## 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)

**Lowe’s Cos. Inc., free cash flow to equity (FCFE) forecast**

US$ in millions, except per share data

Year | Value | FCFE_{t} or Terminal value (TV_{t}) |
Calculation | Present value at 15.02% |
---|---|---|---|---|

0^{1} |
FCFE_{0} |
5,891 | ||

1 | FCFE_{1} |
7,739 | = 5,891 × (1 + 31.38%) | 6,729 |

2 | FCFE_{2} |
9,727 | = 7,739 × (1 + 25.68%) | 7,353 |

3 | FCFE_{3} |
11,671 | = 9,727 × (1 + 19.99%) | 7,671 |

4 | FCFE_{4} |
13,339 | = 11,671 × (1 + 14.29%) | 7,622 |

5 | FCFE_{5} |
14,486 | = 13,339 × (1 + 8.60%) | 7,197 |

5 | Terminal value (TV_{5}) |
245,025 | = 14,486 × (1 + 8.60%) ÷ (15.02% – 8.60%) | 121,732 |

Intrinsic value of Lowe’s Cos. Inc.’s common stock | 158,303 | |||

Intrinsic value of Lowe’s Cos. Inc.’s common stock (per share) | $209.67 | |||

Current share price | $131.98 |

Based on: 10-K (filing date: 2020-03-23).

^{1} See details »

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 Composite^{1} |
R_{F} |
1.32% |

Expected rate of return on market portfolio^{2} |
E(R)_{M} |
11.85% |

Systematic risk of Lowe’s Cos. Inc.’s common stock | β_{LOW} |
1.30 |

Required rate of return on Lowe’s Cos. Inc.’s common stock^{3} |
r_{LOW} |
15.02% |

^{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).

^{2} See details »

^{3} *r*_{LOW} = *R _{F}* + β

_{LOW}[

*E*(

*R*) –

_{M}*R*]

_{F}= 1.32% + 1.30 [11.85% – 1.32%]

= 15.02%

### FCFE Growth Rate (*g*)

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

**Lowe’s Cos. Inc., PRAT model**

Based on: 10-K (filing date: 2020-03-23), 10-K (filing date: 2019-04-02), 10-K (filing date: 2018-04-02), 10-K (filing date: 2017-04-04), 10-K (filing date: 2016-03-29), 10-K (filing date: 2015-03-31).

*2020 Calculations*

^{1} Retention rate = (Net earnings – Cash dividends declared) ÷ Net earnings

= (4,281 – 1,653) ÷ 4,281 = 0.61

^{2} Profit margin = 100 × Net earnings ÷ Net sales

= 100 × 4,281 ÷ 72,148 = 5.93%

^{3} Asset turnover = Net sales ÷ Total assets

= 72,148 ÷ 39,471 = 1.83

^{4} Financial leverage = Total assets ÷ Shareholders’ equity

= 39,471 ÷ 1,972 = 20.02

^{5} *g* = Retention rate × Profit margin × Asset turnover × Financial leverage

= 0.63 × 4.68% × 1.90 × 5.62 = 31.38%

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

*g* = 100 × (Equity market value_{0} × *r* – FCFE_{0}) ÷ (Equity market value_{0} + FCFE_{0})

= 100 × (99,645 × 15.02% – 5,891) ÷ (99,645 + 5,891) = **8.60%**

where:

Equity market value_{0} = current market value of Lowe’s Cos. Inc.’s common stock (US$ in millions)

FCFE_{0} = the last year Lowe’s Cos. Inc.’s free cash flow to equity (US$ in millions)

*r* = required rate of return on Lowe’s Cos. Inc.’s common stock

#### FCFE growth rate (*g*) forecast

**Lowe’s Cos. Inc., H-model**

Year | Value | g_{t} |
---|---|---|

1 | g_{1} |
31.38% |

2 | g_{2} |
25.68% |

3 | g_{3} |
19.99% |

4 | g_{4} |
14.29% |

5 and thereafter | g_{5} |
8.60% |

where:

*g*_{1} is implied by PRAT model

*g*_{5} is implied by single-stage model

*g*_{2}, *g*_{3} and *g*_{4} are calculated using linear interpoltion between *g*_{1} and *g*_{5}

*Calculations*

*g*_{2} = *g*_{1} + (*g*_{5} – *g*_{1}) × (2 – 1) ÷ (5 – 1)

= 31.38% + (8.60% – 31.38%) × (2 – 1) ÷ (5 – 1) = 25.68%

*g*_{3} = *g*_{1} + (*g*_{5} – *g*_{1}) × (3 – 1) ÷ (5 – 1)

= 31.38% + (8.60% – 31.38%) × (3 – 1) ÷ (5 – 1) = 19.99%

*g*_{4} = *g*_{1} + (*g*_{5} – *g*_{1}) × (4 – 1) ÷ (5 – 1)

= 31.38% + (8.60% – 31.38%) × (4 – 1) ÷ (5 – 1) = 14.29%