# Oracle Corp. (ORCL)

## 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)

Oracle Corp., free cash flow to equity (FCFE) forecast

US\$ in millions, except per share data

Year Value FCFEt or Terminal value (TVt) Calculation Present value at 12.23%
01 FCFE0 8,391
1 FCFE1 9,742  = 8,391 × (1 + 16.11%) 8,680
2 FCFE2 11,096  = 9,742 × (1 + 13.89%) 8,808
3 FCFE3 12,391  = 11,096 × (1 + 11.67%) 8,765
4 FCFE4 13,563  = 12,391 × (1 + 9.46%) 8,548
5 FCFE5 14,546  = 13,563 × (1 + 7.24%) 8,168
5 Terminal value (TV5) 312,545  = 14,546 × (1 + 7.24%) ÷ (12.23%7.24%) 175,501
Intrinsic value of Oracle Corp.’s common stock 218,470

Intrinsic value of Oracle Corp.’s common stock (per share) \$66.44
Current share price \$54.83

Based on: 10-K (filing date: 2019-06-21).

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 Composite1 RF 2.21% Expected rate of return on market portfolio2 E(RM) 11.47% Systematic risk of Oracle Corp.’s common stock βORCL 1.08 Required rate of return on Oracle Corp.’s common stock3 rORCL 12.23%

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).

3 rORCL = RF + βORCL [E(RM) – RF]
= 2.21% + 1.08 [11.47%2.21%]
= 12.23%

### FCFE Growth Rate (g)

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

Oracle Corp., PRAT model

Average May 31, 2019 May 31, 2018 May 31, 2017 May 31, 2016 May 31, 2015 May 31, 2014
Selected Financial Data (US\$ in millions)
Cash dividends declared 2,932  3,140  2,631  2,541  2,255  2,178
Net income 11,083  3,825  9,335  8,901  9,938  10,955
Revenues 39,506  39,831  37,728  37,047  38,226  38,275
Total assets 108,709  137,264  134,991  112,180  110,903  90,344
Total Oracle Corporation stockholders’ equity 21,785  45,726  53,860  47,289  48,663  46,878
Financial Ratios
Retention rate1 0.74 0.18 0.72 0.71 0.77 0.80
Profit margin2 28.05% 9.60% 24.74% 24.03% 26.00% 28.62%
Asset turnover3 0.36 0.29 0.28 0.33 0.34 0.42
Financial leverage4 4.99 3.00 2.51 2.37 2.28 1.93
Averages
Retention rate 0.75
Profit margin 26.29%
Asset turnover 0.34
Financial leverage 2.42

FCFE growth rate (g)5 16.11%

Based on: 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: 2016-06-22), 10-K (filing date: 2015-06-25), 10-K (filing date: 2014-06-26).

2019 Calculations

1 Retention rate = (Net income – Cash dividends declared) ÷ Net income
= (11,0832,932) ÷ 11,083 = 0.74

2 Profit margin = 100 × Net income ÷ Revenues
= 100 × 11,083 ÷ 39,506 = 28.05%

3 Asset turnover = Revenues ÷ Total assets
= 39,506 ÷ 108,709 = 0.36

4 Financial leverage = Total assets ÷ Total Oracle Corporation stockholders’ equity
= 108,709 ÷ 21,785 = 4.99

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.75 × 26.29% × 0.34 × 2.42 = 16.11%

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (180,299 × 12.23%8,391) ÷ (180,299 + 8,391) = 7.24%

where:
Equity market value0 = current market value of Oracle Corp.’s common stock (US\$ in millions)
FCFE0 = the last year Oracle Corp.’s free cash flow to equity (US\$ in millions)
r = required rate of return on Oracle Corp.’s common stock

#### FCFE growth rate (g) forecast

Oracle Corp., H-model

Year Value gt
1 g1 16.11%
2 g2 13.89%
3 g3 11.67%
4 g4 9.46%
5 and thereafter g5 7.24%

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)
= 16.11% + (7.24%16.11%) × (2 – 1) ÷ (5 – 1) = 13.89%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 16.11% + (7.24%16.11%) × (3 – 1) ÷ (5 – 1) = 11.67%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 16.11% + (7.24%16.11%) × (4 – 1) ÷ (5 – 1) = 9.46%