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Texas Instruments Inc. (TXN)


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)

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

USD $ in millions, except per share data

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Year Value FCFFt or Terminal value (TVt) Calculation Present value at 13.27%
01 FCFF0 6,157 
1 FCFF1 6,875  = 6,157  × (1 + 11.65%) 6,069 
2 FCFF2 7,602  = 6,875  × (1 + 10.59%) 5,925 
3 FCFF3 8,326  = 7,602  × (1 + 9.52%) 5,729 
4 FCFF4 9,030  = 8,326  × (1 + 8.45%) 5,486 
5 FCFF5 9,697  = 9,030  × (1 + 7.39%) 5,201 
5 Terminal value (TV5) 177,062  = 9,697  × (1 + 7.39%) ÷ (13.27%7.39%) 94,964 
Intrinsic value of Texas Instruments Inc.’s capital 123,374 
Less: Debt (fair value) 5,068 
Intrinsic value of Texas Instruments Inc.’s common stock 118,306 
Intrinsic value of Texas Instruments Inc.’s common stock (per share) $126.10
Current share price $114.43

Based on: 10-K (filing date: 2019-02-22).

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)

Texas Instruments Inc., cost of capital

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Value1 Weight Required rate of return2 Calculation
Equity (fair value) 107,359  0.95 13.80%
Debt (fair value) 5,068  0.05 2.01% = 2.77% × (1 – 27.55%)

Based on: 10-K (filing date: 2019-02-22).

1 USD $ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 938,206,171 × $114.43 = $107,358,932,147.53

   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
= (13.00% + 26.70% + 27.10% + 29.20% + 27.20%) ÷ 5 = 27.55%

WACC = 13.27%


FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Texas Instruments Inc., PRAT model

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Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (USD $ in millions)
Interest and debt expense 125  78  80  90  94 
Net income 5,580  3,682  3,595  2,986  2,821 
Effective income tax rate (EITR)1 13.00% 26.70% 27.10% 29.20% 27.20%
Interest and debt expense, after tax2 109  57  58  64  68 
Add: Dividends declared and paid 2,555  2,104  1,646  1,444  1,323 
Interest expense (after tax) and dividends 2,664  2,161  1,704  1,508  1,391 
EBIT(1 – EITR)3 5,689  3,739  3,653  3,050  2,889 
Current portion of long-term debt 749  500  631  1,000  1,001 
Long-term debt, excluding current portion 4,319  3,577  2,978  3,120  3,641 
Stockholders’ equity 8,994  10,337  10,473  9,946  10,390 
Total capital 14,062  14,414  14,082  14,066  15,032 
Ratios
Retention rate (RR)4 0.53 0.42 0.53 0.51 0.52
Return on invested capital (ROIC)5 40.45% 25.94% 25.94% 21.68% 19.22%
Averages
RR 0.50
ROIC 23.20%
Growth rate of FCFF (g)6 11.65%

Based on: 10-K (filing date: 2019-02-22), 10-K (filing date: 2018-02-22), 10-K (filing date: 2017-02-23), 10-K (filing date: 2016-02-24), 10-K (filing date: 2015-02-24).

2018 Calculations

2 Interest and debt expense, after tax = Interest and debt expense × (1 – EITR)
= 125 × (1 – 13.00%) = 109

3 EBIT(1 – EITR) = Net income + Interest and debt expense, after tax
= 5,580 + 109 = 5,689

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [5,6892,664] ÷ 5,689 = 0.53

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 5,689 ÷ 14,062 = 40.45%

6 g = RR × ROIC
= 0.50 × 23.20% = 11.65%


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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (112,427 × 13.27%6,157) ÷ (112,427 + 6,157) = 7.39%

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


FCFF growth rate (g) forecast

Texas Instruments Inc., H-model

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Year Value gt
1 g1 11.65%
2 g2 10.59%
3 g3 9.52%
4 g4 8.45%
5 and thereafter g5 7.39%

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)
= 11.65% + (7.39%11.65%) × (2 – 1) ÷ (5 – 1) = 10.59%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 11.65% + (7.39%11.65%) × (3 – 1) ÷ (5 – 1) = 9.52%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 11.65% + (7.39%11.65%) × (4 – 1) ÷ (5 – 1) = 8.45%