# Raytheon Co. (RTN)

## 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)

Raytheon Co., 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 10.91%
01 FCFE0 2,609
1 FCFE1 2,970  = 2,609 × (1 + 13.82%) 2,677
2 FCFE2 3,326  = 2,970 × (1 + 12.00%) 2,704
3 FCFE3 3,664  = 3,326 × (1 + 10.17%) 2,686
4 FCFE4 3,970  = 3,664 × (1 + 8.35%) 2,624
5 FCFE5 4,229  = 3,970 × (1 + 6.53%) 2,520
5 Terminal value (TV5) 102,750  = 4,229 × (1 + 6.53%) ÷ (10.91%6.53%) 61,222
Intrinsic value of Raytheon Co.’s common stock 74,432

Intrinsic value of Raytheon Co.’s common stock (per share) \$267.28
Current share price \$227.62

Based on: 10-K (filing date: 2019-02-13).

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 2.02% Expected rate of return on market portfolio2 E(RM) 11.22% Systematic risk of Raytheon Co.’s common stock βRTN 0.97 Required rate of return on Raytheon Co.’s common stock3 rRTN 10.91%

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 rRTN = RF + βRTN [E(RM) – RF]
= 2.02% + 0.97 [11.22%2.02%]
= 10.91%

### FCFE Growth Rate (g)

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

Raytheon Co., PRAT model

Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (US\$ in millions)
Dividends declared 989  927  864  813  746
Net income attributable to Raytheon Company 2,909  2,024  2,211  2,074  2,244
Net sales 27,058  25,348  24,069  23,247  22,826
Total assets 31,864  30,860  30,052  29,281  27,900
Total Raytheon Company stockholders’ equity 11,472  9,963  10,066  10,128  9,525
Financial Ratios
Retention rate1 0.66 0.54 0.61 0.61 0.67
Profit margin2 10.75% 7.98% 9.19% 8.92% 9.83%
Asset turnover3 0.85 0.82 0.80 0.79 0.82
Financial leverage4 2.78 3.10 2.99 2.89 2.93
Averages
Retention rate 0.62
Profit margin 9.33%
Asset turnover 0.82
Financial leverage 2.94

FCFE growth rate (g)5 13.82%

Based on: 10-K (filing date: 2019-02-13), 10-K (filing date: 2018-02-14), 10-K (filing date: 2017-02-15), 10-K (filing date: 2016-02-10), 10-K (filing date: 2015-02-11).

2018 Calculations

1 Retention rate = (Net income attributable to Raytheon Company – Dividends declared) ÷ Net income attributable to Raytheon Company
= (2,909989) ÷ 2,909 = 0.66

2 Profit margin = 100 × Net income attributable to Raytheon Company ÷ Net sales
= 100 × 2,909 ÷ 27,058 = 10.75%

3 Asset turnover = Net sales ÷ Total assets
= 27,058 ÷ 31,864 = 0.85

4 Financial leverage = Total assets ÷ Total Raytheon Company stockholders’ equity
= 31,864 ÷ 11,472 = 2.78

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.62 × 9.33% × 0.82 × 2.94 = 13.82%

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (63,387 × 10.91%2,609) ÷ (63,387 + 2,609) = 6.53%

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

#### FCFE growth rate (g) forecast

Raytheon Co., H-model

Year Value gt
1 g1 13.82%
2 g2 12.00%
3 g3 10.17%
4 g4 8.35%
5 and thereafter g5 6.53%

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)
= 13.82% + (6.53%13.82%) × (2 – 1) ÷ (5 – 1) = 12.00%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 13.82% + (6.53%13.82%) × (3 – 1) ÷ (5 – 1) = 10.17%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 13.82% + (6.53%13.82%) × (4 – 1) ÷ (5 – 1) = 8.35%