# Medtronic PLC (NYSE:MDT)

## 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)

Medtronic PLC, 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 8.23%
01 FCFF0 6,529
1 FCFF1 6,663 = 6,529 × (1 + 2.05%) 6,157
2 FCFF2 6,846 = 6,663 × (1 + 2.74%) 5,845
3 FCFF3 7,081 = 6,846 × (1 + 3.43%) 5,586
4 FCFF4 7,373 = 7,081 × (1 + 4.12%) 5,374
5 FCFF5 7,728 = 7,373 × (1 + 4.81%) 5,205
5 Terminal value (TV5) 237,279 = 7,728 × (1 + 4.81%) ÷ (8.23%4.81%) 159,796
Intrinsic value of Medtronic PLC’s capital 187,962
Less: Debt (fair value) 27,530
Intrinsic value of Medtronic PLC’s common stock 160,432

Intrinsic value of Medtronic PLC’s common stock (per share) \$119.01
Current share price \$128.28

Based on: 10-K (filing date: 2020-06-19).

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)

Medtronic PLC, cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 172,931 0.86 9.22%
Debt (fair value) 27,530 0.14 2.02% = 2.37% × (1 – 14.68%)

Based on: 10-K (filing date: 2020-06-19).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 1,348,072,847 × \$128.28
= \$172,930,784,813.16

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
= (21.00% + 10.30% + 2.50% + 12.60% + 18.40% + 23.30%) ÷ 6
= 14.68%

WACC = 8.23%

### FCFF Growth Rate (g)

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

Medtronic PLC, PRAT model

Average Apr 24, 2020 Apr 26, 2019 Apr 27, 2018 Apr 28, 2017 Apr 29, 2016 Apr 24, 2015
Selected Financial Data (US\$ in millions)
Interest expense 1,092  1,444  1,146  1,094  1,386  666
Net income attributable to Medtronic 4,789  4,631  3,104  4,028  3,538  2,675

Effective income tax rate (EITR)1 21.00% 10.30% 2.50% 12.60% 18.40% 23.30%

Interest expense, after tax2 863  1,295  1,117  956  1,131  511
Add: Dividends to shareholders 2,894  2,693  2,494  2,376  2,139  1,337
Interest expense (after tax) and dividends 3,757  3,988  3,611  3,332  3,270  1,848

EBIT(1 – EITR)3 5,652  5,926  4,221  4,984  4,669  3,186

Current debt obligations 2,776  838  2,058  7,520  993  2,434
Long-term debt 22,021  24,486  23,699  25,921  30,247  33,752
Shareholders’ equity 50,737  50,091  50,720  50,294  52,063  53,230
Total capital 75,534  75,415  76,477  83,735  83,303  89,416
Financial Ratios
Retention rate (RR)4 0.34 0.33 0.14 0.33 0.30 0.42
Return on invested capital (ROIC)5 7.48% 7.86% 5.52% 5.95% 5.60% 3.56%
Averages
RR 0.34
ROIC 6.00%

FCFF growth rate (g)6 2.05%

Based on: 10-K (filing date: 2020-06-19), 10-K (filing date: 2019-06-21), 10-K (filing date: 2018-06-22), 10-K (filing date: 2017-06-27), 10-K (filing date: 2016-06-28), 10-K (filing date: 2015-06-23).

2020 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 1,092 × (1 – 21.00%)
= 863

3 EBIT(1 – EITR) = Net income attributable to Medtronic + Interest expense, after tax
= 4,789 + 863
= 5,652

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [5,6523,757] ÷ 5,652
= 0.34

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 5,652 ÷ 75,534
= 7.48%

6 g = RR × ROIC
= 0.34 × 6.00%
= 2.05%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (200,461 × 8.23%6,529) ÷ (200,461 + 6,529)
= 4.81%

where:

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

#### FCFF growth rate (g) forecast

Medtronic PLC, H-model

Year Value gt
1 g1 2.05%
2 g2 2.74%
3 g3 3.43%
4 g4 4.12%
5 and thereafter g5 4.81%

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)
= 2.05% + (4.81%2.05%) × (2 – 1) ÷ (5 – 1)
= 2.74%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 2.05% + (4.81%2.05%) × (3 – 1) ÷ (5 – 1)
= 3.43%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 2.05% + (4.81%2.05%) × (4 – 1) ÷ (5 – 1)
= 4.12%