Microsoft Excel LibreOffice Calc

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

Difficulty: Intermediate


Intrinsic Stock Value (Valuation Summary)

Abbott Laboratories, free cash flow to the firm (FCFF) forecast

USD $ in millions, except per share data

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Year Value FCFFt or Terminal value (TVt) Calculation Present value at 14.59%
01 FCFF0 4,580 
1 FCFF1 4,631  = 4,580  × (1 + 1.11%) 4,041 
2 FCFF2 4,799  = 4,631  × (1 + 3.63%) 3,655 
3 FCFF3 5,094  = 4,799  × (1 + 6.16%) 3,386 
4 FCFF4 5,537  = 5,094  × (1 + 8.68%) 3,211 
5 FCFF5 6,157  = 5,537  × (1 + 11.21%) 3,116 
5 Terminal value (TV5) 202,346  = 6,157  × (1 + 11.21%) ÷ (14.59%11.21%) 102,415 
Intrinsic value of Abbott's capital 119,824 
Less: Debt (fair value) 29,224 
Intrinsic value of Abbott's common stock 90,600 
Intrinsic value of Abbott's common stock (per share) $51.58
Current share price $69.06

Based on: 10-K (filing date: 2018-02-16).

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

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Value1 Weight Required rate of return2 Calculation
Equity (fair value) 121,292  0.81 17.53%
Debt (fair value) 29,224  0.19 2.40% = 3.57% × (1 – 32.84%)

Based on: 10-K (filing date: 2018-02-16).

1 USD $ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 1,756,333,032 × $69.06 = $121,292,359,189.92

   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
= (84.20% + 24.80% + 18.10% + 31.60% + 5.50%) ÷ 5 = 32.84%

WACC = 14.59%


FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Abbott Laboratories, 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 904  431  163  150  157 
Net earnings from discontinued operations, net of taxes 124  337  1,817  563  193 
Net earnings 477  1,400  4,423  2,284  2,576 
Effective income tax rate (EITR)1 84.20% 24.80% 18.10% 31.60% 5.50%
Interest expense, after tax2 143  324  133  103  148 
Add: Cash dividends declared on common shares 1,947  1,547  1,464  1,363  1,002 
Interest expense (after tax) and dividends 2,090  1,871  1,597  1,466  1,150 
EBIT(1 – EITR)3 496  1,387  2,739  1,824  2,531 
Short-term borrowings 206  1,322  3,127  4,382  3,164 
Current portion of long-term debt 508  55 
Long-term debt, excluding current portion 27,210  20,681  5,871  3,408  3,388 
Total Abbott shareholders' investment 30,897  20,538  21,211  21,526  25,171 
Total capital 58,821  42,544  30,212  29,371  31,732 
Ratios
Retention rate (RR)4 -3.21 -0.35 0.42 0.20 0.55
Return on invested capital (ROIC)5 0.84% 3.26% 9.07% 6.21% 7.98%
Averages
RR 0.20
ROIC 5.47%
Growth rate of FCFF (g)6 1.11%

Based on: 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), 10-K (filing date: 2014-02-21).

2017 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 904 × (1 – 84.20%) = 143

3 EBIT(1 – EITR) = Net earnings – Net earnings from discontinued operations, net of taxes + Interest expense, after tax
= 477124 + 143 = 496

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [4962,090] ÷ 496 = -3.21

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 496 ÷ 58,821 = 0.84%

6 g = RR × ROIC
= 0.20 × 5.47% = 1.11%


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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (150,516 × 14.59%4,580) ÷ (150,516 + 4,580) = 11.21%

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


FCFF growth rate (g) forecast

Abbott Laboratories, H-model

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Year Value gt
1 g1 1.11%
2 g2 3.63%
3 g3 6.16%
4 g4 8.68%
5 and thereafter g5 11.21%

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)
= 1.11% + (11.21%1.11%) × (2 – 1) ÷ (5 – 1) = 3.63%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 1.11% + (11.21%1.11%) × (3 – 1) ÷ (5 – 1) = 6.16%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 1.11% + (11.21%1.11%) × (4 – 1) ÷ (5 – 1) = 8.68%