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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)

DowDuPont Inc., 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 14.58%
01 FCFE0 2,405 
1 FCFE1 2,602  = 2,405 × (1 + 8.21%) 2,271 
2 FCFE2 2,843  = 2,602 × (1 + 9.26%) 2,166 
3 FCFE3 3,136  = 2,843 × (1 + 10.31%) 2,085 
4 FCFE4 3,493  = 3,136 × (1 + 11.36%) 2,026 
5 FCFE5 3,926  = 3,493 × (1 + 12.41%) 1,988 
5 Terminal value (TV5) 203,571  = 3,926 × (1 + 12.41%) ÷ (14.58%12.41%) 103,069 
Intrinsic value of DowDuPont's common stock 113,605 
Intrinsic value of DowDuPont's common stock (per share) $49.52
Current share price $54.35

Based on: 10-K (filing date: 2018-02-15).

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 3.10%
Expected rate of return on market portfolio2 E(RM) 12.48%
Systematic risk (β) of DowDuPont's common stock βDWDP 1.22
Required rate of return on DowDuPont's common stock3 rDWDP 14.58%

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 rDWDP = RF + βDWDP [E(RM) – RF]
= 3.10% + 1.22 [12.48%3.10%]
= 14.58%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

DowDuPont Inc., 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)
Dividends declared on common stock 2,558  2,037  1,942  1,777  1,520 
Preferred stock dividends –  340  340  340  340 
Net income attributable to DowDuPont Inc. 1,460  4,318  7,685  3,772  4,787 
Net sales 62,484  48,158  48,778  58,167  57,080 
Total assets 192,164  79,511  68,026  68,796  69,501 
Total DowDuPont's stockholders' equity 100,330  25,987  25,374  22,423  26,898 
Ratios
Retention rate1 -0.75 0.49 0.74 0.48 0.66
Profit margin2 2.34% 8.26% 15.06% 5.90% 7.79%
Asset turnover3 0.33 0.61 0.72 0.85 0.82
Financial leverage4 1.92 3.06 2.68 3.07 2.58
Averages
Retention rate 0.59
Profit margin 7.87%
Asset turnover 0.66
Financial leverage 2.66
Growth rate of FCFE (g)5 8.21%

Based on: 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-12), 10-K (filing date: 2015-02-13), 10-K (filing date: 2014-02-14).

2017 Calculations

1 Retention rate = (Net income attributable to DowDuPont Inc. – Dividends declared on common stock – Preferred stock dividends) ÷ (Net income attributable to DowDuPont Inc. – Preferred stock dividends)
= (1,4602,5580) ÷ (1,4600) = -0.75

2 Profit margin = 100 × (Net income attributable to DowDuPont Inc. – Preferred stock dividends) ÷ Net sales
= 100 × (1,4600) ÷ 62,484 = 2.34%

3 Asset turnover = Net sales ÷ Total assets
= 62,484 ÷ 192,164 = 0.33

4 Financial leverage = Total assets ÷ Total DowDuPont's stockholders' equity
= 192,164 ÷ 100,330 = 1.92

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.59 × 7.87% × 0.66 × 2.66 = 8.21%


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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (124,692 × 14.58%2,405) ÷ (124,692 + 2,405) = 12.41%

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


FCFE growth rate (g) forecast

DowDuPont Inc., H-model

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Year Value gt
1 g1 8.21%
2 g2 9.26%
3 g3 10.31%
4 g4 11.36%
5 and thereafter g5 12.41%

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)
= 8.21% + (12.41%8.21%) × (2 – 1) ÷ (5 – 1) = 9.26%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 8.21% + (12.41%8.21%) × (3 – 1) ÷ (5 – 1) = 10.31%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 8.21% + (12.41%8.21%) × (4 – 1) ÷ (5 – 1) = 11.36%