## Present Value of Free Cash Flow to Equity (FCFE)

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 asset base.

### Intrinsic Stock Value (Valuation Summary)

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

US\$ in millions, except per share data

Year Value FCFEt or Terminal value (TVt) Calculation Present value at 14.67%
01 FCFE0 15,886
1 FCFE1 15,692 = 15,886 × (1 + -1.22%) 13,684
2 FCFE2 15,919 = 15,692 × (1 + 1.44%) 12,106
3 FCFE3 16,572 = 15,919 × (1 + 4.11%) 10,990
4 FCFE4 17,694 = 16,572 × (1 + 6.77%) 10,233
5 FCFE5 19,364 = 17,694 × (1 + 9.43%) 9,766
5 Terminal value (TV5) 404,538 = 19,364 × (1 + 9.43%) ÷ (14.67%9.43%) 204,016
Intrinsic value of Broadcom Inc. common stock 260,795

Intrinsic value of Broadcom Inc. common stock (per share) \$631.95
Current share price \$804.20

Based on: 10-K (reporting date: 2022-10-30).

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.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 3.99% Expected rate of return on market portfolio2 E(RM) 13.77% Systematic risk of Broadcom Inc. common stock βAVGO 1.09 Required rate of return on Broadcom Inc. common stock3 rAVGO 14.67%

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).

3 rAVGO = RF + βAVGO [E(RM) – RF]
= 3.99% + 1.09 [13.77%3.99%]
= 14.67%

### FCFE Growth Rate (g)

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

Average Oct 30, 2022 Oct 31, 2021 Nov 1, 2020 Nov 3, 2019 Nov 4, 2018 Oct 29, 2017
Selected Financial Data (US\$ in millions)
Dividends to common stockholders 6,733 5,913 5,235 4,235 2,921 1,653
Dividends to preferred stockholders 272 299 297 29
Net income attributable to Broadcom Inc. stockholders 11,495 6,736 2,960 2,724 12,259 1,692
Net revenue 33,203 27,450 23,888 22,597 20,848 17,636
Total assets 73,249 75,570 75,933 67,493 50,124 54,418
Total Broadcom Inc. stockholders’ equity 22,709 24,962 23,874 24,941 26,657 20,285
Financial Ratios
Retention rate1 0.40 0.08 -0.97 -0.57 0.76 0.02
Profit margin2 33.80% 23.45% 11.15% 11.93% 58.80% 9.59%
Asset turnover3 0.45 0.36 0.31 0.33 0.42 0.32
Financial leverage4 3.23 3.03 3.18 2.71 1.88 2.68
Averages
Retention rate -0.05
Profit margin 24.79%
Asset turnover 0.37
Financial leverage 2.96

FCFE growth rate (g)5 -1.22%

Based on: 10-K (reporting date: 2022-10-30), 10-K (reporting date: 2021-10-31), 10-K (reporting date: 2020-11-01), 10-K (reporting date: 2019-11-03), 10-K (reporting date: 2018-11-04), 10-K (reporting date: 2017-10-29).

2022 Calculations

1 Retention rate = (Net income attributable to Broadcom Inc. stockholders – Dividends to common stockholders – Dividends to preferred stockholders) ÷ (Net income attributable to Broadcom Inc. stockholders – Dividends to preferred stockholders)
= (11,4956,733272) ÷ (11,495272)
= 0.40

2 Profit margin = 100 × (Net income attributable to Broadcom Inc. stockholders – Dividends to preferred stockholders) ÷ Net revenue
= 100 × (11,495272) ÷ 33,203
= 33.80%

3 Asset turnover = Net revenue ÷ Total assets
= 33,203 ÷ 73,249
= 0.45

4 Financial leverage = Total assets ÷ Total Broadcom Inc. stockholders’ equity
= 73,249 ÷ 22,709
= 3.23

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= -0.05 × 24.79% × 0.37 × 2.96
= -1.22%

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (331,882 × 14.67%15,886) ÷ (331,882 + 15,886)
= 9.43%

where:
Equity market value0 = current market value of Broadcom Inc. common stock (US\$ in millions)
FCFE0 = the last year Broadcom Inc. free cash flow to equity (US\$ in millions)
r = required rate of return on Broadcom Inc. common stock

#### FCFE growth rate (g) forecast

Year Value gt
1 g1 -1.22%
2 g2 1.44%
3 g3 4.11%
4 g4 6.77%
5 and thereafter g5 9.43%

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)
= -1.22% + (9.43%-1.22%) × (2 – 1) ÷ (5 – 1)
= 1.44%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= -1.22% + (9.43%-1.22%) × (3 – 1) ÷ (5 – 1)
= 4.11%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= -1.22% + (9.43%-1.22%) × (4 – 1) ÷ (5 – 1)
= 6.77%