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

Intermediate level

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)

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

US\$ in millions, except per share data

Year Value FCFFt or Terminal value (TVt) Calculation Present value at 10.52%
01 FCFF0 10,370
1 FCFF1 10,589  = 10,370  × (1 + 2.11%) 9,581
2 FCFF2 10,879  = 10,589  × (1 + 2.74%) 8,907
3 FCFF3 11,244  = 10,879  × (1 + 3.36%) 8,330
4 FCFF4 11,692  = 11,244  × (1 + 3.98%) 7,837
5 FCFF5 12,230  = 11,692  × (1 + 4.61%) 7,418
5 Terminal value (TV5) 216,430  = 12,230  × (1 + 4.61%) ÷ (10.52%4.61%) 131,274
Intrinsic value of Broadcom Inc.’s capital 173,347
Less: 8.00% Mandatory Convertible Preferred Stock, Series A (fair value) 4,394
Less: Debt (fair value) 33,652
Intrinsic value of Broadcom Inc.’s common stock 135,301

Intrinsic value of Broadcom Inc.’s common stock (per share) \$334.49
Current share price \$359.60

Based on: 10-K (filing date: 2019-12-20).

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)

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 145,459  0.79 12.28%
8.00% Mandatory Convertible Preferred Stock, Series A (fair value) 4,394  0.02 8.00%
Debt (fair value) 33,652  0.18 3.23% = 3.70% × (1 – 12.62%)

Based on: 10-K (filing date: 2019-12-20).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 404,501,331 × \$359.60 = \$145,458,678,627.60

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
= (21.00% + 21.00% + 1.90% + 17.00% + 5.20% + 9.60%) ÷ 6 = 12.62%

WACC = 10.52%

### FCFF Growth Rate (g)

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

Average Nov 3, 2019 Nov 4, 2018 Oct 29, 2017 Oct 30, 2016 Nov 1, 2015 Nov 2, 2014
Selected Financial Data (US\$ in millions)
Interest expense 1,444  628  454  585  191  110
Loss from discontinued operations, net of income taxes (12) (19) (6) (112) (27) (46)
Net income (loss) attributable to Broadcom Inc. stockholders 2,724  12,259  1,692  (1,739) 1,364  263

Effective income tax rate (EITR)1 21.00% 21.00% 1.90% 17.00% 5.20% 9.60%

Interest expense, after tax2 1,141  496  445  486  181  99
Add: Dividends to preferred stockholders 29  —  —  —  —  —
Add: Dividends to common stockholders 4,235  2,921  1,653  716  408  284
Interest expense (after tax) and dividends 5,405  3,417  2,098  1,202  589  383

EBIT(1 – EITR)3 3,877  12,774  2,143  (1,141) 1,572  408

Current portion of long-term debt 2,787  —  117  454  46  46
Long-term debt, excluding current portion 30,011  17,493  17,431  13,188  3,903  4,543
Convertible notes payable to related party, non-current —  —  —  —  —  920
Total Broadcom Inc. stockholders’ equity 24,941  26,657  20,285  18,892  4,714  3,243
Total capital 57,739  44,150  37,833  32,534  8,663  8,752
Financial Ratios
Retention rate (RR)4 -0.39 0.73 0.02 0.63 0.06
Return on invested capital (ROIC)5 6.71% 28.93% 5.67% -3.51% 18.15% 4.67%
Averages
RR 0.21
ROIC 10.10%

FCFF growth rate (g)6 2.11%

Based on: 10-K (filing date: 2019-12-20), 10-K (filing date: 2018-12-21), 10-K (filing date: 2017-12-21), 10-K (filing date: 2016-12-23), 10-K (filing date: 2015-12-17), 10-K (filing date: 2014-12-29).

2019 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 1,444 × (1 – 21.00%) = 1,141

3 EBIT(1 – EITR) = Net income (loss) attributable to Broadcom Inc. stockholders – Loss from discontinued operations, net of income taxes + Interest expense, after tax
= 2,724-12 + 1,141 = 3,877

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [3,8775,405] ÷ 3,877 = -0.39

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 3,877 ÷ 57,739 = 6.71%

6 g = RR × ROIC
= 0.21 × 10.10% = 2.11%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (183,505 × 10.52%10,370) ÷ (183,505 + 10,370) = 4.61%

where:
Total capital, fair value0 = current fair value of Broadcom Inc.’s debt and equity (US\$ in millions)
FCFF0 = the last year Broadcom Inc.’s free cash flow to the firm (US\$ in millions)
WACC = weighted average cost of Broadcom Inc.’s capital

#### FCFF growth rate (g) forecast

Year Value gt
1 g1 2.11%
2 g2 2.74%
3 g3 3.36%
4 g4 3.98%
5 and thereafter g5 4.61%

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)
= 2.11% + (4.61%2.11%) × (2 – 1) ÷ (5 – 1) = 2.74%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 2.11% + (4.61%2.11%) × (3 – 1) ÷ (5 – 1) = 3.36%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 2.11% + (4.61%2.11%) × (4 – 1) ÷ (5 – 1) = 3.98%