# Norfolk Southern Corp. (NYSE:NSC)

## 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)

Norfolk Southern Corp., 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 12.58%
01 FCFF0 2,946
1 FCFF1 3,121 = 2,946 × (1 + 5.92%) 2,772
2 FCFF2 3,328 = 3,121 × (1 + 6.62%) 2,625
3 FCFF3 3,571 = 3,328 × (1 + 7.31%) 2,503
4 FCFF4 3,857 = 3,571 × (1 + 8.01%) 2,401
5 FCFF5 4,192 = 3,857 × (1 + 8.70%) 2,318
5 Terminal value (TV5) 117,420 = 4,192 × (1 + 8.70%) ÷ (12.58%8.70%) 64,930
Intrinsic value of Norfolk Southern Corp.’s capital 77,549
Less: Debt (fair value) 16,664
Intrinsic value of Norfolk Southern Corp.’s common stock 60,885

Intrinsic value of Norfolk Southern Corp.’s common stock (per share) \$243.31
Current share price \$263.20

Based on: 10-K (filing date: 2021-02-04).

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)

Norfolk Southern Corp., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 65,863 0.80 14.99%
Debt (fair value) 16,664 0.20 3.04% = 4.17% × (1 – 27.16%)

Based on: 10-K (filing date: 2021-02-04).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 250,241,009 × \$263.20
= \$65,863,433,568.80

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
= (20.40% + 22.00% + 23.10% + 34.90% + 35.40%) ÷ 5
= 27.16%

WACC = 12.58%

### FCFF Growth Rate (g)

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

Norfolk Southern Corp., PRAT model

Average Dec 31, 2020 Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016
Selected Financial Data (US\$ in millions)
Interest expense on debt 625  604  557  550  563
Net income 2,013  2,722  2,666  5,404  1,668

Effective income tax rate (EITR)1 20.40% 22.00% 23.10% 34.90% 35.40%

Interest expense on debt, after tax2 498  471  428  358  364
Add: Dividends on Common Stock 960  949  844  703  695
Interest expense (after tax) and dividends 1,458  1,420  1,272  1,061  1,059

EBIT(1 – EITR)3 2,511  3,193  3,094  5,762  2,032

Short-term debt —  —  —  100  100
Current maturities of long-term debt 579  316  585  600  550
Long-term debt, excluding current maturities 12,102  11,880  10,560  9,136  9,562
Stockholders’ equity 14,791  15,184  15,362  16,359  12,409
Total capital 27,472  27,380  26,507  26,195  22,621
Financial Ratios
Retention rate (RR)4 0.42 0.56 0.59 0.82 0.48
Return on invested capital (ROIC)5 9.14% 11.66% 11.67% 22.00% 8.98%
Averages
RR 0.57
ROIC 10.36%

FCFF growth rate (g)6 5.92%

Based on: 10-K (filing date: 2021-02-04), 10-K (filing date: 2020-02-06), 10-K (filing date: 2019-02-08), 10-K (filing date: 2018-02-05), 10-K (filing date: 2017-02-06).

2020 Calculations

2 Interest expense on debt, after tax = Interest expense on debt × (1 – EITR)
= 625 × (1 – 20.40%)
= 498

3 EBIT(1 – EITR) = Net income + Interest expense on debt, after tax
= 2,013 + 498
= 2,511

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [2,5111,458] ÷ 2,511
= 0.42

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 2,511 ÷ 27,472
= 9.14%

6 g = RR × ROIC
= 0.57 × 10.36%
= 5.92%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (82,527 × 12.58%2,946) ÷ (82,527 + 2,946)
= 8.70%

where:

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

#### FCFF growth rate (g) forecast

Norfolk Southern Corp., H-model

Year Value gt
1 g1 5.92%
2 g2 6.62%
3 g3 7.31%
4 g4 8.01%
5 and thereafter g5 8.70%

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)
= 5.92% + (8.70%5.92%) × (2 – 1) ÷ (5 – 1)
= 6.62%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 5.92% + (8.70%5.92%) × (3 – 1) ÷ (5 – 1)
= 7.31%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 5.92% + (8.70%5.92%) × (4 – 1) ÷ (5 – 1)
= 8.01%