# Intuit Inc. (INTU)

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

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 the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

### Intrinsic Stock Value (Valuation Summary)

Intuit Inc., free cash flow to the firm (FCFF) forecast

USD \$ in millions, except per share data

Year Value FCFFt or Terminal value (TVt) Calculation Present value at 13.47%
01 FCFF0 2,004
1 FCFF1 2,460  = 2,004  × (1 + 22.78%) 2,168
2 FCFF2 2,945  = 2,460  × (1 + 19.70%) 2,287
3 FCFF3 3,434  = 2,945  × (1 + 16.62%) 2,351
4 FCFF4 3,899  = 3,434  × (1 + 13.53%) 2,352
5 FCFF5 4,306  = 3,899  × (1 + 10.45%) 2,290
5 Terminal value (TV5) 157,860  = 4,306  × (1 + 10.45%) ÷ (13.47%10.45%) 83,931
Intrinsic value of Intuit Inc.’s capital 95,379
Less: Debt (fair value) 438
Intrinsic value of Intuit Inc.’s common stock 94,941
Intrinsic value of Intuit Inc.’s common stock (per share) \$366.22
Current share price \$281.65

Based on: 10-K (filing date: 2018-08-31).

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.

### Weighted Average Cost of Capital (WACC)

Intuit Inc., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 73,016  0.99 13.55%
Debt (fair value) 438  0.01 0.00% = 0.00% × (1 – 31.00%)

Based on: 10-K (filing date: 2018-08-31).

1 USD \$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 259,243,385 × \$281.65 = \$73,015,899,385.25

Debt (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
= (16.57% + 28.97% + 33.00% + 41.99% + 34.47%) ÷ 5 = 31.00%

WACC = 13.47%

### FCFF Growth Rate (g)

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

Intuit Inc., PRAT model

Average Jul 31, 2018 Jul 31, 2017 Jul 31, 2016 Jul 31, 2015 Jul 31, 2014
Selected Financial Data (USD \$ in millions)
Interest expense 20  31  35  27  31
Net income (loss) from discontinued operations —  —  173  (48) 46
Net income 1,211  971  979  365  907
Effective income tax rate (EITR)1 16.57% 28.97% 33.00% 41.99% 34.47%
Interest expense, after tax2 17  22  23  16  20
Add: Dividends and dividend rights declared 407  357  319  287  220
Interest expense (after tax) and dividends 424  379  342  303  240
EBIT(1 – EITR)3 1,228  993  829  429  881
Short-term debt 50  50  512  —  —
Long-term debt 388  438  488  500  499
Stockholders’ equity 2,354  1,354  1,161  2,332  3,078
Total capital 2,792  1,842  2,161  2,832  3,577
Ratios
Retention rate (RR)4 0.65 0.62 0.59 0.29 0.73
Return on invested capital (ROIC)5 43.97% 53.91% 38.38% 15.14% 24.64%
Averages
RR 0.65
ROIC 35.21%
Growth rate of FCFF (g)6 22.78%

Based on: 10-K (filing date: 2018-08-31), 10-K (filing date: 2017-09-01), 10-K (filing date: 2016-09-01), 10-K (filing date: 2015-09-01), 10-K (filing date: 2014-09-12).

2018 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 20 × (1 – 16.57%) = 17

3 EBIT(1 – EITR) = Net income – Net income (loss) from discontinued operations + Interest expense, after tax
= 1,2110 + 17 = 1,228

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [1,228424] ÷ 1,228 = 0.65

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 1,228 ÷ 2,792 = 43.97%

6 g = RR × ROIC
= 0.65 × 35.21% = 22.78%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (73,454 × 13.47%2,004) ÷ (73,454 + 2,004) = 10.45%

where:
Total capital, fair value0 = current fair value of Intuit Inc.’s debt and equity (USD \$ in millions)
FCFF0 = last year Intuit Inc.’s free cash flow to the firm (USD \$ in millions)
WACC = weighted average cost of Intuit Inc.’s capital

#### FCFF growth rate (g) forecast

Intuit Inc., H-model

Year Value gt
1 g1 22.78%
2 g2 19.70%
3 g3 16.62%
4 g4 13.53%
5 and thereafter g5 10.45%

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)
= 22.78% + (10.45%22.78%) × (2 – 1) ÷ (5 – 1) = 19.70%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 22.78% + (10.45%22.78%) × (3 – 1) ÷ (5 – 1) = 16.62%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 22.78% + (10.45%22.78%) × (4 – 1) ÷ (5 – 1) = 13.53%