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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)

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

USD $ in thousands, except per share data

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Year Value FCFEt or Terminal value (TVt) Calculation Present value at 15.49%
01 FCFE0 6,118,347 
1 FCFE1 7,707,864  = 6,118,347 × (1 + 25.98%) 6,673,997 
2 FCFE2 9,370,580  = 7,707,864 × (1 + 21.57%) 7,025,388 
3 FCFE3 10,978,931  = 9,370,580 × (1 + 17.16%) 7,127,150 
4 FCFE4 12,379,404  = 10,978,931 × (1 + 12.76%) 6,958,370 
5 FCFE5 13,412,858  = 12,379,404 × (1 + 8.35%) 6,528,014 
5 Terminal value (TV5) 203,457,626  = 13,412,858 × (1 + 8.35%) ÷ (15.49% – 8.35%) 99,022,456 
Intrinsic value of Booking Holdings's common stock 133,335,375 
Intrinsic value of Booking Holdings's common stock (per share) $2,808.71
Current share price $1,955.01

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 3.20%
Expected rate of return on market portfolio2 E(RM) 12.22%
Systematic risk (β) of Booking Holdings's common stock βBKNG 1.36
Required rate of return on Booking Holdings's common stock3 rBKNG 15.49%

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 rBKNG = RF + βBKNG [E(RM) – RF]
= 3.20% + 1.36 [12.22% – 3.20%]
= 15.49%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Booking Holdings 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 thousands)
Net income applicable to common stockholders 2,340,765  2,134,987  2,551,360  2,421,753  1,892,663 
Revenues 12,681,082  10,743,006  9,223,987  8,441,971  6,793,306 
Total assets 25,451,263  19,838,973  17,420,575  14,940,563  10,444,460 
Stockholders' equity 11,260,598  9,820,142  8,795,469  8,566,694  6,909,729 
Ratios
Retention rate1 1.00 1.00 1.00 1.00 1.00
Profit margin2 18.46% 19.87% 27.66% 28.69% 27.86%
Asset turnover3 0.50 0.54 0.53 0.57 0.65
Financial leverage4 2.26 2.02 1.98 1.74 1.51
Averages
Retention rate 1.00
Profit margin 24.51%
Asset turnover 0.56
Financial leverage 1.90
Growth rate of FCFE (g)5 25.98%

2017 Calculations

1 Company does not pay dividends

2 Profit margin = 100 × Net income applicable to common stockholders ÷ Revenues
= 100 × 2,340,765 ÷ 12,681,082 = 18.46%

3 Asset turnover = Revenues ÷ Total assets
= 12,681,082 ÷ 25,451,263 = 0.50

4 Financial leverage = Total assets ÷ Stockholders' equity
= 25,451,263 ÷ 11,260,598 = 2.26

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 1.00 × 24.51% × 0.56 × 1.90 = 25.98%


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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (92,808,286 × 15.49% – 6,118,347) ÷ (92,808,286 + 6,118,347) = 8.35%

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


FCFE growth rate (g) forecast

Booking Holdings Inc., H-model

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Year Value gt
1 g1 25.98%
2 g2 21.57%
3 g3 17.16%
4 g4 12.76%
5 and thereafter g5 8.35%

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)
= 25.98% + (8.35% – 25.98%) × (2 – 1) ÷ (5 – 1) = 21.57%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 25.98% + (8.35% – 25.98%) × (3 – 1) ÷ (5 – 1) = 17.16%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 25.98% + (8.35% – 25.98%) × (4 – 1) ÷ (5 – 1) = 12.76%