# Procter & Gamble Co. (NYSE:PG)

## 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)

Procter & Gamble Co., 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 6.10%
01 FCFF0 14,719
1 FCFF1 15,156 = 14,719 × (1 + 2.97%) 14,285
2 FCFF2 15,571 = 15,156 × (1 + 2.74%) 13,833
3 FCFF3 15,964 = 15,571 × (1 + 2.52%) 13,367
4 FCFF4 16,331 = 15,964 × (1 + 2.30%) 12,888
5 FCFF5 16,669 = 16,331 × (1 + 2.07%) 12,399
5 Terminal value (TV5) 422,962 = 16,669 × (1 + 2.07%) ÷ (6.10%2.07%) 314,610
Intrinsic value of Procter & Gamble Co.’s capital 381,382
Less: Short-term and long-term debt (fair value) 37,675
Intrinsic value of Procter & Gamble Co.’s common stock 343,707

Intrinsic value of Procter & Gamble Co.’s common stock (per share) \$139.58
Current share price \$136.37

Based on: 10-K (filing date: 2020-08-06).

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)

Procter & Gamble Co., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 335,808 0.90 6.63%
Short-term and long-term debt (fair value) 37,675 0.10 1.38% = 1.78% × (1 – 22.28%)

Based on: 10-K (filing date: 2020-08-06).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 2,462,476,044 × \$136.37
= \$335,807,858,120.28

Short-term and long-term 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
= (17.20% + 34.70% + 21.50% + 23.10% + 25.00% + 24.60%) ÷ 6
= 22.28%

WACC = 6.10%

### FCFF Growth Rate (g)

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

Procter & Gamble Co., PRAT model

Average Jun 30, 2020 Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015
Selected Financial Data (US\$ in millions)
Interest expense 465  509  506  465  579  626
Net earnings (loss) from discontinued operations —  —  —  5,217  577  (1,786)
Net earnings attributable to Procter & Gamble 13,027  3,897  9,750  15,326  10,508  7,036

Effective income tax rate (EITR)1 17.20% 34.70% 21.50% 23.10% 25.00% 24.60%

Interest expense, after tax2 385  332  397  358  434  472
Add: Dividends and dividend equivalents, preferred, net of tax benefits 263  263  265  247  255  259
Add: Dividends and dividend equivalents, common 7,551  7,256  7,057  6,989  7,181  7,028
Interest expense (after tax) and dividends 8,199  7,851  7,719  7,594  7,870  7,759

EBIT(1 – EITR)3 13,412  4,229  10,147  10,467  10,365  9,294

Debt due within one year 11,183  9,697  10,423  13,554  11,653  12,021
Long-term debt, excluding due within one year 23,537  20,395  20,863  18,038  18,945  18,329
Shareholders’ equity attributable to Procter & Gamble 46,521  47,194  52,293  55,184  57,341  62,419
Total capital 81,241  77,286  83,579  86,776  87,939  92,769
Financial Ratios
Retention rate (RR)4 0.39 -0.86 0.24 0.27 0.24 0.17
Return on invested capital (ROIC)5 16.51% 5.47% 12.14% 12.06% 11.79% 10.02%
Averages
RR 0.26
ROIC 11.33%

FCFF growth rate (g)6 2.97%

Based on: 10-K (filing date: 2020-08-06), 10-K (filing date: 2019-08-06), 10-K (filing date: 2018-08-07), 10-K (filing date: 2017-08-07), 10-K (filing date: 2016-08-09), 10-K (filing date: 2015-08-07).

2020 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 465 × (1 – 17.20%)
= 385

3 EBIT(1 – EITR) = Net earnings attributable to Procter & Gamble – Net earnings (loss) from discontinued operations + Interest expense, after tax
= 13,0270 + 385
= 13,412

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [13,4128,199] ÷ 13,412
= 0.39

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 13,412 ÷ 81,241
= 16.51%

6 g = RR × ROIC
= 0.26 × 11.33%
= 2.97%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (373,483 × 6.10%14,719) ÷ (373,483 + 14,719)
= 2.07%

where:

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

#### FCFF growth rate (g) forecast

Procter & Gamble Co., H-model

Year Value gt
1 g1 2.97%
2 g2 2.74%
3 g3 2.52%
4 g4 2.30%
5 and thereafter g5 2.07%

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)
= 2.97% + (2.07%2.97%) × (2 – 1) ÷ (5 – 1)
= 2.74%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 2.97% + (2.07%2.97%) × (3 – 1) ÷ (5 – 1)
= 2.52%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 2.97% + (2.07%2.97%) × (4 – 1) ÷ (5 – 1)
= 2.30%