Microsoft Excel LibreOffice Calc

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

Difficulty: Intermediate


Intrinsic Stock Value (Valuation Summary)

AbbVie Inc., free cash flow to the firm (FCFF) forecast

USD $ in millions, except per share data

Microsoft Excel LibreOffice Calc
Year Value FCFFt or Terminal value (TVt) Calculation Present value at 13.93%
01 FCFF0 10,186 
1 FCFF1 10,407  = 10,186  × (1 + 2.17%) 9,134 
2 FCFF2 10,780  = 10,407  × (1 + 3.59%) 8,305 
3 FCFF3 11,320  = 10,780  × (1 + 5.01%) 7,655 
4 FCFF4 12,047  = 11,320  × (1 + 6.43%) 7,151 
5 FCFF5 12,993  = 12,047  × (1 + 7.85%) 6,769 
5 Terminal value (TV5) 230,556  = 12,993  × (1 + 7.85%) ÷ (13.93% – 7.85%) 120,120 
Intrinsic value of AbbVie's capital 159,135 
Less: Debt and lease obligations (fair value) 39,280 
Intrinsic value of AbbVie's common stock 119,855 
Intrinsic value of AbbVie's common stock (per share) $79.15
Current share price $93.42

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)

AbbVie Inc., cost of capital

Microsoft Excel LibreOffice Calc
Value1 Weight Required rate of return2 Calculation
Equity (fair value) 141,463  0.78 17.15%
Debt and lease obligations (fair value) 39,280  0.22 2.32% = 3.10% × (1 – 25.22%)

1 USD $ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 1,514,272,698 × $93.42 = $141,463,355,447.16

   Debt and lease obligations (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
= (31.30% + 24.50% + 22.60% + 25.10% + 22.60%) ÷ 5 = 25.22%

WACC = 13.93%


FCFF Growth Rate (g)

FCFF 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)
Interest expense 1,150  1,047  719  429  299 
Net earnings 5,309  5,953  5,144  1,774  4,128 
Effective income tax rate (EITR)1 31.30% 24.50% 22.60% 25.10% 22.60%
Interest expense, after tax2 790  790  557  321  231 
Add: Dividends declared 4,221  3,823  3,431  2,806  2,561 
Interest expense (after tax) and dividends 5,011  4,613  3,988  3,127  2,792 
EBIT(1 – EITR)3 6,099  6,743  5,701  2,095  4,359 
Short-term borrowings 400  377  406  425  413 
Current portion of long-term debt and lease obligations 6,015  25  2,025  4,021  18 
Long-term debt and lease obligations, excluding current portion 30,953  36,440  29,240  10,565  14,292 
Stockholders' equity 5,097  4,636  3,945  1,742  4,492 
Total capital 42,465  41,478  35,616  16,753  19,215 
Ratios
Retention rate (RR)4 0.18 0.32 0.30 -0.49 0.36
Return on invested capital (ROIC)5 14.36% 16.26% 16.01% 12.51% 22.69%
Averages
RR 0.13
ROIC 16.36%
Growth rate of FCFF (g)6 2.17%

2017 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 1,150 × (1 – 31.30%) = 790

3 EBIT(1 – EITR) = Net earnings + Interest expense, after tax
= 5,309 + 790 = 6,099

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [6,0995,011] ÷ 6,099 = 0.18

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 6,099 ÷ 42,465 = 14.36%

6 g = RR × ROIC
= 0.13 × 16.36% = 2.17%


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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (180,743 × 13.93% – 10,186) ÷ (180,743 + 10,186) = 7.85%

where:
Total capital, fair value0 = current fair value of AbbVie's debt and equity (USD $ in millions)
FCFF0 = last year AbbVie's free cash flow to the firm (USD $ in millions)
WACC = weighted average cost of AbbVie's capital


FCFF growth rate (g) forecast

AbbVie Inc., H-model

Microsoft Excel LibreOffice Calc
Year Value gt
1 g1 2.17%
2 g2 3.59%
3 g3 5.01%
4 g4 6.43%
5 and thereafter g5 7.85%

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)
= 2.17% + (7.85% – 2.17%) × (2 – 1) ÷ (5 – 1) = 3.59%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 2.17% + (7.85% – 2.17%) × (3 – 1) ÷ (5 – 1) = 5.01%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 2.17% + (7.85% – 2.17%) × (4 – 1) ÷ (5 – 1) = 6.43%