Microsoft Excel LibreOffice Calc

Oracle Corp. (ORCL)


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)

Oracle Corp., free cash flow to the firm (FCFF) forecast

USD $ in millions, except per share data

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Year Value FCFFt or Terminal value (TVt) Calculation Present value at 10.29%
01 FCFF0 14,686 
1 FCFF1 15,847  = 14,686  × (1 + 7.90%) 14,368 
2 FCFF2 16,955  = 15,847  × (1 + 6.99%) 13,937 
3 FCFF3 17,986  = 16,955  × (1 + 6.08%) 13,405 
4 FCFF4 18,917  = 17,986  × (1 + 5.17%) 12,783 
5 FCFF5 19,724  = 18,917  × (1 + 4.27%) 12,084 
5 Terminal value (TV5) 341,152  = 19,724  × (1 + 4.27%) ÷ (10.29%4.27%) 209,017 
Intrinsic value of Oracle Corp.’s capital 275,595 
Less: Borrowings (fair value) 58,513 
Intrinsic value of Oracle Corp.’s common stock 217,082 
Intrinsic value of Oracle Corp.’s common stock (per share) $65.08
Current share price $58.61

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.


Weighted Average Cost of Capital (WACC)

Oracle Corp., cost of capital

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Value1 Weight Required rate of return2 Calculation
Equity (fair value) 195,512  0.77 12.54%
Borrowings (fair value) 58,513  0.23 2.80% = 3.45% × (1 – 18.82%)

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

1 USD $ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 3,335,819,000 × $58.61 = $195,512,351,590.00

   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
= (12.80% + 16.30% + 18.90% + 22.20% + 22.60% + 20.10%) ÷ 6 = 18.82%

WACC = 10.29%


FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Oracle Corp., PRAT model

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Average May 31, 2019 May 31, 2018 May 31, 2017 May 31, 2016 May 31, 2015 May 31, 2014
Selected Financial Data (USD $ in millions)
Interest expense 2,082  2,025  1,798  1,467  1,143  914 
Net income 11,083  3,825  9,335  8,901  9,938  10,955 
Effective income tax rate (EITR)1 12.80% 16.30% 18.90% 22.20% 22.60% 20.10%
Interest expense, after tax2 1,816  1,695  1,458  1,141  885  730 
Add: Cash dividends declared 2,932  3,140  2,631  2,541  2,255  2,178 
Interest expense (after tax) and dividends 4,748  4,835  4,089  3,682  3,140  2,908 
EBIT(1 – EITR)3 12,899  5,520  10,793  10,042  10,823  11,685 
Notes payable and other borrowings, current 4,494  4,491  9,797  3,750  1,999  1,508 
Notes payable and other borrowings, non-current 51,673  56,128  48,112  40,105  39,959  22,667 
Total Oracle Corporation stockholders’ equity 21,785  45,726  53,860  47,289  48,663  46,878 
Total capital 77,952  106,345  111,769  91,144  90,621  71,053 
Ratios
Retention rate (RR)4 0.63 0.12 0.62 0.63 0.71 0.75
Return on invested capital (ROIC)5 16.55% 5.19% 9.66% 11.02% 11.94% 16.45%
Averages
RR 0.67
ROIC 11.80%
Growth rate of FCFF (g)6 7.90%

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

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 2,082 × (1 – 12.80%) = 1,816

3 EBIT(1 – EITR) = Net income + Interest expense, after tax
= 11,083 + 1,816 = 12,899

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [12,8994,748] ÷ 12,899 = 0.63

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 12,899 ÷ 77,952 = 16.55%

6 g = RR × ROIC
= 0.67 × 11.80% = 7.90%


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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (254,025 × 10.29%14,686) ÷ (254,025 + 14,686) = 4.27%

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


FCFF growth rate (g) forecast

Oracle Corp., H-model

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Year Value gt
1 g1 7.90%
2 g2 6.99%
3 g3 6.08%
4 g4 5.17%
5 and thereafter g5 4.27%

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)
= 7.90% + (4.27%7.90%) × (2 – 1) ÷ (5 – 1) = 6.99%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 7.90% + (4.27%7.90%) × (3 – 1) ÷ (5 – 1) = 6.08%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 7.90% + (4.27%7.90%) × (4 – 1) ÷ (5 – 1) = 5.17%