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)
Weighted Average Cost of Capital (WACC)
FCFF Growth Rate (g)

Costco Wholesale Corp., free cash flow to the firm (FCFF) forecast

US$ in millions, except per share data

Year	Value	FCFF_t or Terminal value (TV_t)	Calculation	Present value at 11.57%
0¹	FCFF₀	6,738
1	FCFF₁	7,589	= 6,738 × (1 + 12.63%)	6,802
2	FCFF₂	8,485	= 7,589 × (1 + 11.81%)	6,817
3	FCFF₃	9,417	= 8,485 × (1 + 10.99%)	6,782
4	FCFF₄	10,374	= 9,417 × (1 + 10.16%)	6,696
5	FCFF₅	11,343	= 10,374 × (1 + 9.34%)	6,563
5	Terminal value (TV₅)	556,505	= 11,343 × (1 + 9.34%) ÷ (11.57% – 9.34%)	321,974
Intrinsic value of Costco Wholesale Corp. capital				355,633
Less: Long-term debt, including current portion and finance lease liabilities (fair value)				7,170
Intrinsic value of Costco Wholesale Corp. common stock				348,463

Intrinsic value of Costco Wholesale Corp. common stock (per share)				$785.71
Current share price				$729.18

Based on: 10-K (reporting date: 2023-09-03).

¹ See details »

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.

Costco Wholesale Corp., cost of capital

	Value¹	Weight	Required rate of return²	Calculation
Equity (fair value)	323,394	0.98	11.78%
Long-term debt, including current portion and finance lease liabilities (fair value)	7,170	0.02	1.85%	= 2.48% × (1 – 25.30%)

Based on: 10-K (reporting date: 2023-09-03).

¹ US$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 443,504,036 × $729.18
= $323,394,272,970.48

Long-term debt, including current portion and finance lease liabilities (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
= (25.90% + 24.60% + 24.00% + 24.40% + 24.90% + 28.00%) ÷ 6
= 25.30%

WACC = 11.57%

FCFF growth rate (g) implied by PRAT model

Costco Wholesale Corp., PRAT model

	Average	Sep 3, 2023	Aug 28, 2022	Aug 29, 2021	Aug 30, 2020	Sep 1, 2019	Sep 2, 2018
Selected Financial Data (US$ in millions)
Interest expense		160)	158)	171)	160)	150)	159)
Net income attributable to Costco		6,292)	5,844)	5,007)	4,002)	3,659)	3,134)

Effective income tax rate (EITR)¹		25.90%	24.60%	24.00%	24.40%	24.90%	28.00%

Interest expense, after tax²		119)	119)	130)	121)	113)	114)
Add: Cash dividends declared		1,698)	1,498)	5,748)	1,193)	1,057)	939)
Interest expense (after tax) and dividends		1,817)	1,617)	5,878)	1,314)	1,170)	1,053)

EBIT(1 – EITR)³		6,411)	5,963)	5,137)	4,123)	3,772)	3,248)

Current portion of long-term debt		1,081)	73)	799)	95)	1,699)	90)
Current finance lease liabilities		129)	245)	72)	31)	26)	7)
Long-term debt, excluding current portion		5,377)	6,484)	6,692)	7,514)	5,124)	6,487)
Long-term finance lease liabilities		1,303)	1,383)	980)	657)	395)	390)
Total Costco stockholders’ equity		25,058)	20,642)	17,564)	18,284)	15,243)	12,799)
Total capital		32,948)	28,827)	26,107)	26,581)	22,487)	19,773)
Financial Ratios
Retention rate (RR)⁴		0.72	0.73	-0.14	0.68	0.69	0.68
Return on invested capital (ROIC)⁵		19.46%	20.69%	19.68%	15.51%	16.77%	16.43%
Averages
RR	0.70
ROIC	18.09%

FCFF growth rate (g)⁶	12.63%

Based on: 10-K (reporting date: 2023-09-03), 10-K (reporting date: 2022-08-28), 10-K (reporting date: 2021-08-29), 10-K (reporting date: 2020-08-30), 10-K (reporting date: 2019-09-01), 10-K (reporting date: 2018-09-02).

¹ See details »

2023 Calculations

² Interest expense, after tax = Interest expense × (1 – EITR)
= 160 × (1 – 25.90%)
= 119

³ EBIT(1 – EITR) = Net income attributable to Costco + Interest expense, after tax
= 6,292 + 119
= 6,411

⁴ RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [6,411 – 1,817] ÷ 6,411
= 0.72

⁵ ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 6,411 ÷ 32,948
= 19.46%

⁶ g = RR × ROIC
= 0.70 × 18.09%
= 12.63%

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

g = 100 × (Total capital, fair value₀ × WACC – FCFF₀) ÷ (Total capital, fair value₀ + FCFF₀)
= 100 × (330,564 × 11.57% – 6,738) ÷ (330,564 + 6,738)
= 9.34%

where:

Total capital, fair value₀ = current fair value of Costco Wholesale Corp. debt and equity (US$ in millions)
FCFF₀ = the last year Costco Wholesale Corp. free cash flow to the firm (US$ in millions)
WACC = weighted average cost of Costco Wholesale Corp. capital

FCFF growth rate (g) forecast

Costco Wholesale Corp., H-model

Year	Value	g_t
1	g₁	12.63%
2	g₂	11.81%
3	g₃	10.99%
4	g₄	10.16%
5 and thereafter	g₅	9.34%

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 + (g₅ – g₁) × (2 – 1) ÷ (5 – 1)
= 12.63% + (9.34% – 12.63%) × (2 – 1) ÷ (5 – 1)
= 11.81%

g₃ = g₁ + (g₅ – g₁) × (3 – 1) ÷ (5 – 1)
= 12.63% + (9.34% – 12.63%) × (3 – 1) ÷ (5 – 1)
= 10.99%

g₄ = g₁ + (g₅ – g₁) × (4 – 1) ÷ (5 – 1)
= 12.63% + (9.34% – 12.63%) × (4 – 1) ÷ (5 – 1)
= 10.16%

Costco Wholesale Corp. (NASDAQ:COST)

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

Intrinsic Stock Value (Valuation Summary)

Weighted Average Cost of Capital (WACC)

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

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

FCFF growth rate (g) forecast