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

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 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)

Facebook 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 8.74%
01 FCFE0 15,359
1 FCFE1 17,738  = 15,359 × (1 + 15.49%) 16,312
2 FCFE2 20,071  = 17,738 × (1 + 13.15%) 16,974
3 FCFE3 22,243  = 20,071 × (1 + 10.82%) 17,299
4 FCFE4 24,131  = 22,243 × (1 + 8.49%) 17,259
5 FCFE5 25,616  = 24,131 × (1 + 6.16%) 16,849
5 Terminal value (TV5) 1,052,656  = 25,616 × (1 + 6.16%) ÷ (8.74%6.16%) 692,384
Intrinsic value of Facebook Inc.’s common stock 777,078

Intrinsic value of Facebook Inc.’s common stock (per share) \$272.49
Current share price \$221.32

Based on: 10-K (filing date: 2019-01-31).

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 2.14% Expected rate of return on market portfolio2 E(RM) 11.58% Systematic risk of Facebook Inc.’s common stock βFB 0.70 Required rate of return on Facebook Inc.’s common stock3 rFB 8.74%

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 rFB = RF + βFB [E(RM) – RF]
= 2.14% + 0.70 [11.58%2.14%]
= 8.74%

### FCFE Growth Rate (g)

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

Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (US\$ in millions)
Net income 22,112  15,934  10,217  3,688  2,940
Revenue 55,838  40,653  27,638  17,928  12,466
Total assets 97,334  84,524  64,961  49,407  40,184
Stockholders’ equity 84,127  74,347  59,194  44,218  36,096
Financial Ratios
Retention rate1 1.00 1.00 1.00 1.00 1.00
Profit margin2 39.60% 39.20% 36.97% 20.57% 23.58%
Asset turnover3 0.57 0.48 0.43 0.36 0.31
Financial leverage4 1.16 1.14 1.10 1.12 1.11
Averages
Retention rate 1.00
Profit margin 31.98%
Asset turnover 0.43
Financial leverage 1.12

FCFE growth rate (g)5 15.49%

Based on: 10-K (filing date: 2019-01-31), 10-K (filing date: 2018-02-01), 10-K (filing date: 2017-02-03), 10-K (filing date: 2016-01-28), 10-K (filing date: 2015-01-29).

2018 Calculations

1 Company does not pay dividends

2 Profit margin = 100 × Net income ÷ Revenue
= 100 × 22,112 ÷ 55,838 = 39.60%

3 Asset turnover = Revenue ÷ Total assets
= 55,838 ÷ 97,334 = 0.57

4 Financial leverage = Total assets ÷ Stockholders’ equity
= 97,334 ÷ 84,127 = 1.16

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 1.00 × 31.98% × 0.43 × 1.12 = 15.49%

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (631,149 × 8.74%15,359) ÷ (631,149 + 15,359) = 6.16%

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

#### FCFE growth rate (g) forecast

Year Value gt
1 g1 15.49%
2 g2 13.15%
3 g3 10.82%
4 g4 8.49%
5 and thereafter g5 6.16%

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)
= 15.49% + (6.16%15.49%) × (2 – 1) ÷ (5 – 1) = 13.15%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 15.49% + (6.16%15.49%) × (3 – 1) ÷ (5 – 1) = 10.82%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 15.49% + (6.16%15.49%) × (4 – 1) ÷ (5 – 1) = 8.49%