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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)

Bristol-Myers Squibb 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 13.45%
01 FCFE0 5,211 
1 FCFE1 4,896  = 5,211 × (1 + -6.04%) 4,316 
2 FCFE2 4,766  = 4,896 × (1 + -2.66%) 3,703 
3 FCFE3 4,800  = 4,766 × (1 + 0.72%) 3,288 
4 FCFE4 4,997  = 4,800 × (1 + 4.10%) 3,017 
5 FCFE5 5,370  = 4,997 × (1 + 7.48%) 2,858 
5 Terminal value (TV5) 96,720  = 5,370 × (1 + 7.48%) ÷ (13.45% – 7.48%) 51,471 
Intrinsic value of BMS's common stock 68,652 
Intrinsic value of BMS's common stock (per share) $42.07
Current share price $57.51

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 3.28%
Expected rate of return on market portfolio2 E(RM) 12.31%
Systematic risk (β) of BMS's common stock βBMY 1.13
Required rate of return on BMS's common stock3 rBMY 13.45%

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 rBMY = RF + βBMY [E(RM) – RF]
= 3.28% + 1.13 [12.31% – 3.28%]
= 13.45%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Bristol-Myers Squibb 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 2,573  2,557  2,493  2,415  2,344 
Net earnings attributable to BMS 1,007  4,457  1,565  2,004  2,563 
Revenues 20,776  19,427  16,560  15,879  16,385 
Total assets 33,551  33,707  31,748  33,749  38,592 
Total Bristol-Myers Squibb Company shareholders' equity 11,741  16,177  14,266  14,852  15,154 
Ratios
Retention rate1 -1.56 0.43 -0.59 -0.21 0.09
Profit margin2 4.85% 22.94% 9.45% 12.62% 15.64%
Asset turnover3 0.62 0.58 0.52 0.47 0.42
Financial leverage4 2.86 2.08 2.23 2.27 2.55
Averages
Retention rate -0.37
Profit margin 13.10%
Asset turnover 0.52
Financial leverage 2.40
Growth rate of FCFE (g)5 -6.04%

2017 Calculations

1 Retention rate = (Net earnings attributable to BMS – Cash dividends) ÷ Net earnings attributable to BMS
= (1,0072,573) ÷ 1,007 = -1.56

2 Profit margin = 100 × Net earnings attributable to BMS ÷ Revenues
= 100 × 1,007 ÷ 20,776 = 4.85%

3 Asset turnover = Revenues ÷ Total assets
= 20,776 ÷ 33,551 = 0.62

4 Financial leverage = Total assets ÷ Total Bristol-Myers Squibb Company shareholders' equity
= 33,551 ÷ 11,741 = 2.86

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= -0.37 × 13.10% × 0.52 × 2.40 = -6.04%


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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (93,849 × 13.45% – 5,211) ÷ (93,849 + 5,211) = 7.48%

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


FCFE growth rate (g) forecast

Bristol-Myers Squibb Co., H-model

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Year Value gt
1 g1 -6.04%
2 g2 -2.66%
3 g3 0.72%
4 g4 4.10%
5 and thereafter g5 7.48%

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)
= -6.04% + (7.48% – -6.04%) × (2 – 1) ÷ (5 – 1) = -2.66%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= -6.04% + (7.48% – -6.04%) × (3 – 1) ÷ (5 – 1) = 0.72%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= -6.04% + (7.48% – -6.04%) × (4 – 1) ÷ (5 – 1) = 4.10%