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Ford Motor Co. (F)


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

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 the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.


Intrinsic Stock Value (Valuation Summary)

Ford Motor Co., free cash flow to the firm (FCFF) forecast

USD $ in millions, except per share data

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Year Value FCFFt or Terminal value (TVt) Calculation Present value at 4.24%
01 FCFF0 11,232 
1 FCFF1 11,385  = 11,232  × (1 + 1.36%) 10,922 
2 FCFF2 11,458  = 11,385  × (1 + 0.64%) 10,545 
3 FCFF3 11,449  = 11,458  × (1 + -0.08%) 10,108 
4 FCFF4 11,358  = 11,449  × (1 + -0.80%) 9,620 
5 FCFF5 11,185  = 11,358  × (1 + -1.52%) 9,089 
5 Terminal value (TV5) 191,320  = 11,185  × (1 + -1.52%) ÷ (4.24%-1.52%) 155,461 
Intrinsic value of Ford Motor Co.’s capital 205,745 
Less: Debt (fair value) 152,825 
Intrinsic value of Ford Motor Co.’s common stock 52,920 
Intrinsic value of Ford Motor Co.’s common stock (per share) $13.26
Current share price $9.85

Based on: 10-K (filing date: 2019-02-21).

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.


Weighted Average Cost of Capital (WACC)

Ford Motor Co., cost of capital

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Value1 Weight Required rate of return2 Calculation
Equity (fair value) 39,297  0.20 11.25%
Debt (fair value) 152,825  0.80 2.44% = 3.20% × (1 – 23.88%)

Based on: 10-K (filing date: 2019-02-21).

1 USD $ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 3,989,545,901 × $9.85 = $39,297,027,124.85

   Debt (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
= (15.00% + 6.40% + 32.20% + 28.10% + 37.70%) ÷ 5 = 23.88%

WACC = 4.24%


FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Ford Motor Co., PRAT model

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Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (USD $ in millions)
Interest expense 1,228  1,133  894  773  797 
Net income attributable to Ford Motor Company 3,677  7,602  4,596  7,373  3,187 
Effective income tax rate (EITR)1 15.00% 6.40% 32.20% 28.10% 37.70%
Interest expense, after tax2 1,044  1,060  606  556  497 
Add: Cash dividends declared 2,915  2,584  3,376  2,380  1,952 
Interest expense (after tax) and dividends 3,959  3,644  3,982  2,936  2,449 
EBIT(1 – EITR)3 4,721  8,662  5,202  7,929  3,684 
Automotive debt payable within one year 2,314  3,356  2,685  1,779  2,501 
Ford Credit debt payable within one year 51,179  48,265  46,984  41,196  36,671 
Automotive long-term debt payable after one year 11,233  12,575  13,222  11,060  11,323 
Ford Credit long-term debt payable after one year 88,887  89,492  80,079  78,819  68,676 
Other long-term debt payable after one year 600  599  –  –  – 
Equity attributable to Ford Motor Company 35,932  34,890  29,170  28,642  24,805 
Total capital 190,145  189,177  172,140  161,496  143,976 
Ratios
Retention rate (RR)4 0.16 0.58 0.23 0.63 0.34
Return on invested capital (ROIC)5 2.48% 4.58% 3.02% 4.91% 2.56%
Averages
RR 0.39
ROIC 3.51%
Growth rate of FCFF (g)6 1.36%

Based on: 10-K (filing date: 2019-02-21), 10-K (filing date: 2018-02-08), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-13).

2018 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 1,228 × (1 – 15.00%) = 1,044

3 EBIT(1 – EITR) = Net income attributable to Ford Motor Company + Interest expense, after tax
= 3,677 + 1,044 = 4,721

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [4,7213,959] ÷ 4,721 = 0.16

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 4,721 ÷ 190,145 = 2.48%

6 g = RR × ROIC
= 0.39 × 3.51% = 1.36%


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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (192,122 × 4.24%11,232) ÷ (192,122 + 11,232) = -1.52%

where:
Total capital, fair value0 = current fair value of Ford Motor Co.’s debt and equity (USD $ in millions)
FCFF0 = last year Ford Motor Co.’s free cash flow to the firm (USD $ in millions)
WACC = weighted average cost of Ford Motor Co.’s capital


FCFF growth rate (g) forecast

Ford Motor Co., H-model

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Year Value gt
1 g1 1.36%
2 g2 0.64%
3 g3 -0.08%
4 g4 -0.80%
5 and thereafter g5 -1.52%

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)
= 1.36% + (-1.52%1.36%) × (2 – 1) ÷ (5 – 1) = 0.64%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 1.36% + (-1.52%1.36%) × (3 – 1) ÷ (5 – 1) = -0.08%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 1.36% + (-1.52%1.36%) × (4 – 1) ÷ (5 – 1) = -0.80%