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Present Value of Free Cash Flow to Equity (FCFE)

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 equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company's asset base.


Intrinsic Stock Value (Valuation Summary)

Boeing Co., free cash flow to equity (FCFE) forecast

USD $ in millions, except per share data

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Year Value FCFEt or Terminal value (TVt) Calculation Present value at 15.49%
01 FCFE0 12,690 
1 FCFE1 46,187  = 12,690 × (1 + 263.96%) 39,993 
2 FCFE2 138,557  = 46,187 × (1 + 199.99%) 103,884 
3 FCFE3 327,019  = 138,557 × (1 + 136.02%) 212,300 
4 FCFE4 562,613  = 327,019 × (1 + 72.04%) 316,261 
5 FCFE5 608,012  = 562,613 × (1 + 8.07%) 295,942 
5 Terminal value (TV5) 8,855,685  = 608,012 × (1 + 8.07%) ÷ (15.49%8.07%) 4,310,394 
Intrinsic value of Boeing's common stock 5,278,773 
Intrinsic value of Boeing's common stock (per share) $9,295.49
Current share price $325.47

Based on: 10-K (filing date: 2018-02-12).

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.


Required Rate of Return (r)

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Assumptions
Rate of return on LT Treasury Composite1 RF 3.11%
Expected rate of return on market portfolio2 E(RM) 12.39%
Systematic risk (β) of Boeing's common stock βBA 1.33
Required rate of return on Boeing's common stock3 rBA 15.49%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

Calculations

2 See Details »

3 rBA = RF + βBA [E(RM) – RF]
= 3.11% + 1.33 [12.39%3.11%]
= 15.49%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Boeing Co., 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)
Cash dividends declared 3,556  2,902  2,575  2,210  1,642 
Net earnings related to parent 8,197  4,895  5,176  5,446  4,585 
Revenues 93,392  94,571  96,114  90,762  86,623 
Total assets 92,333  89,997  94,408  99,198  92,663 
Shareholders’ equity 355  817  6,335  8,665  14,875 
Ratios
Retention rate1 0.57 0.41 0.50 0.59 0.64
Profit margin2 8.78% 5.18% 5.39% 6.00% 5.29%
Asset turnover3 1.01 1.05 1.02 0.91 0.93
Financial leverage4 260.09 110.16 14.90 11.45 6.23
Averages
Retention rate 0.54
Profit margin 6.13%
Asset turnover 0.99
Financial leverage 80.57
Growth rate of FCFE (g)5 263.96%

Based on: 10-K (filing date: 2018-02-12), 10-K (filing date: 2017-02-08), 10-K (filing date: 2016-02-10), 10-K (filing date: 2015-02-12), 10-K (filing date: 2014-02-14).

2017 Calculations

1 Retention rate = (Net earnings related to parent – Cash dividends declared) ÷ Net earnings related to parent
= (8,1973,556) ÷ 8,197 = 0.57

2 Profit margin = 100 × Net earnings related to parent ÷ Revenues
= 100 × 8,197 ÷ 93,392 = 8.78%

3 Asset turnover = Revenues ÷ Total assets
= 93,392 ÷ 92,333 = 1.01

4 Financial leverage = Total assets ÷ Shareholders’ equity
= 92,333 ÷ 355 = 260.09

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.54 × 6.13% × 0.99 × 80.57 = 263.96%


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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (184,830 × 15.49%12,690) ÷ (184,830 + 12,690) = 8.07%

where:
Equity market value0 = current market value of Boeing's common stock (USD $ in millions)
FCFE0 = last year Boeing's free cash flow to equity (USD $ in millions)
r = required rate of return on Boeing's common stock


FCFE growth rate (g) forecast

Boeing Co., H-model

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Year Value gt
1 g1 263.96%
2 g2 199.99%
3 g3 136.02%
4 g4 72.04%
5 and thereafter g5 8.07%

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)
= 263.96% + (8.07%263.96%) × (2 – 1) ÷ (5 – 1) = 199.99%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 263.96% + (8.07%263.96%) × (3 – 1) ÷ (5 – 1) = 136.02%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 263.96% + (8.07%263.96%) × (4 – 1) ÷ (5 – 1) = 72.04%