Stock Analysis on Net
Stock Analysis on Net

Oracle Corp. (NYSE:ORCL)

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

Microsoft Excel

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

Microsoft Excel
Year Value FCFFt or Terminal value (TVt) Calculation Present value at 11.57%
01 FCFF0 11,499
1 FCFF1 12,296 = 11,499 × (1 + 6.93%) 11,021
2 FCFF2 13,194 = 12,296 × (1 + 7.30%) 10,600
3 FCFF3 14,207 = 13,194 × (1 + 7.68%) 10,231
4 FCFF4 15,352 = 14,207 × (1 + 8.05%) 9,909
5 FCFF5 16,646 = 15,352 × (1 + 8.43%) 9,630
5 Terminal value (TV5) 575,378 = 16,646 × (1 + 8.43%) ÷ (11.57% – 8.43%) 332,872
Intrinsic value of Oracle Corp. capital 384,262
Less: Borrowings (fair value) 80,463
Intrinsic value of Oracle Corp. common stock 303,799
 
Intrinsic value of Oracle Corp. common stock (per share) $110.53
Current share price $115.34

Based on: 10-K (reporting date: 2023-05-31).

1 See details »

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

Microsoft Excel
Value1 Weight Required rate of return2 Calculation
Equity (fair value) 317,014 0.80 13.63%
Borrowings (fair value) 80,463 0.20 3.44% = 4.01% × (1 – 14.18%)

Based on: 10-K (reporting date: 2023-05-31).

1 US$ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 2,748,514,000 × $115.34
= $317,013,604,760.00

   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
= (6.80% + 12.20% + 21.00% + 16.00% + 12.80% + 16.30%) ÷ 6
= 14.18%

WACC = 11.57%

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Oracle Corp., PRAT model

Microsoft Excel
Average May 31, 2023 May 31, 2022 May 31, 2021 May 31, 2020 May 31, 2019 May 31, 2018
Selected Financial Data (US$ in millions)
Interest expense 3,505 2,755 2,496 1,995 2,082 2,025
Net income 8,503 6,717 13,746 10,135 11,083 3,825
 
Effective income tax rate (EITR)1 6.80% 12.20% 21.00% 16.00% 12.80% 16.30%
 
Interest expense, after tax2 3,267 2,419 1,972 1,676 1,816 1,695
Add: Cash dividends declared 3,668 3,457 3,063 3,070 2,932 3,140
Interest expense (after tax) and dividends 6,935 5,876 5,035 4,746 4,748 4,835
 
EBIT(1 – EITR)3 11,770 9,136 15,718 11,811 12,899 5,520
 
Notes payable and other borrowings, current 4,061 3,749 8,250 2,371 4,494 4,491
Notes payable and other borrowings, non-current 86,420 72,110 75,995 69,226 51,673 56,128
Total Oracle Corporation stockholders’ equity (deficit) 1,073 (6,220) 5,238 12,074 21,785 45,726
Total capital 91,554 69,639 89,483 83,671 77,952 106,345
Financial Ratios
Retention rate (RR)4 0.41 0.36 0.68 0.60 0.63 0.12
Return on invested capital (ROIC)5 12.86% 13.12% 17.57% 14.12% 16.55% 5.19%
Averages
RR 0.47
ROIC 14.84%
 
FCFF growth rate (g)6 6.93%

Based on: 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), 10-K (reporting date: 2018-05-31).

1 See details »

2023 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 3,505 × (1 – 6.80%)
= 3,267

3 EBIT(1 – EITR) = Net income + Interest expense, after tax
= 8,503 + 3,267
= 11,770

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [11,770 – 6,935] ÷ 11,770
= 0.41

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 11,770 ÷ 91,554
= 12.86%

6 g = RR × ROIC
= 0.47 × 14.84%
= 6.93%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (397,477 × 11.57% – 11,499) ÷ (397,477 + 11,499)
= 8.43%

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

Microsoft Excel
Year Value gt
1 g1 6.93%
2 g2 7.30%
3 g3 7.68%
4 g4 8.05%
5 and thereafter g5 8.43%

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 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= 6.93% + (8.43% – 6.93%) × (2 – 1) ÷ (5 – 1)
= 7.30%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 6.93% + (8.43% – 6.93%) × (3 – 1) ÷ (5 – 1)
= 7.68%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 6.93% + (8.43% – 6.93%) × (4 – 1) ÷ (5 – 1)
= 8.05%