# Edwards Lifesciences Corp. (NYSE:EW)

## Present Value of Free Cash Flow to Equity (FCFE)

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 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)

Edwards Lifesciences Corp., free cash flow to equity (FCFE) forecast

US\$ in thousands, except per share data

Year Value FCFEt or Terminal value (TVt) Calculation Present value at 11.60%
01 FCFE0 646,200
1 FCFE1 786,025 = 646,200 × (1 + 21.64%) 704,320
2 FCFE2 933,877 = 786,025 × (1 + 18.81%) 749,822
3 FCFE3 1,083,133 = 933,877 × (1 + 15.98%) 779,263
4 FCFE4 1,225,615 = 1,083,133 × (1 + 13.15%) 790,115
5 FCFE5 1,352,181 = 1,225,615 × (1 + 10.33%) 781,098
5 Terminal value (TV5) 117,129,648 = 1,352,181 × (1 + 10.33%) ÷ (11.60%10.33%) 67,660,872
Intrinsic value of Edwards Lifesciences Corp.’s common stock 71,465,491

Intrinsic value of Edwards Lifesciences Corp.’s common stock (per share) \$114.43
Current share price \$89.63

Based on: 10-K (filing date: 2021-02-12).

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)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.15% Expected rate of return on market portfolio2 E(RM) 11.72% Systematic risk of Edwards Lifesciences Corp.’s common stock βEW 0.99 Required rate of return on Edwards Lifesciences Corp.’s common stock3 rEW 11.60%

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).

3 rEW = RF + βEW [E(RM) – RF]
= 2.15% + 0.99 [11.72%2.15%]
= 11.60%

### FCFE Growth Rate (g)

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

Edwards Lifesciences Corp., PRAT model

Average Dec 31, 2020 Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016
Selected Financial Data (US\$ in thousands)
Net income 823,400  1,046,900  722,200  583,600  569,500
Net sales 4,386,300  4,348,000  3,722,800  3,435,300  2,963,700
Total assets 7,237,100  6,488,100  5,323,700  5,695,800  4,510,000
Stockholders’ equity 4,574,300  4,148,300  3,140,400  2,956,200  2,619,000
Financial Ratios
Retention rate1 1.00 1.00 1.00 1.00 1.00
Profit margin2 18.77% 24.08% 19.40% 16.99% 19.22%
Asset turnover3 0.61 0.67 0.70 0.60 0.66
Financial leverage4 1.58 1.56 1.70 1.93 1.72
Averages
Retention rate 1.00
Profit margin 19.69%
Asset turnover 0.65
Financial leverage 1.70

FCFE growth rate (g)5 21.64%

Based on: 10-K (filing date: 2021-02-12), 10-K (filing date: 2020-02-14), 10-K (filing date: 2019-02-15), 10-K (filing date: 2018-02-16), 10-K (filing date: 2017-02-17).

2020 Calculations

1 Company does not pay dividends

2 Profit margin = 100 × Net income ÷ Net sales
= 100 × 823,400 ÷ 4,386,300
= 18.77%

3 Asset turnover = Net sales ÷ Total assets
= 4,386,300 ÷ 7,237,100
= 0.61

4 Financial leverage = Total assets ÷ Stockholders’ equity
= 7,237,100 ÷ 4,574,300
= 1.58

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 1.00 × 19.69% × 0.65 × 1.70
= 21.64%

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (55,975,627 × 11.60%646,200) ÷ (55,975,627 + 646,200)
= 10.33%

where:
Equity market value0 = current market value of Edwards Lifesciences Corp.’s common stock (US\$ in thousands)
FCFE0 = the last year Edwards Lifesciences Corp.’s free cash flow to equity (US\$ in thousands)
r = required rate of return on Edwards Lifesciences Corp.’s common stock

#### FCFE growth rate (g) forecast

Edwards Lifesciences Corp., H-model

Year Value gt
1 g1 21.64%
2 g2 18.81%
3 g3 15.98%
4 g4 13.15%
5 and thereafter g5 10.33%

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)
= 21.64% + (10.33%21.64%) × (2 – 1) ÷ (5 – 1)
= 18.81%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 21.64% + (10.33%21.64%) × (3 – 1) ÷ (5 – 1)
= 15.98%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 21.64% + (10.33%21.64%) × (4 – 1) ÷ (5 – 1)
= 13.15%