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)
Weighted Average Cost of Capital (WACC)
FCFF Growth Rate (g)

Diageo PLC, free cash flow to the firm (FCFF) forecast

US$ in millions, except per share data

Year	Value	FCFF_t or Terminal value (TV_t)	Calculation	Present value at 10.27%
0¹	FCFF₀	2,885
1	FCFF₁	3,079	= 2,885 × (1 + 6.73%)	2,792
2	FCFF₂	3,289	= 3,079 × (1 + 6.82%)	2,705
3	FCFF₃	3,516	= 3,289 × (1 + 6.91%)	2,622
4	FCFF₄	3,762	= 3,516 × (1 + 7.00%)	2,545
5	FCFF₅	4,029	= 3,762 × (1 + 7.09%)	2,471
5	Terminal value (TV₅)	135,535	= 4,029 × (1 + 7.09%) ÷ (10.27% – 7.09%)	83,129
Intrinsic value of Diageo PLC capital				96,264
Less: Borrowings and bank overdrafts (fair value)				16,318
Intrinsic value of Diageo PLC common stock				79,946

Intrinsic value of Diageo PLC common stock (per share)				$116.11
Current share price				$117.25

Based on: 20-F (reporting date: 2014-06-30).

¹ See details »

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.

Diageo PLC, cost of capital

	Value¹	Weight	Required rate of return²	Calculation
Equity (fair value)	80,733	0.83	11.71%
Borrowings and bank overdrafts (fair value)	16,318	0.17	3.16%	= 3.80% × (1 – 16.75%)

Based on: 20-F (reporting date: 2014-06-30).

¹ US$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 688,554,634 × $117.25
= $80,733,030,836.50

Borrowings and bank overdrafts (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
= (16.49% + 16.94% + 33.26% + 14.53% + 21.30% + 14.49%) ÷ 6
= 16.75%

WACC = 10.27%

FCFF growth rate (g) implied by PRAT model

Diageo PLC, PRAT model

	Average	Jun 30, 2014	Jun 30, 2013	Jun 30, 2012	Jun 30, 2011	Jun 30, 2010	Jun 30, 2009
Selected Financial Data (US$ in millions, translated from GBP £)
Interest charges		966)	1,082)	1,047)	1,005)	1,299)	1,242)
Profit for the year attributable to equity shareholders of the parent company		3,797)	4,118)	3,158)	2,952)	2,507)	2,621)
Add: Net income attributable to noncontrolling interest		(113)	181)	211)	182)	175)	168)
Less: Discontinued operations		(140)	—)	(18)	—)	(29)	3)
Add: Income tax expense		755)	877)	1,688)	533)	734)	472)
Earnings before tax (EBT)		4,579)	5,176)	5,076)	3,667)	3,446)	3,258)

Effective income tax rate (EITR)¹		16.49%	16.94%	33.26%	14.53%	21.30%	14.49%

Interest charges, after tax²		807)	899)	699)	859)	1,022)	1,062)
Add: Dividends paid		2,074)	1,864)	1,685)	1,512)	1,407)	1,407)
Interest expense (after tax) and dividends		2,881)	2,763)	2,384)	2,371)	2,429)	2,468)

EBIT(1 – EITR)³		4,744)	5,017)	3,875)	3,811)	3,559)	3,679)

Borrowings due within one year and bank overdrafts		2,662)	3,079)	2,000)	2,248)	903)	1,439)
Borrowings due after one year		12,900)	13,644)	12,033)	10,485)	12,586)	12,425)
Equity attributable to equity shareholders of the parent company		11,523)	11,661)	9,088)	8,149)	6,167)	5,208)
Total capital		27,085)	28,384)	23,121)	20,883)	19,657)	19,072)
Financial Ratios
Retention rate (RR)⁴		0.39	0.45	0.38	0.38	0.32	0.33
Return on invested capital (ROIC)⁵		17.51%	17.68%	16.76%	18.25%	18.11%	19.29%
Averages
RR	0.38
ROIC	17.93%

FCFF growth rate (g)⁶	6.73%

Based on: 20-F (reporting date: 2014-06-30), 20-F (reporting date: 2013-06-30), 20-F (reporting date: 2012-06-30), 20-F (reporting date: 2011-06-30), 20-F (reporting date: 2010-06-30), 20-F (reporting date: 2009-06-30).

2014 Calculations

¹ EITR = 100 × Income tax expense ÷ EBT
= 100 × 755 ÷ 4,579
= 16.49%

² Interest charges, after tax = Interest charges × (1 – EITR)
= 966 × (1 – 16.49%)
= 807

³ EBIT(1 – EITR) = Profit for the year attributable to equity shareholders of the parent company – Discontinued operations + Interest charges, after tax
= 3,797 – -140 + 807
= 4,744

⁴ RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [4,744 – 2,881] ÷ 4,744
= 0.39

⁵ ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 4,744 ÷ 27,085
= 17.51%

⁶ g = RR × ROIC
= 0.38 × 17.93%
= 6.73%

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

g = 100 × (Total capital, fair value₀ × WACC – FCFF₀) ÷ (Total capital, fair value₀ + FCFF₀)
= 100 × (97,051 × 10.27% – 2,885) ÷ (97,051 + 2,885)
= 7.09%

where:

Total capital, fair value₀ = current fair value of Diageo PLC debt and equity (US$ in millions)
FCFF₀ = the last year Diageo PLC free cash flow to the firm (US$ in millions)
WACC = weighted average cost of Diageo PLC capital

FCFF growth rate (g) forecast

Diageo PLC, H-model

Year	Value	g_t
1	g₁	6.73%
2	g₂	6.82%
3	g₃	6.91%
4	g₄	7.00%
5 and thereafter	g₅	7.09%

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 + (g₅ – g₁) × (2 – 1) ÷ (5 – 1)
= 6.73% + (7.09% – 6.73%) × (2 – 1) ÷ (5 – 1)
= 6.82%

g₃ = g₁ + (g₅ – g₁) × (3 – 1) ÷ (5 – 1)
= 6.73% + (7.09% – 6.73%) × (3 – 1) ÷ (5 – 1)
= 6.91%

g₄ = g₁ + (g₅ – g₁) × (4 – 1) ÷ (5 – 1)
= 6.73% + (7.09% – 6.73%) × (4 – 1) ÷ (5 – 1)
= 7.00%

Diageo PLC (NYSE:DEO)

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

Intrinsic Stock Value (Valuation Summary)

Weighted Average Cost of Capital (WACC)

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

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

FCFF growth rate (g) forecast