# AT&T Inc. (NYSE:T)

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

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)

AT&T 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 6.17%
01 FCFF0 34,059
1 FCFF1 26,525 = 34,059 × (1 + -22.12%) 24,984
2 FCFF2 21,957 = 26,525 × (1 + -17.22%) 19,481
3 FCFF3 19,252 = 21,957 × (1 + -12.32%) 16,089
4 FCFF4 17,824 = 19,252 × (1 + -7.42%) 14,030
5 FCFF5 17,375 = 17,824 × (1 + -2.52%) 12,883
5 Terminal value (TV5) 195,110 = 17,375 × (1 + -2.52%) ÷ (6.17%-2.52%) 144,665
Intrinsic value of AT&T Inc. capital 232,132
Less: 5.000% Perpetual Preferred Stock, Series A (fair value) 1,303
Less: 4.750% Perpetual Preferred Stock, Series C (fair value) 1,873
Less: Debt (fair value) 189,260
Intrinsic value of AT&T Inc. common stock 39,696

Intrinsic value of AT&T Inc. common stock (per share) \$5.56
Current share price \$26.61

Based on: 10-K (reporting date: 2020-12-31).

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)

AT&T Inc., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 190,022 0.50 9.32%
5.000% Perpetual Preferred Stock, Series A (fair value) 1,303 0.00 5.00%
4.750% Perpetual Preferred Stock, Series C (fair value) 1,873 0.00 4.75%
Debt (fair value) 189,260 0.49 3.02% = 4.10% × (1 – 26.42%)

Based on: 10-K (reporting date: 2020-12-31).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 7,141,000,000 × \$26.61
= \$190,022,010,000.00

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
= (21.00% + 18.90% + 22.70% + 36.80% + 32.70%) ÷ 5
= 26.42%

WACC = 6.17%

### FCFF Growth Rate (g)

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

AT&T Inc., PRAT model

Average Dec 31, 2020 Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016
Selected Financial Data (US\$ in millions)
Interest expense 7,925  8,422  7,957  6,300  4,910
Net income (loss) attributable to AT&T (5,176) 13,903  19,370  29,450  12,976

Effective income tax rate (EITR)1 21.00% 18.90% 22.70% 36.80% 32.70%

Interest expense, after tax2 6,261  6,830  6,151  3,982  3,304
Add: Preferred stock dividends 139  —  —  —
Add: Common stock dividends 14,871  15,028  14,117  12,157  11,913
Interest expense (after tax) and dividends 21,271  21,866  20,268  16,139  15,217

EBIT(1 – EITR)3 1,085  20,733  25,521  33,432  16,280

Debt maturing within one year 3,470  11,838  10,255  38,374  9,832
Long-term debt, excluding maturing within one year 153,775  151,309  166,250  125,972  113,681
Stockholders’ equity attributable to AT&T 161,673  184,221  184,089  140,861  123,135
Total capital 318,918  347,368  360,594  305,207  246,648
Financial Ratios
Retention rate (RR)4 -18.61 -0.05 0.21 0.52 0.07
Return on invested capital (ROIC)5 0.34% 5.97% 7.08% 10.95% 6.60%
Averages
RR -3.58
ROIC 6.19%

FCFF growth rate (g)6 -22.12%

Based on: 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31).

2020 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 7,925 × (1 – 21.00%)
= 6,261

3 EBIT(1 – EITR) = Net income (loss) attributable to AT&T + Interest expense, after tax
= -5,176 + 6,261
= 1,085

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [1,08521,271] ÷ 1,085
= -18.61

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 1,085 ÷ 318,918
= 0.34%

6 g = RR × ROIC
= -3.58 × 6.19%
= -22.12%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (382,458 × 6.17%34,059) ÷ (382,458 + 34,059)
= -2.52%

where:

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

#### FCFF growth rate (g) forecast

AT&T Inc., H-model

Year Value gt
1 g1 -22.12%
2 g2 -17.22%
3 g3 -12.32%
4 g4 -7.42%
5 and thereafter g5 -2.52%

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)
= -22.12% + (-2.52%-22.12%) × (2 – 1) ÷ (5 – 1)
= -17.22%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= -22.12% + (-2.52%-22.12%) × (3 – 1) ÷ (5 – 1)
= -12.32%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= -22.12% + (-2.52%-22.12%) × (4 – 1) ÷ (5 – 1)
= -7.42%