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# Twenty-First Century Fox Inc. (FOXA)

## 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)

Twenty-First Century Fox 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 11.71%
01 FCFF0 4,982
1 FCFF1 5,555  = 4,982  × (1 + 11.50%) 4,972
2 FCFF2 6,121  = 5,555  × (1 + 10.20%) 4,905
3 FCFF3 6,665  = 6,121  × (1 + 8.89%) 4,781
4 FCFF4 7,171  = 6,665  × (1 + 7.58%) 4,605
5 FCFF5 7,621  = 7,171  × (1 + 6.28%) 4,381
5 Terminal value (TV5) 149,151  = 7,621  × (1 + 6.28%) ÷ (11.71%6.28%) 85,743
Intrinsic value of Twenty-First Century Fox Inc.’s capital 109,388
Less: Borrowings (fair value) 22,591
Intrinsic value of Twenty-First Century Fox Inc.’s common stock 86,797
Intrinsic value of Twenty-First Century Fox Inc.’s common stock (per share) \$46.74
Current share price \$40.34

Based on: 10-K (filing date: 2018-08-13).

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)

Twenty-First Century Fox Inc., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 74,909  0.77 13.84%
Borrowings (fair value) 22,591  0.23 4.64% = 6.01% × (1 – 22.80%)

Based on: 10-K (filing date: 2018-08-13).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 1,856,929,453 × \$40.34 = \$74,908,534,134.02

Borrowings (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
= (-8.00% + 30.00% + 27.00% + 13.00% + 25.00% + 19.00%) ÷ 6 = 22.80%

WACC = 11.71%

### FCFF Growth Rate (g)

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

Twenty-First Century Fox Inc., PRAT model

Average Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013
Selected Financial Data (US\$ in millions)
Interest expense, net 1,248  1,219  1,184  1,198  1,121  1,063
Income (loss) from discontinued operations, net of tax (12) (44) (8) (67) 729  277
Net income attributable to Twenty-First Century Fox, Inc. stockholders 4,464  2,952  2,755  8,306  4,514  7,097
Effective income tax rate (EITR)1 -8.00% 30.00% 27.00% 13.00% 25.00% 19.00%
Interest expense, net, after tax2 1,348  853  864  1,042  841  861
Add: Dividends declared 667  668  586  586  568  398
Interest expense (after tax) and dividends 2,015  1,521  1,450  1,628  1,409  1,259
EBIT(1 – EITR)3 5,824  3,849  3,627  9,415  4,626  7,681
Current borrowings 1,054  457  427  244  799  137
Non-current borrowings 18,469  19,456  19,298  18,795  18,259  16,321
Total Twenty-First Century Fox, Inc. stockholders’ equity 19,564  15,722  13,661  17,220  17,418  16,998
Total capital 39,087  35,635  33,386  36,259  36,476  33,456
Ratios
Retention rate (RR)4 0.65 0.60 0.60 0.83 0.70 0.84
Return on invested capital (ROIC)5 14.90% 10.80% 10.86% 25.97% 12.68% 22.96%
Averages
RR 0.70
ROIC 16.36%
Growth rate of FCFF (g)6 11.50%

Based on: 10-K (filing date: 2018-08-13), 10-K (filing date: 2017-08-14), 10-K (filing date: 2016-08-11), 10-K (filing date: 2015-08-13), 10-K (filing date: 2014-08-14), 10-K (filing date: 2013-08-19).

2018 Calculations

2 Interest expense, net, after tax = Interest expense, net × (1 – EITR)
= 1,248 × (1 – -8.00%) = 1,348

3 EBIT(1 – EITR) = Net income attributable to Twenty-First Century Fox, Inc. stockholders – Income (loss) from discontinued operations, net of tax + Interest expense, net, after tax
= 4,464-12 + 1,348 = 5,824

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [5,8242,015] ÷ 5,824 = 0.65

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 5,824 ÷ 39,087 = 14.90%

6 g = RR × ROIC
= 0.70 × 16.36% = 11.50%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (97,500 × 11.71%4,982) ÷ (97,500 + 4,982) = 6.28%

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

#### FCFF growth rate (g) forecast

Twenty-First Century Fox Inc., H-model

Year Value gt
1 g1 11.50%
2 g2 10.20%
3 g3 8.89%
4 g4 7.58%
5 and thereafter g5 6.28%

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)
= 11.50% + (6.28%11.50%) × (2 – 1) ÷ (5 – 1) = 10.20%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 11.50% + (6.28%11.50%) × (3 – 1) ÷ (5 – 1) = 8.89%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 11.50% + (6.28%11.50%) × (4 – 1) ÷ (5 – 1) = 7.58%