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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)

Gilead Sciences Inc., 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
01 FCFE0
1 FCFE1 = × (1 + )
2 FCFE2 = × (1 + )
3 FCFE3 = × (1 + )
4 FCFE4 = × (1 + )
5 FCFE5 = × (1 + )
5 Terminal value (TV5) = × (1 + ) ÷ ()
Intrinsic value of Gilead Sciences Inc.’s common stock
Intrinsic value of Gilead Sciences Inc.’s common stock (per share) \$
Current share price \$

Based on: 10-K (filing date: 2018-02-27).

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.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF Expected rate of return on market portfolio2 E(RM) Systematic risk (β) of Gilead Sciences Inc.’s common stock βGILD Required rate of return on Gilead Sciences Inc.’s common stock3 rGILD

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

3 rGILD = RF + βGILD [E(RM) – RF]
= + []
=

### FCFE Growth Rate (g)

#### FCFE growth rate (g) implied by 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
Product sales
Total assets
Ratios
Retention rate1
Profit margin2
Asset turnover3
Financial leverage4
Averages
Retention rate
Profit margin
Asset turnover
Financial leverage
Growth rate of FCFE (g)5

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-27), 10-K (filing date: 2016-02-24), 10-K (filing date: 2015-02-25), 10-K (filing date: 2014-02-25).

2017 Calculations

1 Retention rate = (Net income attributable to Gilead – Dividends declared) ÷ Net income attributable to Gilead
= () ÷ =

2 Profit margin = 100 × Net income attributable to Gilead ÷ Product sales
= 100 × ÷ =

3 Asset turnover = Product sales ÷ Total assets
= ÷ =

4 Financial leverage = Total assets ÷ Total Gilead stockholders’ equity
= ÷ =

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= × × × =

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × ( × ) ÷ ( + ) =

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

#### FCFE growth rate (g) forecast

Year Value gt
1 g1
2 g2
3 g3
4 g4
5 and thereafter g5

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)
= + () × (2 – 1) ÷ (5 – 1) =

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= + () × (3 – 1) ÷ (5 – 1) =

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= + () × (4 – 1) ÷ (5 – 1) =