Walgreens Boots Alliance Inc. (WBA)

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)

Walgreens Boots Alliance 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 11.66%
01 FCFF0 7,379
1 FCFF1 7,821  = 7,379  × (1 + 5.99%) 7,004
2 FCFF2 8,175  = 7,821  × (1 + 4.53%) 6,557
3 FCFF3 8,426  = 8,175  × (1 + 3.07%) 6,052
4 FCFF4 8,562  = 8,426  × (1 + 1.61%) 5,507
5 FCFF5 8,575  = 8,562  × (1 + 0.15%) 4,940
5 Terminal value (TV5) 74,613  = 8,575  × (1 + 0.15%) ÷ (11.66%0.15%) 42,980
Intrinsic value of Walgreens Boots Alliance Inc.’s capital 73,039
Less: Borrowings (fair value) 14,240
Intrinsic value of Walgreens Boots Alliance Inc.’s common stock 58,799

Intrinsic value of Walgreens Boots Alliance Inc.’s common stock (per share) \$65.11
Current share price \$55.32

Based on: 10-K (filing date: 2018-10-11).

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)

Walgreens Boots Alliance Inc., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 49,962  0.78 14.23%
Borrowings (fair value) 14,240  0.22 2.65% = 3.55% × (1 – 25.28%)

Based on: 10-K (filing date: 2018-10-11).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 903,143,463 × \$55.32 = \$49,961,896,373.16

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
= (16.70% + 15.70% + 19.40% + 19.90% + 42.90% + 37.10%) ÷ 6 = 25.28%

WACC = 11.66%

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Walgreens Boots Alliance Inc., PRAT model

Average Aug 31, 2018 Aug 31, 2017 Aug 31, 2016 Aug 31, 2015 Aug 31, 2014 Aug 31, 2013
Selected Financial Data (US\$ in millions)
Interest expense, net 616  693  596  605  156  165
Net earnings attributable to Walgreens Boots Alliance, Inc. 5,024  4,078  4,173  4,220  1,932  2,450

Effective income tax rate (EITR)1 16.70% 15.70% 19.40% 19.90% 42.90% 37.10%

Interest expense, net, after tax2 513  584  480  485  89  104
Add: Dividends declared and distributions 1,610  1,625  1,578  1,458  1,226  1,083
Interest expense (after tax) and dividends 2,123  2,209  2,058  1,943  1,315  1,187

EBIT(1 – EITR)3 5,537  4,662  4,653  4,705  2,021  2,554

Short-term debt 1,966  251  323  1,068  774  570
Long-term debt 12,431  12,684  18,705  13,315  3,736  4,477
Total Walgreens Boots Alliance, Inc. shareholders’ equity 26,007  27,466  29,880  30,861  20,457  19,454
Total capital 40,404  40,401  48,908  45,244  24,967  24,501
Financial Ratios
Retention rate (RR)4 0.62 0.53 0.56 0.59 0.35 0.54
Return on invested capital (ROIC)5 13.70% 11.54% 9.51% 10.40% 8.09% 10.42%
Averages
RR 0.56
ROIC 10.61%

FCFF growth rate (g)6 5.99%

Based on: 10-K (filing date: 2018-10-11), 10-K (filing date: 2017-10-25), 10-K (filing date: 2016-10-20), 10-K (filing date: 2015-10-28), 10-K (filing date: 2014-10-20), 10-K (filing date: 2013-10-21).

2018 Calculations

2 Interest expense, net, after tax = Interest expense, net × (1 – EITR)
= 616 × (1 – 16.70%) = 513

3 EBIT(1 – EITR) = Net earnings attributable to Walgreens Boots Alliance, Inc. + Interest expense, net, after tax
= 5,024 + 513 = 5,537

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [5,5372,123] ÷ 5,537 = 0.62

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 5,537 ÷ 40,404 = 13.70%

6 g = RR × ROIC
= 0.56 × 10.61% = 5.99%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (64,202 × 11.66%7,379) ÷ (64,202 + 7,379) = 0.15%

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

FCFF growth rate (g) forecast

Walgreens Boots Alliance Inc., H-model

Year Value gt
1 g1 5.99%
2 g2 4.53%
3 g3 3.07%
4 g4 1.61%
5 and thereafter g5 0.15%

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)
= 5.99% + (0.15%5.99%) × (2 – 1) ÷ (5 – 1) = 4.53%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 5.99% + (0.15%5.99%) × (3 – 1) ÷ (5 – 1) = 3.07%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 5.99% + (0.15%5.99%) × (4 – 1) ÷ (5 – 1) = 1.61%