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)
Weighted Average Cost of Capital (WACC)
FCFF Growth Rate (g)

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

US$ in thousands, except per share data

Year	Value	FCFF_t or Terminal value (TV_t)	Calculation	Present value at 10.69%
0¹	FCFF₀	1,718,930
1	FCFF₁	811,639	= 1,718,930 × (1 + -52.78%)	733,250
2	FCFF₂	506,761	= 811,639 × (1 + -37.56%)	413,601
3	FCFF₃	393,530	= 506,761 × (1 + -22.34%)	290,165
4	FCFF₄	365,491	= 393,530 × (1 + -7.13%)	243,463
5	FCFF₅	395,074	= 365,491 × (1 + 8.09%)	237,752
5	Terminal value (TV₅)	16,446,799	= 395,074 × (1 + 8.09%) ÷ (10.69% – 8.09%)	9,897,536
Intrinsic value of Allergan Inc. capital				11,815,766
Less: Notes payable and long-term debt (fair value)				2,167,600
Intrinsic value of Allergan Inc. common stock				9,648,166

Intrinsic value of Allergan Inc. common stock (per share)				$32.14
Current share price				$231.12

Based on: 10-K (reporting date: 2014-12-31).

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.

Allergan Inc., cost of capital

	Value¹	Weight	Required rate of return²	Calculation
Equity (fair value)	69,390,936	0.97	10.96%
Notes payable and long-term debt (fair value)	2,167,600	0.03	2.08%	= 3.49% × (1 – 40.50%)

Based on: 10-K (reporting date: 2014-12-31).

¹ US$ in thousands

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 300,237,694 × $231.12
= $69,390,935,837.28

Notes payable and long-term 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
= (23.00% + 26.50% + 28.10% + 27.80% + 97.10%) ÷ 5
= 40.50%

WACC = 10.69%

FCFF growth rate (g) implied by PRAT model

Allergan Inc., PRAT model

	Average	Dec 31, 2014	Dec 31, 2013	Dec 31, 2012	Dec 31, 2011	Dec 31, 2010
Selected Financial Data (US$ in thousands)
Interest expense		69,400)	75,000)	63,600)	71,800)	78,700)
Discontinued operations		(3,800)	(283,800)	—)	—)	—)
Net earnings attributable to Allergan, Inc.		1,524,200)	985,100)	1,098,800)	934,500)	600)

Effective income tax rate (EITR)¹		23.00%	26.50%	28.10%	27.80%	97.10%

Interest expense, after tax²		53,438)	55,125)	45,728)	51,840)	2,282)
Add: Dividends		59,700)	59,500)	60,400)	61,100)	60,900)
Interest expense (after tax) and dividends		113,138)	114,625)	106,128)	112,940)	63,182)

EBIT(1 – EITR)³		1,581,438)	1,324,025)	1,144,528)	986,340)	2,882)

Notes payable		72,100)	55,600)	48,800)	83,900)	28,100)
Convertible notes		—)	—)	—)	—)	642,500)
Long-term debt, excluding current maturities		2,085,300)	2,098,300)	1,512,400)	1,515,400)	1,534,200)
Total Allergan, Inc. stockholders’ equity		7,753,000)	6,463,200)	5,837,100)	5,309,600)	4,757,700)
Total capital		9,910,400)	8,617,100)	7,398,300)	6,908,900)	6,962,500)
Financial Ratios
Retention rate (RR)⁴		0.93	0.91	0.91	0.89	-20.92
Return on invested capital (ROIC)⁵		15.96%	15.37%	15.47%	14.28%	0.04%
Averages
RR	-3.46
ROIC	15.27%

FCFF growth rate (g)⁶	-52.78%

Based on: 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31), 10-K (reporting date: 2011-12-31), 10-K (reporting date: 2010-12-31).

¹ See details »

2014 Calculations

² Interest expense, after tax = Interest expense × (1 – EITR)
= 69,400 × (1 – 23.00%)
= 53,438

³ EBIT(1 – EITR) = Net earnings attributable to Allergan, Inc. – Discontinued operations + Interest expense, after tax
= 1,524,200 – -3,800 + 53,438
= 1,581,438

⁴ RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [1,581,438 – 113,138] ÷ 1,581,438
= 0.93

⁵ ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 1,581,438 ÷ 9,910,400
= 15.96%

⁶ g = RR × ROIC
= -3.46 × 15.27%
= -52.78%

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

g = 100 × (Total capital, fair value₀ × WACC – FCFF₀) ÷ (Total capital, fair value₀ + FCFF₀)
= 100 × (71,558,536 × 10.69% – 1,718,930) ÷ (71,558,536 + 1,718,930)
= 8.09%

where:

Total capital, fair value₀ = current fair value of Allergan Inc. debt and equity (US$ in thousands)
FCFF₀ = the last year Allergan Inc. free cash flow to the firm (US$ in thousands)
WACC = weighted average cost of Allergan Inc. capital

FCFF growth rate (g) forecast

Allergan Inc., H-model

Year	Value	g_t
1	g₁	-52.78%
2	g₂	-37.56%
3	g₃	-22.34%
4	g₄	-7.13%
5 and thereafter	g₅	8.09%

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 + (g₅ – g₁) × (2 – 1) ÷ (5 – 1)
= -52.78% + (8.09% – -52.78%) × (2 – 1) ÷ (5 – 1)
= -37.56%

g₃ = g₁ + (g₅ – g₁) × (3 – 1) ÷ (5 – 1)
= -52.78% + (8.09% – -52.78%) × (3 – 1) ÷ (5 – 1)
= -22.34%

g₄ = g₁ + (g₅ – g₁) × (4 – 1) ÷ (5 – 1)
= -52.78% + (8.09% – -52.78%) × (4 – 1) ÷ (5 – 1)
= -7.13%

Allergan Inc. (NYSE:AGN.)

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

Intrinsic Stock Value (Valuation Summary)

Weighted Average Cost of Capital (WACC)

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

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

FCFF growth rate (g) forecast