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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)

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

USD $ in millions, except per share data

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Year Value FCFEt or Terminal value (TVt) Calculation Present value at 8.88%
01 FCFE0 17,483 
1 FCFE1 19,696  = 17,483 × (1 + 12.66%) 18,090 
2 FCFE2 21,767  = 19,696 × (1 + 10.52%) 18,363 
3 FCFE3 23,590  = 21,767 × (1 + 8.38%) 18,279 
4 FCFE4 25,061  = 23,590 × (1 + 6.23%) 17,836 
5 FCFE5 26,087  = 25,061 × (1 + 4.09%) 17,052 
5 Terminal value (TV5) 567,869  = 26,087 × (1 + 4.09%) ÷ (8.88%4.09%) 371,198 
Intrinsic value of Facebook's common stock 460,818 
Intrinsic value of Facebook's common stock (per share) $160.35
Current share price $132.43

Based on: 10-K (filing date: 2018-02-01).

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)

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Assumptions
Rate of return on LT Treasury Composite1 RF 3.27%
Expected rate of return on market portfolio2 E(RM) 12.45%
Systematic risk (β) of Facebook's common stock βFB 0.61
Required rate of return on Facebook's common stock3 rFB 8.88%

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 rFB = RF + βFB [E(RM) – RF]
= 3.27% + 0.61 [12.45%3.27%]
= 8.88%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Facebook Inc., PRAT model

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Average Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Selected Financial Data (USD $ in millions)
Net income 15,934  10,217  3,688  2,940  1,500 
Revenue 40,653  27,638  17,928  12,466  7,872 
Total assets 84,524  64,961  49,407  40,184  17,895 
Stockholders' equity 74,347  59,194  44,218  36,096  15,470 
Ratios
Retention rate1 1.00 1.00 1.00 1.00 1.00
Profit margin2 39.20% 36.97% 20.57% 23.58% 19.05%
Asset turnover3 0.48 0.43 0.36 0.31 0.44
Financial leverage4 1.14 1.10 1.12 1.11 1.16
Averages
Retention rate 1.00
Profit margin 27.87%
Asset turnover 0.40
Financial leverage 1.12
Growth rate of FCFE (g)5 12.66%

Based on: 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), 10-K (filing date: 2014-01-31).

2017 Calculations

1 Company does not pay dividends

2 Profit margin = 100 × Net income ÷ Revenue
= 100 × 15,934 ÷ 40,653 = 39.20%

3 Asset turnover = Revenue ÷ Total assets
= 40,653 ÷ 84,524 = 0.48

4 Financial leverage = Total assets ÷ Stockholders' equity
= 84,524 ÷ 74,347 = 1.14

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 1.00 × 27.87% × 0.40 × 1.12 = 12.66%


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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (380,576 × 8.88%17,483) ÷ (380,576 + 17,483) = 4.09%

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


FCFE growth rate (g) forecast

Facebook Inc., H-model

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Year Value gt
1 g1 12.66%
2 g2 10.52%
3 g3 8.38%
4 g4 6.23%
5 and thereafter g5 4.09%

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)
= 12.66% + (4.09%12.66%) × (2 – 1) ÷ (5 – 1) = 10.52%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 12.66% + (4.09%12.66%) × (3 – 1) ÷ (5 – 1) = 8.38%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 12.66% + (4.09%12.66%) × (4 – 1) ÷ (5 – 1) = 6.23%