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)
Weighted Average Cost of Capital (WACC)
FCFF Growth Rate (g)

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

US$ in thousands, except per share data

Year	Value	FCFF_t or Terminal value (TV_t)	Calculation	Present value at 10.59%
0¹	FCFF₀	2,628,446
1	FCFF₁	2,928,665	= 2,628,446 × (1 + 11.42%)	2,648,209
2	FCFF₂	3,235,115	= 2,928,665 × (1 + 10.46%)	2,645,177
3	FCFF₃	3,542,635	= 3,235,115 × (1 + 9.51%)	2,619,232
4	FCFF₄	3,845,445	= 3,542,635 × (1 + 8.55%)	2,570,850
5	FCFF₅	4,137,294	= 3,845,445 × (1 + 7.59%)	2,501,088
5	Terminal value (TV₅)	148,329,986	= 4,137,294 × (1 + 7.59%) ÷ (10.59% – 7.59%)	89,668,832
Intrinsic value of Automatic Data Processing Inc. capital				102,653,388
Less: Debt (fair value)				3,090,800
Intrinsic value of Automatic Data Processing Inc. common stock				99,562,588

Intrinsic value of Automatic Data Processing Inc. common stock (per share)				$238.33
Current share price				$218.18

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

¹ See details »

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.

Automatic Data Processing Inc., cost of capital

	Value¹	Weight	Required rate of return²	Calculation
Equity (fair value)	91,144,074	0.97	10.89%
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
= 417,747,152 × $218.18
= $91,144,073,623.36

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 = 10.59%

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).

¹ See details »

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
= 2,598,500 – 0 + 46,148
= 2,644,648

⁴ RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [2,644,648 – 1,629,848] ÷ 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 × (94,234,874 × 10.59% – 2,628,446) ÷ (94,234,874 + 2,628,446)
= 7.59%

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	g_t
1	g₁	11.42%
2	g₂	10.46%
3	g₃	9.51%
4	g₄	8.55%
5 and thereafter	g₅	7.59%

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 + (g₅ – g₁) × (2 – 1) ÷ (5 – 1)
= 11.42% + (7.59% – 11.42%) × (2 – 1) ÷ (5 – 1)
= 10.46%

g₃ = g₁ + (g₅ – g₁) × (3 – 1) ÷ (5 – 1)
= 11.42% + (7.59% – 11.42%) × (3 – 1) ÷ (5 – 1)
= 9.51%

g₄ = g₁ + (g₅ – g₁) × (4 – 1) ÷ (5 – 1)
= 11.42% + (7.59% – 11.42%) × (4 – 1) ÷ (5 – 1)
= 8.55%

Automatic Data Processing Inc. (NASDAQ:ADP)

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

Intrinsic Stock Value (Valuation Summary)

Weighted Average Cost of Capital (WACC)

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

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

FCFF growth rate (g) forecast