# Abbott Laboratories (ABT)

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

Medium level of difficulty

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)

Abbott Laboratories, 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 12.56%
01 FCFF0 5,645
1 FCFF1 5,579  = 5,645  × (1 + -1.17%) 4,957
2 FCFF2 5,655  = 5,579  × (1 + 1.36%) 4,463
3 FCFF3 5,876  = 5,655  × (1 + 3.90%) 4,120
4 FCFF4 6,254  = 5,876  × (1 + 6.44%) 3,896
5 FCFF5 6,816  = 6,254  × (1 + 8.98%) 3,772
5 Terminal value (TV5) 207,235  = 6,816  × (1 + 8.98%) ÷ (12.56%8.98%) 114,685
Intrinsic value of Abbott Laboratories’s capital 135,893
Less: Debt (fair value) 20,071
Intrinsic value of Abbott Laboratories’s common stock 115,822

Intrinsic value of Abbott Laboratories’s common stock (per share) \$65.49
Current share price \$85.71

Based on: 10-K (filing date: 2019-02-22).

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)

Abbott Laboratories, cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 151,574  0.88 13.87%
Debt (fair value) 20,071  0.12 2.66% = 3.37% × (1 – 21.14%)

Based on: 10-K (filing date: 2019-02-22).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 1,768,455,705 × \$85.71 = \$151,574,338,475.55

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
= (12.50% + 18.70% + 24.80% + 18.10% + 31.60%) ÷ 5 = 21.14%

WACC = 12.56%

### FCFF Growth Rate (g)

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

Abbott Laboratories, PRAT model

Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (US\$ in millions)
Interest expense 826  904  431  163  150
Net earnings from discontinued operations, net of taxes 34  124  337  1,817  563
Net earnings 2,368  477  1,400  4,423  2,284

Effective income tax rate (EITR)1 12.50% 18.70% 24.80% 18.10% 31.60%

Interest expense, after tax2 723  735  324  133  103
Add: Cash dividends declared on common shares 2,047  1,947  1,547  1,464  1,363
Interest expense (after tax) and dividends 2,770  2,682  1,871  1,597  1,466

EBIT(1 – EITR)3 3,057  1,088  1,387  2,739  1,824

Short-term borrowings 200  206  1,322  3,127  4,382
Current portion of long-term debt 508  55
Long-term debt, excluding current portion 19,359  27,210  20,681  5,871  3,408
Total Abbott shareholders’ investment 30,524  30,897  20,538  21,211  21,526
Total capital 50,090  58,821  42,544  30,212  29,371
Financial Ratios
Retention rate (RR)4 0.09 -1.47 -0.35 0.42 0.20
Return on invested capital (ROIC)5 6.10% 1.85% 3.26% 9.07% 6.21%
Averages
RR -0.22
ROIC 5.30%

FCFF growth rate (g)6 -1.17%

Based on: 10-K (filing date: 2019-02-22), 10-K (filing date: 2018-02-16), 10-K (filing date: 2017-02-17), 10-K (filing date: 2016-02-19), 10-K (filing date: 2015-02-27).

2018 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 826 × (1 – 12.50%) = 723

3 EBIT(1 – EITR) = Net earnings – Net earnings from discontinued operations, net of taxes + Interest expense, after tax
= 2,36834 + 723 = 3,057

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [3,0572,770] ÷ 3,057 = 0.09

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 3,057 ÷ 50,090 = 6.10%

6 g = RR × ROIC
= -0.22 × 5.30% = -1.17%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (171,645 × 12.56%5,645) ÷ (171,645 + 5,645) = 8.98%

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

#### FCFF growth rate (g) forecast

Abbott Laboratories, H-model

Year Value gt
1 g1 -1.17%
2 g2 1.36%
3 g3 3.90%
4 g4 6.44%
5 and thereafter g5 8.98%

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)
= -1.17% + (8.98%-1.17%) × (2 – 1) ÷ (5 – 1) = 1.36%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= -1.17% + (8.98%-1.17%) × (3 – 1) ÷ (5 – 1) = 3.90%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= -1.17% + (8.98%-1.17%) × (4 – 1) ÷ (5 – 1) = 6.44%