# Home Depot Inc. (NYSE:HD)

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

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

### Intrinsic Stock Value (Valuation Summary)

Home Depot Inc., free cash flow to the firm (FCFF) forecast

US\$ in millions, except per share data

Year Value FCFFt or Terminal value (TVt) Calculation Present value at 10.50%
01 FCFF0 17,043
1 FCFF1 20,012 = 17,043 × (1 + 17.42%) 18,110
2 FCFF2 22,912 = 20,012 × (1 + 14.49%) 18,764
3 FCFF3 25,560 = 22,912 × (1 + 11.56%) 18,944
4 FCFF4 27,765 = 25,560 × (1 + 8.62%) 18,622
5 FCFF5 29,345 = 27,765 × (1 + 5.69%) 17,812
5 Terminal value (TV5) 644,801 = 29,345 × (1 + 5.69%) ÷ (10.50%5.69%) 391,379
Intrinsic value of Home Depot Inc.’s capital 483,632
Less: Debt (fair value) 44,055
Intrinsic value of Home Depot Inc.’s common stock 439,577

Intrinsic value of Home Depot Inc.’s common stock (per share) \$413.42
Current share price \$310.77

Based on: 10-K (filing date: 2021-03-24).

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)

Home Depot Inc., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 330,429 0.88 11.56%
Debt (fair value) 44,055 0.12 2.57% = 3.68% × (1 – 30.18%)

Based on: 10-K (filing date: 2021-03-24).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 1,063,258,434 × \$310.77
= \$330,428,823,534.18

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
= (24.20% + 23.60% + 23.60% + 37.00% + 36.30% + 36.40%) ÷ 6
= 30.18%

WACC = 10.50%

### FCFF Growth Rate (g)

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

Home Depot Inc., PRAT model

Average Jan 31, 2021 Feb 2, 2020 Feb 3, 2019 Jan 28, 2018 Jan 29, 2017 Jan 31, 2016
Selected Financial Data (US\$ in millions)
Interest expense 1,347  1,201  1,051  1,057  972  919
Net earnings 12,866  11,242  11,121  8,630  7,957  7,009

Effective income tax rate (EITR)1 24.20% 23.60% 23.60% 37.00% 36.30% 36.40%

Interest expense, after tax2 1,021  918  803  666  619  584
Add: Cash dividends 6,451  5,958  4,704  4,212  3,404  3,031
Interest expense (after tax) and dividends 7,472  6,876  5,507  4,878  4,023  3,615

EBIT(1 – EITR)3 13,887  12,160  11,924  9,296  8,576  7,593

Short-term debt —  974  1,339  1,559  710  350
Current installments of long-term debt 1,416  1,839  1,056  1,202  542  77
Long-term debt, excluding current installments 35,822  28,670  26,807  24,267  22,349  20,888
Stockholders’ equity (deficit) 3,299  (3,116) (1,878) 1,454  4,333  6,316
Total capital 40,537  28,367  27,324  28,482  27,934  27,631
Financial Ratios
Retention rate (RR)4 0.46 0.43 0.54 0.48 0.53 0.52
Return on invested capital (ROIC)5 34.26% 42.87% 43.64% 32.64% 30.70% 27.48%
Averages
RR 0.49
ROIC 35.26%

FCFF growth rate (g)6 17.42%

Based on: 10-K (filing date: 2021-03-24), 10-K (filing date: 2020-03-25), 10-K (filing date: 2019-03-28), 10-K (filing date: 2018-03-22), 10-K (filing date: 2017-03-23), 10-K (filing date: 2016-03-24).

2021 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 1,347 × (1 – 24.20%)
= 1,021

3 EBIT(1 – EITR) = Net earnings + Interest expense, after tax
= 12,866 + 1,021
= 13,887

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [13,8877,472] ÷ 13,887
= 0.46

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 13,887 ÷ 40,537
= 34.26%

6 g = RR × ROIC
= 0.49 × 35.26%
= 17.42%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (374,484 × 10.50%17,043) ÷ (374,484 + 17,043)
= 5.69%

where:

Total capital, fair value0 = current fair value of Home Depot Inc.’s debt and equity (US\$ in millions)
FCFF0 = the last year Home Depot Inc.’s free cash flow to the firm (US\$ in millions)
WACC = weighted average cost of Home Depot Inc.’s capital

#### FCFF growth rate (g) forecast

Home Depot Inc., H-model

Year Value gt
1 g1 17.42%
2 g2 14.49%
3 g3 11.56%
4 g4 8.62%
5 and thereafter g5 5.69%

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)
= 17.42% + (5.69%17.42%) × (2 – 1) ÷ (5 – 1)
= 14.49%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 17.42% + (5.69%17.42%) × (3 – 1) ÷ (5 – 1)
= 11.56%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 17.42% + (5.69%17.42%) × (4 – 1) ÷ (5 – 1)
= 8.62%