## 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)

Gilead Sciences 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 6.07%
01 FCFE0 13,202
1 FCFE1 -5,379 = 13,202 × (1 + -140.75%) -5,072
2 FCFE2 406 = -5,379 × (1 + -107.55%) 361
3 FCFE3 104 = 406 × (1 + -74.36%) 87
4 FCFE4 61 = 104 × (1 + -41.16%) 48
5 FCFE5 56 = 61 × (1 + -7.97%) 42
5 Terminal value (TV5) 370 = 56 × (1 + -7.97%) ÷ (6.07%-7.97%) 275
Intrinsic value of Gilead Sciences Inc.’s common stock -4,257

Intrinsic value of Gilead Sciences Inc.’s common stock (per share) \$-3.39
Current share price \$69.02

Based on: 10-K (filing date: 2021-02-25).

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 1.83% Expected rate of return on market portfolio2 E(RM) 11.71% Systematic risk of Gilead Sciences Inc.’s common stock βGILD 0.43 Required rate of return on Gilead Sciences Inc.’s common stock3 rGILD 6.07%

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 rGILD = RF + βGILD [E(RM) – RF]
= 1.83% + 0.43 [11.71%1.83%]
= 6.07%

### FCFE Growth Rate (g)

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

Average Dec 31, 2020 Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016
Selected Financial Data (US\$ in millions)
Dividends declared 3,464  3,239  2,986  2,742  2,465
Net income attributable to Gilead 123  5,386  5,455  4,628  13,501
Product sales 24,355  22,119  21,677  25,662  29,953
Total assets 68,407  61,627  63,675  70,283  56,977
Total Gilead stockholders’ equity 18,202  22,525  21,387  20,442  18,887
Financial Ratios
Retention rate1 -27.16 0.40 0.45 0.41 0.82
Profit margin2 0.51% 24.35% 25.16% 18.03% 45.07%
Asset turnover3 0.36 0.36 0.34 0.37 0.53
Financial leverage4 3.76 2.74 2.98 3.44 3.02
Averages
Retention rate -5.02
Profit margin 22.63%
Asset turnover 0.39
Financial leverage 3.19

FCFE growth rate (g)5 -140.75%

Based on: 10-K (filing date: 2021-02-25), 10-K (filing date: 2020-02-25), 10-K (filing date: 2019-02-26), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-27).

2020 Calculations

1 Retention rate = (Net income attributable to Gilead – Dividends declared) ÷ Net income attributable to Gilead
= (1233,464) ÷ 123
= -27.16

2 Profit margin = 100 × Net income attributable to Gilead ÷ Product sales
= 100 × 123 ÷ 24,355
= 0.51%

3 Asset turnover = Product sales ÷ Total assets
= 24,355 ÷ 68,407
= 0.36

4 Financial leverage = Total assets ÷ Total Gilead stockholders’ equity
= 68,407 ÷ 18,202
= 3.76

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= -5.02 × 22.63% × 0.39 × 3.19
= -140.75%

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (86,563 × 6.07%13,202) ÷ (86,563 + 13,202)
= -7.97%

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

#### FCFE growth rate (g) forecast

Year Value gt
1 g1 -140.75%
2 g2 -107.55%
3 g3 -74.36%
4 g4 -41.16%
5 and thereafter g5 -7.97%

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)
= -140.75% + (-7.97%-140.75%) × (2 – 1) ÷ (5 – 1)
= -107.55%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= -140.75% + (-7.97%-140.75%) × (3 – 1) ÷ (5 – 1)
= -74.36%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= -140.75% + (-7.97%-140.75%) × (4 – 1) ÷ (5 – 1)
= -41.16%