# Oracle Corp. (NYSE:ORCL)

## Present Value of Free Cash Flow to the Firm (FCFF)

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)

Oracle 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 12.38%
01 FCFF0 15,064
1 FCFF1 16,220 = 15,064 × (1 + 7.67%) 14,433
2 FCFF2 17,524 = 16,220 × (1 + 8.04%) 13,876
3 FCFF3 18,999 = 17,524 × (1 + 8.41%) 13,386
4 FCFF4 20,668 = 18,999 × (1 + 8.78%) 12,957
5 FCFF5 22,560 = 20,668 × (1 + 9.16%) 12,585
5 Terminal value (TV5) 763,162 = 22,560 × (1 + 9.16%) ÷ (12.38%9.16%) 425,733
Intrinsic value of Oracle Corp. capital 492,969
Less: Borrowings (fair value) 77,601
Intrinsic value of Oracle Corp. common stock 415,368

Intrinsic value of Oracle Corp. common stock (per share) \$149.90
Current share price \$155.89

Based on: 10-K (reporting date: 2024-05-31).

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)

Oracle Corp., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 431,966 0.85 13.96%
Borrowings (fair value) 77,601 0.15 3.58% = 4.13% × (1 – 13.28%)

Based on: 10-K (reporting date: 2024-05-31).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 2,770,968,000 × \$155.89
= \$431,966,201,520.00

Borrowings (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
= (10.90% + 6.80% + 12.20% + 21.00% + 16.00% + 12.80%) ÷ 6
= 13.28%

WACC = 12.38%

### FCFF Growth Rate (g)

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

Oracle Corp., PRAT model

Average May 31, 2024 May 31, 2023 May 31, 2022 May 31, 2021 May 31, 2020 May 31, 2019
Selected Financial Data (US\$ in millions)
Interest expense 3,514 3,505 2,755 2,496 1,995 2,082
Net income 10,467 8,503 6,717 13,746 10,135 11,083

Effective income tax rate (EITR)1 10.90% 6.80% 12.20% 21.00% 16.00% 12.80%

Interest expense, after tax2 3,131 3,267 2,419 1,972 1,676 1,816
Add: Cash dividends declared 4,391 3,668 3,457 3,063 3,070 2,932
Interest expense (after tax) and dividends 7,522 6,935 5,876 5,035 4,746 4,748

EBIT(1 – EITR)3 13,598 11,770 9,136 15,718 11,811 12,899

Notes payable and other borrowings, current 10,605 4,061 3,749 8,250 2,371 4,494
Notes payable and other borrowings, non-current 76,264 86,420 72,110 75,995 69,226 51,673
Total Oracle Corporation stockholders’ equity (deficit) 8,704 1,073 (6,220) 5,238 12,074 21,785
Total capital 95,573 91,554 69,639 89,483 83,671 77,952
Financial Ratios
Retention rate (RR)4 0.45 0.41 0.36 0.68 0.60 0.63
Return on invested capital (ROIC)5 14.23% 12.86% 13.12% 17.57% 14.12% 16.55%
Averages
RR 0.52
ROIC 14.74%

FCFF growth rate (g)6 7.67%

Based on: 10-K (reporting date: 2024-05-31), 10-K (reporting date: 2023-05-31), 10-K (reporting date: 2022-05-31), 10-K (reporting date: 2021-05-31), 10-K (reporting date: 2020-05-31), 10-K (reporting date: 2019-05-31).

2024 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 3,514 × (1 – 10.90%)
= 3,131

3 EBIT(1 – EITR) = Net income + Interest expense, after tax
= 10,467 + 3,131
= 13,598

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [13,5987,522] ÷ 13,598
= 0.45

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 13,598 ÷ 95,573
= 14.23%

6 g = RR × ROIC
= 0.52 × 14.74%
= 7.67%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (509,567 × 12.38%15,064) ÷ (509,567 + 15,064)
= 9.16%

where:

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

#### FCFF growth rate (g) forecast

Oracle Corp., H-model

Year Value gt
1 g1 7.67%
2 g2 8.04%
3 g3 8.41%
4 g4 8.78%
5 and thereafter g5 9.16%

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)
= 7.67% + (9.16%7.67%) × (2 – 1) ÷ (5 – 1)
= 8.04%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 7.67% + (9.16%7.67%) × (3 – 1) ÷ (5 – 1)
= 8.41%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 7.67% + (9.16%7.67%) × (4 – 1) ÷ (5 – 1)
= 8.78%