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)

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

USD $ in millions, except per share data

 
Year Value FCFEt or Terminal value (TVt) Calculation Present value at 13.45%
01 FCFE0 11,931 
1 FCFE1 27,724  = 11,931 × (1 + 132.37%) 24,438 
2 FCFE2 54,933  = 27,724 × (1 + 98.14%) 42,682 
3 FCFE3 90,041  = 54,933 × (1 + 63.91%) 61,669 
4 FCFE4 116,768  = 90,041 × (1 + 29.68%) 70,494 
5 FCFE5 111,459  = 116,768 × (1 + -4.55%) 59,314 
5 Terminal value (TV5) 591,310  = 111,459 × (1 + -4.55%) ÷ (13.45% – -4.55%) 314,671 
Intrinsic value of Charter's common stock 573,268 
Intrinsic value of Charter's common stock (per share) $2,414.13
Current share price $266.55

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.

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Required Rate of Return (r)

 
Assumptions
Rate of return on LT Treasury Composite1 RF 3.16%
Expected rate of return on market portfolio2 E(RM) 12.47%
Systematic risk (β) of Charter's common stock βCHTR 1.10
Required rate of return on Charter's common stock3 rCHTR 13.45%

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 rCHTR = RF + βCHTR [E(RM) – RF]
= 3.16% + 1.10 [12.47% – 3.16%]
= 13.45%

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FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Charter Communications Inc., PRAT model

 
Average Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Selected Financial Data (USD $ in millions)
Net income (loss) attributable to Charter shareholders 9,895  3,522  (271) (183) (169)
Revenues 41,581  29,003  9,754  9,108  8,155 
Total assets 146,623  149,067  39,316  24,550  17,295 
Total Charter shareholders' equity (deficit) 39,084  40,139  (46) 146  151 
Ratios
Retention rate1 1.00 1.00 1.00 1.00 1.00
Profit margin2 23.80% 12.14% -2.78% -2.01% -2.07%
Asset turnover3 0.28 0.19 0.25 0.37 0.47
Financial leverage4 3.75 3.71 168.15 114.54
Averages
Retention rate 1.00
Profit margin 5.82%
Asset turnover 0.31
Financial leverage 72.54
Growth rate of FCFE (g)5 132.37%

2017 Calculations

1 Company does not pay dividends

2 Profit margin = 100 × Net income (loss) attributable to Charter shareholders ÷ Revenues
= 100 × 9,895 ÷ 41,581 = 23.80%

3 Asset turnover = Revenues ÷ Total assets
= 41,581 ÷ 146,623 = 0.28

4 Financial leverage = Total assets ÷ Total Charter shareholders' equity (deficit)
= 146,623 ÷ 39,084 = 3.75

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 1.00 × 5.82% × 0.31 × 72.54 = 132.37%

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (63,296 × 13.45% – 11,931) ÷ (63,296 + 11,931) = -4.55%

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

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FCFE growth rate (g) forecast

Charter Communications Inc., H-model

 
Year Value gt
1 g1 132.37%
2 g2 98.14%
3 g3 63.91%
4 g4 29.68%
5 and thereafter g5 -4.55%

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)
= 132.37% + (-4.55% – 132.37%) × (2 – 1) ÷ (5 – 1) = 98.14%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 132.37% + (-4.55% – 132.37%) × (3 – 1) ÷ (5 – 1) = 63.91%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 132.37% + (-4.55% – 132.37%) × (4 – 1) ÷ (5 – 1) = 29.68%

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