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Microsoft Excel LibreOffice Calc


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)

International Business Machines Corp., free cash flow to the firm (FCFF) forecast

USD $ in millions, except per share data

Microsoft Excel LibreOffice Calc
Year Value FCFFt or Terminal value (TVt) Calculation Present value at hidden
01 FCFF0 hidden
1 FCFF1 hidden = hidden × (1 + hidden) hidden
2 FCFF2 hidden = hidden × (1 + hidden) hidden
3 FCFF3 hidden = hidden × (1 + hidden) hidden
4 FCFF4 hidden = hidden × (1 + hidden) hidden
5 FCFF5 hidden = hidden × (1 + hidden) hidden
5 Terminal value (TV5) hidden = hidden × (1 + hidden) ÷ (hiddenhidden) hidden
Intrinsic value of IBM's capital hidden
Less: Debt (fair value) hidden
Intrinsic value of IBM's common stock hidden
Intrinsic value of IBM's common stock (per share) $hidden
Current share price $hidden

Based on: 10-K (filing date: 2018-02-27).

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)

International Business Machines Corp., cost of capital

Microsoft Excel LibreOffice Calc
Value1 Weight Required rate of return2 Calculation
Equity (fair value) hidden hidden hidden
Debt (fair value) hidden hidden hidden = hidden × (1 – hidden)

Based on: 10-K (filing date: 2018-02-27).

1 USD $ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= hidden × $hidden = $hidden

   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
= (hidden + hidden + hidden + hidden + hidden) ÷ 5 = hidden

WACC = hidden


FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

International Business Machines Corp., PRAT model

Microsoft Excel LibreOffice Calc
Average Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Selected Financial Data (USD $ in millions)
Interest expense hidden hidden hidden hidden hidden
Loss from discontinued operations, net of tax hidden hidden hidden hidden hidden
Net income attributable to IBM hidden hidden hidden hidden hidden
Effective income tax rate (EITR)1 hidden hidden hidden hidden hidden
Interest expense, after tax2 hidden hidden hidden hidden hidden
Add: Cash dividends paid, common stock hidden hidden hidden hidden hidden
Interest expense (after tax) and dividends hidden hidden hidden hidden hidden
EBIT(1 – EITR)3 hidden hidden hidden hidden hidden
Short-term debt hidden hidden hidden hidden hidden
Long-term debt hidden hidden hidden hidden hidden
Total IBM stockholders' equity hidden hidden hidden hidden hidden
Total capital hidden hidden hidden hidden hidden
Ratios
Retention rate (RR)4 hidden hidden hidden hidden hidden
Return on invested capital (ROIC)5 hidden hidden hidden hidden hidden
Averages
RR hidden
ROIC hidden
Growth rate of FCFF (g)6 hidden

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-25).

2017 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= hidden × (1 – hidden) = hidden

3 EBIT(1 – EITR) = Net income attributable to IBM – Loss from discontinued operations, net of tax + Interest expense, after tax
= hiddenhidden + hidden = hidden

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [hiddenhidden] ÷ hidden = hidden

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × hidden ÷ hidden = hidden

6 g = RR × ROIC
= hidden × hidden = hidden


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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (hidden × hiddenhidden) ÷ (hidden + hidden) = hidden

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


FCFF growth rate (g) forecast

International Business Machines Corp., H-model

Microsoft Excel LibreOffice Calc
Year Value gt
1 g1 hidden
2 g2 hidden
3 g3 hidden
4 g4 hidden
5 and thereafter g5 hidden

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)
= hidden + (hiddenhidden) × (2 – 1) ÷ (5 – 1) = hidden

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= hidden + (hiddenhidden) × (3 – 1) ÷ (5 – 1) = hidden

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= hidden + (hiddenhidden) × (4 – 1) ÷ (5 – 1) = hidden