# Eli Lilly & Co. (LLY)

## 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)

Eli Lilly & Co., 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 5.70%
01 FCFE0 3,588,200
1 FCFE1 3,725,744  = 3,588,200 × (1 + 3.83%) 3,524,933
2 FCFE2 3,860,248  = 3,725,744 × (1 + 3.61%) 3,455,339
3 FCFE3 3,990,993  = 3,860,248 × (1 + 3.39%) 3,379,825
4 FCFE4 4,117,261  = 3,990,993 × (1 + 3.16%) 3,298,827
5 FCFE5 4,238,338  = 4,117,261 × (1 + 2.94%) 3,212,805
5 Terminal value (TV5) 158,296,933  = 4,238,338 × (1 + 2.94%) ÷ (5.70%2.94%) 119,994,493
Intrinsic value of Eli Lilly & Co.’s common stock 136,866,222

Intrinsic value of Eli Lilly & Co.’s common stock (per share) \$142.55
Current share price \$139.58

Based on: 10-K (filing date: 2019-02-19).

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 2.23% Expected rate of return on market portfolio2 E(RM) 11.40% Systematic risk of Eli Lilly & Co.’s common stock βLLY 0.38 Required rate of return on Eli Lilly & Co.’s common stock3 rLLY 5.70%

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 rLLY = RF + βLLY [E(RM) – RF]
= 2.23% + 0.38 [11.40%2.23%]
= 5.70%

### FCFE Growth Rate (g)

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

Eli Lilly & Co., PRAT model

Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (US\$ in thousands)
Cash dividends declared 2,372,000  2,234,600  2,167,600  2,136,000  2,108,100
Net income (loss) 3,232,000  (204,100) 2,737,600  2,408,400  2,390,500
Revenue 24,555,700  22,871,300  21,222,100  19,958,700  19,615,600
Total assets 43,908,400  44,981,000  38,805,900  35,568,900  37,178,200
Total Eli Lilly and Company shareholders’ equity 9,828,700  11,592,200  14,007,700  14,571,300  15,373,200
Financial Ratios
Retention rate1 0.27 0.21 0.11 0.12
Profit margin2 13.16% -0.89% 12.90% 12.07% 12.19%
Asset turnover3 0.56 0.51 0.55 0.56 0.53
Financial leverage4 4.47 3.88 2.77 2.44 2.42
Averages
Retention rate 0.18
Profit margin 12.58%
Asset turnover 0.54
Financial leverage 3.20

FCFE growth rate (g)5 3.83%

Based on: 10-K (filing date: 2019-02-19), 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).

2018 Calculations

1 Retention rate = (Net income (loss) – Cash dividends declared) ÷ Net income (loss)
= (3,232,0002,372,000) ÷ 3,232,000 = 0.27

2 Profit margin = 100 × Net income (loss) ÷ Revenue
= 100 × 3,232,000 ÷ 24,555,700 = 13.16%

3 Asset turnover = Revenue ÷ Total assets
= 24,555,700 ÷ 43,908,400 = 0.56

4 Financial leverage = Total assets ÷ Total Eli Lilly and Company shareholders’ equity
= 43,908,400 ÷ 9,828,700 = 4.47

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.18 × 12.58% × 0.54 × 3.20 = 3.83%

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (134,015,053 × 5.70%3,588,200) ÷ (134,015,053 + 3,588,200) = 2.94%

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

#### FCFE growth rate (g) forecast

Eli Lilly & Co., H-model

Year Value gt
1 g1 3.83%
2 g2 3.61%
3 g3 3.39%
4 g4 3.16%
5 and thereafter g5 2.94%

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)
= 3.83% + (2.94%3.83%) × (2 – 1) ÷ (5 – 1) = 3.61%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 3.83% + (2.94%3.83%) × (3 – 1) ÷ (5 – 1) = 3.39%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 3.83% + (2.94%3.83%) × (4 – 1) ÷ (5 – 1) = 3.16%