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

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 the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.


Intrinsic Stock Value (Valuation Summary)

Accenture PLC, free cash flow to the firm (FCFF) forecast

USD $ in thousands, except per share data

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Year Value FCFFt or Terminal value (TVt) Calculation Present value at 11.88%
01 FCFF0 5,428,719 
1 FCFF1 7,084,651  = 5,428,719  × (1 + 30.50%) 6,332,329 
2 FCFF2 8,815,378  = 7,084,651  × (1 + 24.43%) 7,042,566 
3 FCFF3 10,433,466  = 8,815,378  × (1 + 18.36%) 7,450,127 
4 FCFF4 11,714,836  = 10,433,466  × (1 + 12.28%) 7,476,809 
5 FCFF5 12,442,023  = 11,714,836  × (1 + 6.21%) 7,097,674 
5 Terminal value (TV5) 232,923,777  = 12,442,023  × (1 + 6.21%) ÷ (11.88%6.21%) 132,873,657 
Intrinsic value of Accenture PLC’s capital 168,273,162 
Less: Outstanding debt (fair value) 25,013 
Intrinsic value of Accenture PLC’s common stock 168,248,149 
Intrinsic value of Accenture PLC’s common stock (per share) $263.67
Current share price $159.23

Based on: 10-K (filing date: 2018-10-24).

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)

Accenture PLC, cost of capital

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Value1 Weight Required rate of return2 Calculation
Equity (fair value) 101,604,570  1.00 11.88%
Outstanding debt (fair value) 25,013  0.00 0.00% = 0.00% × (1 – 23.52%)

Based on: 10-K (filing date: 2018-10-24).

1 USD $ in thousands

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 638,099,416 × $159.23 = $101,604,570,009.68

   Outstanding 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
= (27.40% + 21.30% + 22.40% + 25.80% + 26.10% + 18.10%) ÷ 6 = 23.52%

WACC = 11.88%


FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Accenture PLC, PRAT model

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Average Aug 31, 2018 Aug 31, 2017 Aug 31, 2016 Aug 31, 2015 Aug 31, 2014 Aug 31, 2013
Selected Financial Data (USD $ in thousands)
Interest expense 19,539  15,545  16,258  14,578  17,621  14,035 
Net income attributable to Accenture plc 4,059,907  3,445,149  4,111,892  3,053,581  2,941,498  3,281,878 
Effective income tax rate (EITR)1 27.40% 21.30% 22.40% 25.80% 26.10% 18.10%
Interest expense, after tax2 14,185  12,234  12,616  10,817  13,022  11,495 
Add: Dividends 1,671,072  1,498,734  1,372,179  1,276,787  1,178,890  1,042,917 
Interest expense (after tax) and dividends 1,685,257  1,510,968  1,384,795  1,287,604  1,191,912  1,054,412 
EBIT(1 – EITR)3 4,074,092  3,457,383  4,124,508  3,064,398  2,954,520  3,293,373 
Current portion of long-term debt and bank borrowings 5,337  2,907  2,773  1,848  330  – 
Long-term debt, excluding current portion 19,676  22,163  24,457  25,587  26,403  25,600 
Total Accenture plc shareholders’ equity 10,364,753  8,949,477  7,555,262  6,133,725  5,732,035  4,960,186 
Total capital 10,389,766  8,974,547  7,582,492  6,161,160  5,758,768  4,985,786 
Ratios
Retention rate (RR)4 0.59 0.56 0.66 0.58 0.60 0.68
Return on invested capital (ROIC)5 39.21% 38.52% 54.40% 49.74% 51.30% 66.06%
Averages
RR 0.61
ROIC 49.87%
Growth rate of FCFF (g)6 30.50%

Based on: 10-K (filing date: 2018-10-24), 10-K (filing date: 2017-10-26), 10-K (filing date: 2016-10-28), 10-K (filing date: 2015-10-30), 10-K (filing date: 2014-10-24), 10-K (filing date: 2013-10-29).

2018 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 19,539 × (1 – 27.40%) = 14,185

3 EBIT(1 – EITR) = Net income attributable to Accenture plc + Interest expense, after tax
= 4,059,907 + 14,185 = 4,074,092

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [4,074,0921,685,257] ÷ 4,074,092 = 0.59

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 4,074,092 ÷ 10,389,766 = 39.21%

6 g = RR × ROIC
= 0.61 × 49.87% = 30.50%


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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (101,629,583 × 11.88%5,428,719) ÷ (101,629,583 + 5,428,719) = 6.21%

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


FCFF growth rate (g) forecast

Accenture PLC, H-model

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Year Value gt
1 g1 30.50%
2 g2 24.43%
3 g3 18.36%
4 g4 12.28%
5 and thereafter g5 6.21%

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)
= 30.50% + (6.21%30.50%) × (2 – 1) ÷ (5 – 1) = 24.43%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 30.50% + (6.21%30.50%) × (3 – 1) ÷ (5 – 1) = 18.36%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 30.50% + (6.21%30.50%) × (4 – 1) ÷ (5 – 1) = 12.28%