Microsoft Excel LibreOffice Calc

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

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


Intrinsic Stock Value (Valuation Summary)

Coca-Cola Co., free cash flow to the firm (FCFF) forecast

USD $ in millions, except per share data

Microsoft Excel LibreOffice Calc
Year Value FCFFt or Terminal value (TVt) Calculation Present value at 7.89%
01 FCFF0 5,556 
1 FCFF1 5,234  = 5,556  × (1 + -5.80%) 4,852 
2 FCFF2 5,079  = 5,234  × (1 + -2.97%) 4,363 
3 FCFF3 5,071  = 5,079  × (1 + -0.15%) 4,038 
4 FCFF4 5,206  = 5,071  × (1 + 2.67%) 3,842 
5 FCFF5 5,492  = 5,206  × (1 + 5.49%) 3,756 
5 Terminal value (TV5) 241,007  = 5,492  × (1 + 5.49%) ÷ (7.89% – 5.49%) 164,846 
Intrinsic value of Coca-Cola's capital 185,696 
Less: Debt (fair value) 48,374 
Intrinsic value of Coca-Cola's common stock 137,322 
Intrinsic value of Coca-Cola's common stock (per share) $32.29
Current share price $45.96

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)

Coca-Cola Co., cost of capital

Microsoft Excel LibreOffice Calc
Value1 Weight Required rate of return2 Calculation
Equity (fair value) 195,464  0.80 9.57%
Debt (fair value) 48,374  0.20 1.10% = 1.69% × (1 – 34.74%)

1 USD $ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 4,252,922,447 × $45.96 = $195,464,315,664.12

   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
= (82.50% + 19.50% + 23.30% + 23.60% + 24.80%) ÷ 5 = 34.74%

WACC = 7.89%


FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Coca-Cola Co., PRAT model

Microsoft Excel LibreOffice Calc
Average Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Selected Financial Data (USD $ in millions)
Interest expense 841  733  856  483  463 
Income from discontinued operations, net of income taxes 101 
Net income attributable to shareowners of The Coca-Cola Company 1,248  6,527  7,351  7,098  8,584 
Effective income tax rate (EITR)1 82.50% 19.50% 23.30% 23.60% 24.80%
Interest expense, after tax2 147  590  657  369  348 
Add: Dividends 6,320  6,043  5,741  5,350  4,969 
Interest expense (after tax) and dividends 6,467  6,633  6,398  5,719  5,317 
EBIT(1 – EITR)3 1,294  7,117  8,008  7,467  8,932 
Loans and notes payable 13,205  12,498  13,129  19,130  16,901 
Current maturities of long-term debt 3,298  3,527  2,677  3,552  1,024 
Long-term debt, excluding current maturities 31,182  29,684  28,407  19,063  19,154 
Equity attributable to shareowners of The Coca-Cola Company 17,072  23,062  25,554  30,320  33,173 
Total capital 64,757  68,771  69,767  72,065  70,252 
Ratios
Retention rate (RR)4 -4.00 0.07 0.20 0.23 0.40
Return on invested capital (ROIC)5 2.00% 10.35% 11.48% 10.36% 12.71%
Averages
RR -0.62
ROIC 9.38%
Growth rate of FCFF (g)6 -5.80%

2017 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 841 × (1 – 82.50%) = 147

3 EBIT(1 – EITR) = Net income attributable to shareowners of The Coca-Cola Company – Income from discontinued operations, net of income taxes + Interest expense, after tax
= 1,248101 + 147 = 1,294

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [1,2946,467] ÷ 1,294 = -4.00

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 1,294 ÷ 64,757 = 2.00%

6 g = RR × ROIC
= -0.62 × 9.38% = -5.80%


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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (243,838 × 7.89% – 5,556) ÷ (243,838 + 5,556) = 5.49%

where:
Total capital, fair value0 = current fair value of Coca-Cola's debt and equity (USD $ in millions)
FCFF0 = last year Coca-Cola's free cash flow to the firm (USD $ in millions)
WACC = weighted average cost of Coca-Cola's capital


FCFF growth rate (g) forecast

Coca-Cola Co., H-model

Microsoft Excel LibreOffice Calc
Year Value gt
1 g1 -5.80%
2 g2 -2.97%
3 g3 -0.15%
4 g4 2.67%
5 and thereafter g5 5.49%

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)
= -5.80% + (5.49% – -5.80%) × (2 – 1) ÷ (5 – 1) = -2.97%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= -5.80% + (5.49% – -5.80%) × (3 – 1) ÷ (5 – 1) = -0.15%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= -5.80% + (5.49% – -5.80%) × (4 – 1) ÷ (5 – 1) = 2.67%