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

Intermediate level

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 | FCFF_{t} or Terminal value (TV_{t}) |
Calculation | Present value at 12.41% |
---|---|---|---|---|

0^{1} |
FCFF_{0} |
5,096 | ||

1 | FCFF_{1} |
5,037 | = 5,096 × (1 + -1.15%) | 4,481 |

2 | FCFF_{2} |
5,116 | = 5,037 × (1 + 1.57%) | 4,049 |

3 | FCFF_{3} |
5,335 | = 5,116 × (1 + 4.28%) | 3,756 |

4 | FCFF_{4} |
5,708 | = 5,335 × (1 + 6.99%) | 3,575 |

5 | FCFF_{5} |
6,261 | = 5,708 × (1 + 9.70%) | 3,489 |

5 | Terminal value (TV_{5}) |
253,767 | = 6,261 × (1 + 9.70%) ÷ (12.41% – 9.70%) | 141,412 |

Intrinsic value of Abbott Laboratories’s capital | 160,763 | |||

Less: Debt (fair value) | 20,973 | |||

Intrinsic value of Abbott Laboratories’s common stock | 139,790 | |||

Intrinsic value of Abbott Laboratories’s common stock (per share) | $78.95 | |||

Current share price | $104.80 |

Based on: 10-K (filing date: 2020-02-21).

^{1} See details »

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**

Value^{1} |
Weight | Required rate of return^{2} |
Calculation | |
---|---|---|---|---|

Equity (fair value) | 185,552 | 0.90 | 13.50% | |

Debt (fair value) | 20,973 | 0.10 | 2.68% | = 3.24% × (1 – 17.16%) |

Based on: 10-K (filing date: 2020-02-21).

^{1} US$ in millions

^{ } Equity (fair value) = No. shares of common stock outstanding × Current share price

= 1,770,529,999 × $104.80 = $185,551,543,895.20

^{ } 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

= (11.70% + 12.50% + 18.70% + 24.80% + 18.10%) ÷ 5 = 17.16%

WACC = 12.41%

### FCFF Growth Rate (*g*)

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

**Abbott Laboratories, PRAT model**

Based on: 10-K (filing date: 2020-02-21), 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).

^{1} See details »

*2019 Calculations*

^{2} Interest expense, after tax = Interest expense × (1 – EITR)

= 670 × (1 – 11.70%) = 592

^{3} EBIT(1 – EITR)
= Net earnings – Net earnings from discontinued operations, net of taxes + Interest expense, after tax

= 3,687 – 0 + 592 = 4,279

^{4} RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)

= [4,279 – 2,935] ÷ 4,279 = 0.31

^{5} ROIC = 100 × EBIT(1 – EITR) ÷ Total capital

= 100 × 4,279 ÷ 49,227 = 8.69%

^{6} *g* = RR × ROIC

= -0.20 × 5.79% = -1.15%

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

*g* = 100 × (Total capital, fair value_{0} × WACC – FCFF_{0}) ÷ (Total capital, fair value_{0} + FCFF_{0})

= 100 × (206,525 × 12.41% – 5,096) ÷ (206,525 + 5,096) = **9.70%**

where:

Total capital, fair value_{0} = current fair value of Abbott Laboratories’s debt and equity (US$ in millions)

FCFF_{0} = 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 | g_{t} |
---|---|---|

1 | g_{1} |
-1.15% |

2 | g_{2} |
1.57% |

3 | g_{3} |
4.28% |

4 | g_{4} |
6.99% |

5 and thereafter | g_{5} |
9.70% |

where:

*g*_{1} is implied by PRAT model

*g*_{5} is implied by single-stage model

*g*_{2}, *g*_{3} and *g*_{4} are calculated using linear interpoltion between *g*_{1} and *g*_{5}

*Calculations*

*g*_{2} = *g*_{1} + (*g*_{5} – *g*_{1}) × (2 – 1) ÷ (5 – 1)

= -1.15% + (9.70% – -1.15%) × (2 – 1) ÷ (5 – 1) = 1.57%

*g*_{3} = *g*_{1} + (*g*_{5} – *g*_{1}) × (3 – 1) ÷ (5 – 1)

= -1.15% + (9.70% – -1.15%) × (3 – 1) ÷ (5 – 1) = 4.28%

*g*_{4} = *g*_{1} + (*g*_{5} – *g*_{1}) × (4 – 1) ÷ (5 – 1)

= -1.15% + (9.70% – -1.15%) × (4 – 1) ÷ (5 – 1) = 6.99%