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# AT&T Inc. (T)

## Present Value of Free Cash Flow to Equity (FCFE)

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 equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company's asset base.

### Intrinsic Stock Value (Valuation Summary)

AT&T Inc., free cash flow to equity (FCFE) forecast

USD \$ in millions, except per share data

Year Value FCFEt or Terminal value (TVt) Calculation Present value at %
01 FCFE0
1 FCFE1 = × (1 + %)
2 FCFE2 = × (1 + %)
3 FCFE3 = × (1 + %)
4 FCFE4 = × (1 + %)
5 FCFE5 = × (1 + %)
5 Terminal value (TV5) = × (1 + %) ÷ (% – %)
Intrinsic value of AT&T's common stock
Intrinsic value of AT&T's common stock (per share) \$
Current share price \$

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.

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### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF % Expected rate of return on market portfolio2 E(RM) % Systematic risk (β) of AT&T's common stock βT Required rate of return on AT&T's common stock3 rT %

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

Calculations

3 rT = RF + βT [E(RM) – RF]
= % + [% – %]
= %

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### FCFE Growth Rate (g)

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

AT&T Inc., PRAT model

Average Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Selected Financial Data (USD \$ in millions)
Dividends to stockholders
Net income attributable to AT&T
Operating revenues
Total assets
Stockholders' equity attributable to AT&T
Ratios
Retention rate1
Profit margin2 % % % % %
Asset turnover3
Financial leverage4
Averages
Retention rate
Profit margin %
Asset turnover
Financial leverage
Growth rate of FCFE (g)5 %

2017 Calculations

1 Retention rate = (Net income attributable to AT&T – Dividends to stockholders) ÷ Net income attributable to AT&T
= () ÷ =

2 Profit margin = 100 × Net income attributable to AT&T ÷ Operating revenues
= 100 × ÷ = %

3 Asset turnover = Operating revenues ÷ Total assets
= ÷ =

4 Financial leverage = Total assets ÷ Stockholders' equity attributable to AT&T
= ÷ =

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= × % × × = %

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × ( × % – ) ÷ ( + ) = %

where:
Equity market value0 = current market value of AT&T's common stock (USD \$ in millions)
FCFE0 = last year AT&T's free cash flow to equity (USD \$ in millions)
r = required rate of return on AT&T's common stock

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#### FCFE growth rate (g) forecast

AT&T Inc., H-model

Year Value gt
1 g1 %
2 g2 %
3 g3 %
4 g4 %
5 and thereafter g5 %

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)
= % + (% – %) × (2 – 1) ÷ (5 – 1) = %

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

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

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