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)

Comcast Corp., 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 12.90%
01 FCFE0 13,303 
1 FCFE1 15,186  = 13,303 × (1 + 14.15%) 13,451 
2 FCFE2 16,947  = 15,186 × (1 + 11.60%) 13,297 
3 FCFE3 18,481  = 16,947 × (1 + 9.05%) 12,844 
4 FCFE4 19,682  = 18,481 × (1 + 6.50%) 12,116 
5 FCFE5 20,459  = 19,682 × (1 + 3.95%) 11,156 
5 Terminal value (TV5) 237,646  = 20,459 × (1 + 3.95%) ÷ (12.90% – 3.95%) 129,579 
Intrinsic value of Comcast's common stock 192,442 
Intrinsic value of Comcast's common stock (per share) $41.43
Current share price $33.27

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 3.00%
Expected rate of return on market portfolio2 E(RM) 12.48%
Systematic risk (β) of Comcast's common stock βCMCSA 1.04
Required rate of return on Comcast's common stock3 rCMCSA 12.90%

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 rCMCSA = RF + βCMCSA [E(RM) – RF]
= 3.00% + 1.04 [12.48% – 3.00%]
= 12.90%

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FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Comcast Corp., PRAT model

 
Average Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Selected Financial Data (USD $ in millions)
Dividends declared 2,975  2,656  2,483  2,320  2,046 
Net income attributable to Comcast Corporation 22,714  8,695  8,163  8,380  6,816 
Revenue 84,526  80,403  74,510  68,775  64,657 
Total assets 186,949  180,500  166,574  159,339  158,813 
Total Comcast Corporation shareholders' equity 68,606  53,943  52,269  52,711  50,694 
Ratios
Retention rate1 0.87 0.69 0.70 0.72 0.70
Profit margin2 26.87% 10.81% 10.96% 12.18% 10.54%
Asset turnover3 0.45 0.45 0.45 0.43 0.41
Financial leverage4 2.72 3.35 3.19 3.02 3.13
Averages
Retention rate 0.74
Profit margin 14.27%
Asset turnover 0.44
Financial leverage 3.08
Growth rate of FCFE (g)5 14.15%

2017 Calculations

1 Retention rate = (Net income attributable to Comcast Corporation – Dividends declared) ÷ Net income attributable to Comcast Corporation
= (22,714 – 2,975) ÷ 22,714 = 0.87

2 Profit margin = 100 × Net income attributable to Comcast Corporation ÷ Revenue
= 100 × 22,714 ÷ 84,526 = 26.87%

3 Asset turnover = Revenue ÷ Total assets
= 84,526 ÷ 186,949 = 0.45

4 Financial leverage = Total assets ÷ Total Comcast Corporation shareholders' equity
= 186,949 ÷ 68,606 = 2.72

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.74 × 14.27% × 0.44 × 3.08 = 14.15%

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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 × (154,523 × 12.90% – 13,303) ÷ (154,523 + 13,303) = 3.95%

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

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FCFE growth rate (g) forecast

Comcast Corp., H-model

 
Year Value gt
1 g1 14.15%
2 g2 11.60%
3 g3 9.05%
4 g4 6.50%
5 and thereafter g5 3.95%

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)
= 14.15% + (3.95% – 14.15%) × (2 – 1) ÷ (5 – 1) = 11.60%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 14.15% + (3.95% – 14.15%) × (3 – 1) ÷ (5 – 1) = 9.05%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 14.15% + (3.95% – 14.15%) × (4 – 1) ÷ (5 – 1) = 6.50%

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