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Microsoft Excel LibreOffice Calc

Lowe’s Cos. Inc. (LOW)


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)

Lowe’s Cos. Inc., 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 Lowe’s Cos. Inc.’s capital hidden
Less: Debt, including capitalized lease obligations (fair value) hidden
Intrinsic value of Lowe’s Cos. Inc.’s common stock hidden
Intrinsic value of Lowe’s Cos. Inc.’s common stock (per share) $hidden
Current share price $hidden

Based on: 10-K (filing date: 2018-04-02).

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)

Lowe’s Cos. Inc., cost of capital

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

Based on: 10-K (filing date: 2018-04-02).

1 USD $ in millions

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

   Debt, including capitalized lease obligations (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 + hidden) ÷ 6 = hidden

WACC = hidden


FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Lowe’s Cos. Inc., PRAT model

Microsoft Excel LibreOffice Calc
Average Feb 2, 2018 Feb 3, 2017 Jan 29, 2016 Jan 30, 2015 Jan 31, 2014 Feb 1, 2013
Selected Financial Data (USD $ in millions)
Interest expense, net of amount capitalized hidden hidden hidden hidden hidden hidden
Net earnings hidden hidden hidden hidden hidden hidden
Effective income tax rate (EITR)1 hidden hidden hidden hidden hidden hidden
Interest expense, net of amount capitalized, after tax2 hidden hidden hidden hidden hidden hidden
Add: Cash dividends declared hidden hidden hidden hidden hidden hidden
Interest expense (after tax) and dividends hidden hidden hidden hidden hidden hidden
EBIT(1 – EITR)3 hidden hidden hidden hidden hidden hidden
Short-term borrowings hidden hidden hidden hidden hidden hidden
Current maturities of long-term debt hidden hidden hidden hidden hidden hidden
Long-term debt, excluding current maturities hidden hidden hidden hidden hidden hidden
Shareholders’ equity hidden hidden hidden hidden hidden hidden
Total capital hidden hidden hidden hidden hidden hidden
Ratios
Retention rate (RR)4 hidden hidden hidden hidden hidden hidden
Return on invested capital (ROIC)5 hidden hidden hidden hidden hidden hidden
Averages
RR hidden
ROIC hidden
Growth rate of FCFF (g)6 hidden

Based on: 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), 10-K (filing date: 2014-03-31), 10-K (filing date: 2013-04-02).

2018 Calculations

2 Interest expense, net of amount capitalized, after tax = Interest expense, net of amount capitalized × (1 – EITR)
= hidden × (1 – hidden) = hidden

3 EBIT(1 – EITR) = Net earnings + Interest expense, net of amount capitalized, after tax
= hidden + 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 Lowe’s Cos. Inc.’s debt and equity (USD $ in millions)
FCFF0 = last year Lowe’s Cos. Inc.’s free cash flow to the firm (USD $ in millions)
WACC = weighted average cost of Lowe’s Cos. Inc.’s capital


FCFF growth rate (g) forecast

Lowe’s Cos. Inc., 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