# Bristol-Myers Squibb Co. (BMY)

## Present Value of Free Cash Flow to Equity (FCFE)

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 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)

Bristol-Myers Squibb Co., free cash flow to equity (FCFE) forecast

US\$ in millions, except per share data

Year Value FCFEt or Terminal value (TVt) Calculation Present value at 11.04%
01 FCFE0 4,441
1 FCFE1 4,189  = 4,441 × (1 + -5.66%) 3,773
2 FCFE2 4,081  = 4,189 × (1 + -2.58%) 3,310
3 FCFE3 4,102  = 4,081 × (1 + 0.51%) 2,996
4 FCFE4 4,250  = 4,102 × (1 + 3.60%) 2,795
5 FCFE5 4,534  = 4,250 × (1 + 6.68%) 2,686
5 Terminal value (TV5) 110,974  = 4,534 × (1 + 6.68%) ÷ (11.04%6.68%) 65,739
Intrinsic value of Bristol-Myers Squibb Co.’s common stock 81,300

Intrinsic value of Bristol-Myers Squibb Co.’s common stock (per share) \$49.90
Current share price \$66.72

Based on: 10-K (filing date: 2019-02-25).

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)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.23% Expected rate of return on market portfolio2 E(RM) 11.40% Systematic risk of Bristol-Myers Squibb Co.’s common stock βBMY 0.96 Required rate of return on Bristol-Myers Squibb Co.’s common stock3 rBMY 11.04%

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).

3 rBMY = RF + βBMY [E(RM) – RF]
= 2.23% + 0.96 [11.40%2.23%]
= 11.04%

### FCFE Growth Rate (g)

#### FCFE growth rate (g) implied by PRAT model

Bristol-Myers Squibb Co., PRAT model

Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (US\$ in millions)
Cash dividends declared 2,630  2,573  2,557  2,493  2,415
Net earnings attributable to BMS 4,920  1,007  4,457  1,565  2,004
Revenues 22,561  20,776  19,427  16,560  15,879
Total assets 34,986  33,551  33,707  31,748  33,749
Total Bristol-Myers Squibb Company shareholders’ equity 14,031  11,741  16,177  14,266  14,852
Financial Ratios
Retention rate1 0.47 -1.56 0.43 -0.59 -0.21
Profit margin2 21.81% 4.85% 22.94% 9.45% 12.62%
Asset turnover3 0.64 0.62 0.58 0.52 0.47
Financial leverage4 2.49 2.86 2.08 2.23 2.27
Averages
Retention rate -0.29
Profit margin 14.33%
Asset turnover 0.57
Financial leverage 2.39

FCFE growth rate (g)5 -5.66%

Based on: 10-K (filing date: 2019-02-25), 10-K (filing date: 2018-02-13), 10-K (filing date: 2017-02-21), 10-K (filing date: 2016-02-12), 10-K (filing date: 2015-02-13).

2018 Calculations

1 Retention rate = (Net earnings attributable to BMS – Cash dividends declared) ÷ Net earnings attributable to BMS
= (4,9202,630) ÷ 4,920 = 0.47

2 Profit margin = 100 × Net earnings attributable to BMS ÷ Revenues
= 100 × 4,920 ÷ 22,561 = 21.81%

3 Asset turnover = Revenues ÷ Total assets
= 22,561 ÷ 34,986 = 0.64

4 Financial leverage = Total assets ÷ Total Bristol-Myers Squibb Company shareholders’ equity
= 34,986 ÷ 14,031 = 2.49

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= -0.29 × 14.33% × 0.57 × 2.39 = -5.66%

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (108,706 × 11.04%4,441) ÷ (108,706 + 4,441) = 6.68%

where:
Equity market value0 = current market value of Bristol-Myers Squibb Co.’s common stock (US\$ in millions)
FCFE0 = the last year Bristol-Myers Squibb Co.’s free cash flow to equity (US\$ in millions)
r = required rate of return on Bristol-Myers Squibb Co.’s common stock

#### FCFE growth rate (g) forecast

Bristol-Myers Squibb Co., H-model

Year Value gt
1 g1 -5.66%
2 g2 -2.58%
3 g3 0.51%
4 g4 3.60%
5 and thereafter g5 6.68%

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)
= -5.66% + (6.68%-5.66%) × (2 – 1) ÷ (5 – 1) = -2.58%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= -5.66% + (6.68%-5.66%) × (3 – 1) ÷ (5 – 1) = 0.51%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= -5.66% + (6.68%-5.66%) × (4 – 1) ÷ (5 – 1) = 3.60%