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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)

Eli Lilly & Co., free cash flow to equity (FCFE) forecast

USD $ in thousands, except per share data

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Year Value FCFEt or Terminal value (TVt) Calculation Present value at 5.99%
01 FCFE0 7,578,400 
1 FCFE1 7,986,016  = 7,578,400 × (1 + 5.38%) 7,534,464 
2 FCFE2 8,301,185  = 7,986,016 × (1 + 3.95%) 7,388,979 
3 FCFE3 8,509,908  = 8,301,185 × (1 + 2.51%) 7,146,466 
4 FCFE4 8,602,005  = 8,509,908 × (1 + 1.08%) 6,815,353 
5 FCFE5 8,571,906  = 8,602,005 × (1 + -0.35%) 6,407,494 
5 Terminal value (TV5) 134,665,283  = 8,571,906 × (1 + -0.35%) ÷ (5.99%-0.35%) 100,662,206 
Intrinsic value of Lilly's common stock 135,954,962 
Intrinsic value of Lilly's common stock (per share) $128.34
Current share price $112.39

Based on: 10-K (filing date: 2018-02-20).

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 3.32%
Expected rate of return on market portfolio2 E(RM) 12.37%
Systematic risk (β) of Lilly's common stock βLLY 0.30
Required rate of return on Lilly's common stock3 rLLY 5.99%

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 rLLY = RF + βLLY [E(RM) – RF]
= 3.32% + 0.30 [12.37%3.32%]
= 5.99%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Eli Lilly & Co., 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 thousands)
Cash dividends declared 2,234,600  2,167,600  2,136,000  2,108,100  2,102,800 
Net income (loss) (204,100) 2,737,600  2,408,400  2,390,500  4,684,800 
Revenue 22,871,300  21,222,100  19,958,700  19,615,600  23,113,100 
Total assets 44,981,000  38,805,900  35,568,900  37,178,200  35,248,700 
Total Eli Lilly and Company shareholders' equity 11,592,200  14,007,700  14,571,300  15,373,200  17,631,400 
Ratios
Retention rate1 0.21 0.11 0.12 0.55
Profit margin2 -0.89% 12.90% 12.07% 12.19% 20.27%
Asset turnover3 0.51 0.55 0.56 0.53 0.66
Financial leverage4 3.88 2.77 2.44 2.42 2.00
Averages
Retention rate 0.25
Profit margin 14.36%
Asset turnover 0.56
Financial leverage 2.70
Growth rate of FCFE (g)5 5.38%

Based on: 10-K (filing date: 2018-02-20), 10-K (filing date: 2017-02-21), 10-K (filing date: 2016-02-19), 10-K (filing date: 2015-02-19), 10-K (filing date: 2014-02-19).

2017 Calculations

1 Retention rate = (Net income (loss) – Cash dividends declared) ÷ Net income (loss)
= (-204,1002,234,600) ÷ -204,100 =

2 Profit margin = 100 × Net income (loss) ÷ Revenue
= 100 × -204,100 ÷ 22,871,300 = -0.89%

3 Asset turnover = Revenue ÷ Total assets
= 22,871,300 ÷ 44,981,000 = 0.51

4 Financial leverage = Total assets ÷ Total Eli Lilly and Company shareholders' equity
= 44,981,000 ÷ 11,592,200 = 3.88

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.25 × 14.36% × 0.56 × 2.70 = 5.38%


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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (119,057,228 × 5.99%7,578,400) ÷ (119,057,228 + 7,578,400) = -0.35%

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


FCFE growth rate (g) forecast

Eli Lilly & Co., H-model

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Year Value gt
1 g1 5.38%
2 g2 3.95%
3 g3 2.51%
4 g4 1.08%
5 and thereafter g5 -0.35%

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)
= 5.38% + (-0.35%5.38%) × (2 – 1) ÷ (5 – 1) = 3.95%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 5.38% + (-0.35%5.38%) × (3 – 1) ÷ (5 – 1) = 2.51%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 5.38% + (-0.35%5.38%) × (4 – 1) ÷ (5 – 1) = 1.08%