# Bristol-Myers Squibb Co. (NYSE:BMY)

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

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

### Intrinsic Stock Value (Valuation Summary)

Bristol-Myers Squibb Co., free cash flow to the firm (FCFF) forecast

US\$ in millions, except per share data

Year Value FCFFt or Terminal value (TVt) Calculation Present value at 7.42%
01 FCFF0 7,519
1 FCFF1 7,344  = 7,519  × (1 + -2.32%) 6,836
2 FCFF2 7,274  = 7,344  × (1 + -0.95%) 6,304
3 FCFF3 7,306  = 7,274  × (1 + 0.43%) 5,893
4 FCFF4 7,437  = 7,306  × (1 + 1.80%) 5,585
5 FCFF5 7,674  = 7,437  × (1 + 3.18%) 5,364
5 Terminal value (TV5) 186,541  = 7,674  × (1 + 3.18%) ÷ (7.42%3.18%) 130,392
Intrinsic value of Bristol-Myers Squibb Co.’s capital 160,374
Less: Debt (fair value) 51,283
Intrinsic value of Bristol-Myers Squibb Co.’s common stock 109,091

Intrinsic value of Bristol-Myers Squibb Co.’s common stock (per share) \$48.21
Current share price \$58.11

Based on: 10-K (filing date: 2020-02-24).

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)

Bristol-Myers Squibb Co., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 131,485  0.72 9.25%
Debt (fair value) 51,283  0.28 2.74% = 3.64% × (1 – 24.78%)

Based on: 10-K (filing date: 2020-02-24).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 2,262,689,755 × \$58.11 = \$131,484,901,663.05

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
= (30.50% + 18.00% + 30.10% + 23.80% + 21.50%) ÷ 5 = 24.78%

WACC = 7.42%

### FCFF Growth Rate (g)

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

Bristol-Myers Squibb Co., PRAT model

Average Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Selected Financial Data (US\$ in millions)
Interest expense 656  183  196  167  184
Net earnings attributable to BMS 3,439  4,920  1,007  4,457  1,565

Effective income tax rate (EITR)1 30.50% 18.00% 30.10% 23.80% 21.50%

Interest expense, after tax2 456  150  137  127  144
Add: Cash dividends declared 3,035  2,630  2,573  2,557  2,493
Interest expense (after tax) and dividends 3,491  2,780  2,710  2,684  2,637

EBIT(1 – EITR)3 3,895  5,070  1,144  4,584  1,709

Short-term debt obligations 3,346  1,703  987  992  139
Long-term debt, excluding current portion 43,387  5,646  6,975  5,716  6,550
Total Bristol-Myers Squibb Company shareholders’ equity 51,598  14,031  11,741  16,177  14,266
Total capital 98,331  21,380  19,703  22,885  20,955
Financial Ratios
Retention rate (RR)4 0.10 0.45 -1.37 0.41 -0.54
Return on invested capital (ROIC)5 3.96% 23.71% 5.81% 20.03% 8.16%
Averages
RR -0.19
ROIC 12.33%

FCFF growth rate (g)6 -2.32%

Based on: 10-K (filing date: 2020-02-24), 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).

2019 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 656 × (1 – 30.50%) = 456

3 EBIT(1 – EITR) = Net earnings attributable to BMS + Interest expense, after tax
= 3,439 + 456 = 3,895

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [3,8953,491] ÷ 3,895 = 0.10

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 3,895 ÷ 98,331 = 3.96%

6 g = RR × ROIC
= -0.19 × 12.33% = -2.32%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (182,768 × 7.42%7,519) ÷ (182,768 + 7,519) = 3.18%

where:
Total capital, fair value0 = current fair value of Bristol-Myers Squibb Co.’s debt and equity (US\$ in millions)
FCFF0 = the last year Bristol-Myers Squibb Co.’s free cash flow to the firm (US\$ in millions)
WACC = weighted average cost of Bristol-Myers Squibb Co.’s capital

#### FCFF growth rate (g) forecast

Bristol-Myers Squibb Co., H-model

Year Value gt
1 g1 -2.32%
2 g2 -0.95%
3 g3 0.43%
4 g4 1.80%
5 and thereafter g5 3.18%

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)
= -2.32% + (3.18%-2.32%) × (2 – 1) ÷ (5 – 1) = -0.95%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= -2.32% + (3.18%-2.32%) × (3 – 1) ÷ (5 – 1) = 0.43%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= -2.32% + (3.18%-2.32%) × (4 – 1) ÷ (5 – 1) = 1.80%