.20% 25.20%
Interest expense, after tax2 1,752  1,083  539  284  100 
Add: Dividends and dividend equivalents declared 12,803  12,188  11,627  11,215  10,676  2,523 
Interest expense (after tax) and dividends 14,555  13,271  12,166  11,499  10,776  2,523 
EBIT(1 – EITR)3 50,103  46,770  53,933  39,794  37,137  41,733 
Commercial paper 11,977  8,105  8,499  6,308 
Current portion of long-term debt 6,496  3,500  2,500 
Long-term debt, excluding current portion 97,207  75,427  53,463  28,987  16,960 
Shareholders' equity 134,047  128,249  119,355  111,547  123,549  118,210 
Total capital 249,727  215,281  183,817  146,842  140,509  118,210 
Ratios
Retention rate (RR)4 0.71 0.72 0.77 0.71 0.71 0.94
Return on invested capital (ROIC)5 20.06% 21.73% 29.34% 27.10% 26.43% 35.30%
Averages
RR 0.72
ROIC 26.66%
Growth rate of FCFF (g)6 19.31%

2017 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 2,323 × (1 – 24.60%) = 1,752

3 EBIT(1 – EITR) = Net income + Interest expense, after tax
= 48,351 + 1,752 = 50,103

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [50,103 – 14,555] ÷ 50,103 = 0.71

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 50,103 ÷ 249,727 = 20.06%

6 g = RR × ROIC
= 0.72 × 26.66% = 19.31%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (1,020,439 × 14.00% – 52,380) ÷ (1,020,439 + 52,380) = 8.43%

where:
Total capital, fair value0 = current fair value of Apple's debt and equity (USD $ in millions)
FCFF0 = last year Apple's free cash flow to the firm (USD $ in millions)
WACC = weighted average cost of Apple's capital

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FCFF growth rate (g) forecast

Apple Inc., H-model

 
Year Value gt
1 g1 19.31%
2 g2 16.59%
3 g3 13.87%
4 g4 11.15%
5 and thereafter g5 8.43%

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)
= 19.31% + (8.43% – 19.31%) × (2 – 1) ÷ (5 – 1) = 16.59%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 19.31% + (8.43% – 19.31%) × (3 – 1) ÷ (5 – 1) = 13.87%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 19.31% + (8.43% – 19.31%) × (4 – 1) ÷ (5 – 1) = 11.15%

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