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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)

AbbVie Inc., free cash flow to equity (FCFE) forecast

USD $ in millions, except per share data

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Year Value FCFEt or Terminal value (TVt) Calculation Present value at 17.19%
01 FCFE0 9,428 
1 FCFE1 11,280  = 9,428 × (1 + 19.64%) 9,625 
2 FCFE2 13,217  = 11,280 × (1 + 17.17%) 9,624 
3 FCFE3 15,159  = 13,217 × (1 + 14.70%) 9,419 
4 FCFE4 17,012  = 15,159 × (1 + 12.23%) 9,020 
5 FCFE5 18,671  = 17,012 × (1 + 9.75%) 8,448 
5 Terminal value (TV5) 275,629  = 18,671 × (1 + 9.75%) ÷ (17.19% – 9.75%) 124,713 
Intrinsic value of AbbVie's common stock 170,850 
Intrinsic value of AbbVie's common stock (per share) $112.83
Current share price $91.91

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.


Required Rate of Return (r)

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Assumptions
Rate of return on LT Treasury Composite1 RF 3.29%
Expected rate of return on market portfolio2 E(RM) 12.28%
Systematic risk (β) of AbbVie's common stock βABBV 1.55
Required rate of return on AbbVie's common stock3 rABBV 17.19%

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

2 See Details »

3 rABBV = RF + βABBV [E(RM) – RF]
= 3.29% + 1.55 [12.28% – 3.29%]
= 17.19%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

AbbVie Inc., PRAT model

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Average Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Selected Financial Data (USD $ in millions)
Dividends declared 4,221  3,823  3,431  2,806  2,561 
Net earnings 5,309  5,953  5,144  1,774  4,128 
Net revenues 28,216  25,638  22,859  19,960  18,790 
Total assets 70,786  66,099  53,050  27,547  29,198 
Stockholders' equity 5,097  4,636  3,945  1,742  4,492 
Ratios
Retention rate1 0.20 0.36 0.33 -0.58 0.38
Profit margin2 18.82% 23.22% 22.50% 8.89% 21.97%
Asset turnover3 0.40 0.39 0.43 0.72 0.64
Financial leverage4 13.89 14.26 13.45 15.81 6.50
Averages
Retention rate 0.14
Profit margin 19.08%
Asset turnover 0.52
Financial leverage 14.35
Growth rate of FCFE (g)5 19.64%

2017 Calculations

1 Retention rate = (Net earnings – Dividends declared) ÷ Net earnings
= (5,3094,221) ÷ 5,309 = 0.20

2 Profit margin = 100 × Net earnings ÷ Net revenues
= 100 × 5,309 ÷ 28,216 = 18.82%

3 Asset turnover = Net revenues ÷ Total assets
= 28,216 ÷ 70,786 = 0.40

4 Financial leverage = Total assets ÷ Stockholders' equity
= 70,786 ÷ 5,097 = 13.89

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.14 × 19.08% × 0.52 × 14.35 = 19.64%


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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (139,177 × 17.19% – 9,428) ÷ (139,177 + 9,428) = 9.75%

where:
Equity market value0 = current market value of AbbVie's common stock (USD $ in millions)
FCFE0 = last year AbbVie's free cash flow to equity (USD $ in millions)
r = required rate of return on AbbVie's common stock


FCFE growth rate (g) forecast

AbbVie Inc., H-model

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Year Value gt
1 g1 19.64%
2 g2 17.17%
3 g3 14.70%
4 g4 12.23%
5 and thereafter g5 9.75%

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)
= 19.64% + (9.75% – 19.64%) × (2 – 1) ÷ (5 – 1) = 17.17%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 19.64% + (9.75% – 19.64%) × (3 – 1) ÷ (5 – 1) = 14.70%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 19.64% + (9.75% – 19.64%) × (4 – 1) ÷ (5 – 1) = 12.23%