# Automatic Data Processing Inc. (NASDAQ:ADP)

## 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)

Automatic Data Processing Inc., free cash flow to the firm (FCFF) forecast

US\$ in thousands, except per share data

Year Value FCFFt or Terminal value (TVt) Calculation Present value at 8.51%
01 FCFF0 2,628,446
1 FCFF1 2,928,665 = 2,628,446 × (1 + 11.42%) 2,699,025
2 FCFF2 3,221,392 = 2,928,665 × (1 + 10.00%) 2,736,012
3 FCFF3 3,497,417 = 3,221,392 × (1 + 8.57%) 2,737,532
4 FCFF4 3,747,197 = 3,497,417 × (1 + 7.14%) 2,703,059
5 FCFF5 3,961,354 = 3,747,197 × (1 + 5.72%) 2,633,479
5 Terminal value (TV5) 149,930,783 = 3,961,354 × (1 + 5.72%) ÷ (8.51%5.72%) 99,672,874
Intrinsic value of Automatic Data Processing Inc. capital 113,181,980
Less: Debt (fair value) 3,090,800
Intrinsic value of Automatic Data Processing Inc. common stock 110,091,180

Intrinsic value of Automatic Data Processing Inc. common stock (per share) \$261.26
Current share price \$228.75

Based on: 10-K (reporting date: 2021-06-30).

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)

Automatic Data Processing Inc., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 96,391,600 0.97 8.73%
Debt (fair value) 3,090,800 0.03 1.74% = 2.37% × (1 – 26.48%)

Based on: 10-K (reporting date: 2021-06-30).

1 US\$ in thousands

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 421,384,042 × \$228.75
= \$96,391,599,607.50

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
= (22.70% + 22.50% + 23.70% + 25.30% + 31.50% + 33.20%) ÷ 6
= 26.48%

WACC = 8.51%

### FCFF Growth Rate (g)

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

Automatic Data Processing Inc., PRAT model

Average Jun 30, 2021 Jun 30, 2020 Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016
Selected Financial Data (US\$ in thousands)
Interest expense 59,700  107,100  129,900  102,700  80,000  56,200
Net loss from discontinued operations —  —  —  —  —  (900)
Net earnings 2,598,500  2,466,500  2,292,800  1,620,800  1,733,400  1,492,500

Effective income tax rate (EITR)1 22.70% 22.50% 23.70% 25.30% 31.50% 33.20%

Interest expense, after tax2 46,148  83,003  99,114  76,717  54,800  37,542
Add: Dividends 1,583,700  1,523,900  1,338,800  1,120,000  1,008,500  955,700
Interest expense (after tax) and dividends 1,629,848  1,606,903  1,437,914  1,196,717  1,063,300  993,242

EBIT(1 – EITR)3 2,644,648  2,549,503  2,391,914  1,697,517  1,788,200  1,530,942

Obligations under reverse repurchase agreements 23,500  13,600  262,000  —  —  —
Short-term debt —  1,001,800  —  —  —  —
Long-term debt 2,985,000  1,002,800  2,002,200  2,002,400  2,002,400  2,007,700
Stockholders’ equity 5,670,100  5,752,200  5,399,900  3,459,600  3,977,000  4,481,600
Total capital 8,678,600  7,770,400  7,664,100  5,462,000  5,979,400  6,489,300
Financial Ratios
Retention rate (RR)4 0.38 0.37 0.40 0.30 0.41 0.35
Return on invested capital (ROIC)5 30.47% 32.81% 31.21% 31.08% 29.91% 23.59%
Averages
RR 0.37
ROIC 31.10%

FCFF growth rate (g)6 11.42%

Based on: 10-K (reporting date: 2021-06-30), 10-K (reporting date: 2020-06-30), 10-K (reporting date: 2019-06-30), 10-K (reporting date: 2018-06-30), 10-K (reporting date: 2017-06-30), 10-K (reporting date: 2016-06-30).

2021 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 59,700 × (1 – 22.70%)
= 46,148

3 EBIT(1 – EITR) = Net earnings – Net loss from discontinued operations + Interest expense, after tax
= 2,598,5000 + 46,148
= 2,644,648

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [2,644,6481,629,848] ÷ 2,644,648
= 0.38

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 2,644,648 ÷ 8,678,600
= 30.47%

6 g = RR × ROIC
= 0.37 × 31.10%
= 11.42%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (99,482,400 × 8.51%2,628,446) ÷ (99,482,400 + 2,628,446)
= 5.72%

where:

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

#### FCFF growth rate (g) forecast

Automatic Data Processing Inc., H-model

Year Value gt
1 g1 11.42%
2 g2 10.00%
3 g3 8.57%
4 g4 7.14%
5 and thereafter g5 5.72%

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)
= 11.42% + (5.72%11.42%) × (2 – 1) ÷ (5 – 1)
= 10.00%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 11.42% + (5.72%11.42%) × (3 – 1) ÷ (5 – 1)
= 8.57%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 11.42% + (5.72%11.42%) × (4 – 1) ÷ (5 – 1)
= 7.14%