# PepsiCo Inc. (NASDAQ:PEP)

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

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

### Intrinsic Stock Value (Valuation Summary)

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

US\$ in millions, except per share data

Year Value FCFFt or Terminal value (TVt) Calculation Present value at 6.52%
01 FCFF0 6,436
1 FCFF1 6,737 = 6,436 × (1 + 4.67%) 6,324
2 FCFF2 7,034 = 6,737 × (1 + 4.41%) 6,199
3 FCFF3 7,326 = 7,034 × (1 + 4.15%) 6,061
4 FCFF4 7,611 = 7,326 × (1 + 3.89%) 5,911
5 FCFF5 7,887 = 7,611 × (1 + 3.63%) 5,750
5 Terminal value (TV5) 282,254 = 7,887 × (1 + 3.63%) ÷ (6.52%3.63%) 205,787
Intrinsic value of PepsiCo Inc.’s capital 236,033
Less: Preferred stock (fair value) 0
Less: Debt obligations (fair value) 34,000
Intrinsic value of PepsiCo Inc.’s common stock 202,033

Intrinsic value of PepsiCo Inc.’s common stock (per share) \$146.19
Current share price \$142.06

Based on: 10-K (filing date: 2020-02-13).

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)

PepsiCo Inc., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 196,321 0.85 7.23%
Preferred stock (fair value) 0 0.00 0.00%
Debt obligations (fair value) 34,000 0.15 2.46% = 3.13% × (1 – 21.38%)

Based on: 10-K (filing date: 2020-02-13).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 1,381,956,485 × \$142.06
= \$196,320,738,259.10

Debt obligations (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
= (21.10% + 10.90% + 23.40% + 25.40% + 26.10%) ÷ 5
= 21.38%

WACC = 6.52%

### FCFF Growth Rate (g)

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

PepsiCo Inc., PRAT model

Average Dec 28, 2019 Dec 29, 2018 Dec 30, 2017 Dec 31, 2016 Dec 26, 2015
Selected Financial Data (US\$ in millions)
Interest expense 1,135  1,525  1,151  1,342  970
Net income attributable to PepsiCo 7,314  12,515  4,857  6,329  5,452

Effective income tax rate (EITR)1 21.10% 10.90% 23.40% 25.40% 26.10%

Interest expense, after tax2 896  1,359  882  1,001  717
Add: Cash dividends declared, preferred —  —  —
Add: Cash dividends declared, common 5,323  5,098  4,536  4,282  4,071
Interest expense (after tax) and dividends 6,219  6,457  5,418  5,284  4,789

EBIT(1 – EITR)3 8,210  13,874  5,739  7,330  6,169

Short-term debt obligations 2,920  4,026  5,485  6,892  4,071
Long-term debt obligations 29,148  28,295  33,796  30,053  29,213
Total PepsiCo shareholders’ equity 14,786  14,518  10,889  11,095  11,923
Total capital 46,854  46,839  50,170  48,040  45,207
Financial Ratios
Retention rate (RR)4 0.24 0.53 0.06 0.28 0.22
Return on invested capital (ROIC)5 17.52% 29.62% 11.44% 15.26% 13.65%
Averages
RR 0.27
ROIC 17.50%

FCFF growth rate (g)6 4.67%

Based on: 10-K (filing date: 2020-02-13), 10-K (filing date: 2019-02-15), 10-K (filing date: 2018-02-13), 10-K (filing date: 2017-02-15), 10-K (filing date: 2016-02-11).

2019 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 1,135 × (1 – 21.10%)
= 896

3 EBIT(1 – EITR) = Net income attributable to PepsiCo + Interest expense, after tax
= 7,314 + 896
= 8,210

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [8,2106,219] ÷ 8,210
= 0.24

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 8,210 ÷ 46,854
= 17.52%

6 g = RR × ROIC
= 0.27 × 17.50%
= 4.67%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (230,321 × 6.52%6,436) ÷ (230,321 + 6,436)
= 3.63%

where:

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

#### FCFF growth rate (g) forecast

PepsiCo Inc., H-model

Year Value gt
1 g1 4.67%
2 g2 4.41%
3 g3 4.15%
4 g4 3.89%
5 and thereafter g5 3.63%

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)
= 4.67% + (3.63%4.67%) × (2 – 1) ÷ (5 – 1)
= 4.41%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 4.67% + (3.63%4.67%) × (3 – 1) ÷ (5 – 1)
= 4.15%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 4.67% + (3.63%4.67%) × (4 – 1) ÷ (5 – 1)
= 3.89%