Stock Analysis on Net
Stock Analysis on Net
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Raytheon Technologies Corp. (NYSE:RTX)

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)

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

US$ in millions, except per share data

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Year Value FCFFt or Terminal value (TVt) Calculation Present value at 10.80%
01 FCFF0 7,927
1 FCFF1 8,264 = 7,927 × (1 + 4.25%) 7,459
2 FCFF2 8,638 = 8,264 × (1 + 4.52%) 7,036
3 FCFF3 9,051 = 8,638 × (1 + 4.78%) 6,654
4 FCFF4 9,508 = 9,051 × (1 + 5.05%) 6,308
5 FCFF5 10,013 = 9,508 × (1 + 5.31%) 5,996
5 Terminal value (TV5) 192,099 = 10,013 × (1 + 5.31%) ÷ (10.80%5.31%) 115,029
Intrinsic value of Raytheon Technologies Corp.’s capital 148,481
Less: Debt (fair value) 48,651
Intrinsic value of Raytheon Technologies Corp.’s common stock 99,830
 
Intrinsic value of Raytheon Technologies Corp.’s common stock (per share) $65.73
Current share price $68.11

Based on: 10-K (filing date: 2020-02-06).

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)

Raytheon Technologies Corp., cost of capital

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Value1 Weight Required rate of return2 Calculation
Equity (fair value) 103,440 0.68 14.61%
Debt (fair value) 48,651 0.32 2.70% = 3.70% × (1 – 26.92%)

Based on: 10-K (filing date: 2020-02-06).

1 US$ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 1,518,716,426 × $68.11
= $103,439,775,774.86

   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
= (27.80% + 22.70% + 27.70% + 23.80% + 32.60%) ÷ 5
= 26.92%

WACC = 10.80%


FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Raytheon Technologies Corp., PRAT model

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Average Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Selected Financial Data (US$ in millions)
Interest expense 1,773  1,225  1,017  1,161  945 
Net income (loss) from discontinued operations —  —  —  (10) 3,610 
Net income attributable to common shareowners 5,537  5,269  4,552  5,055  7,608 
 
Effective income tax rate (EITR)1 27.80% 22.70% 27.70% 23.80% 32.60%
 
Interest expense, after tax2 1,280  947  735  885  637 
Add: Dividends on Common Stock 2,442  2,170  2,074  2,069  2,184 
Interest expense (after tax) and dividends 3,722  3,117  2,809  2,954  2,821 
 
EBIT(1 – EITR)3 6,817  6,216  5,287  5,950  4,635 
 
Short-term borrowings 2,364  1,469  392  601  926 
Long-term debt currently due 3,496  2,876  2,104  1,603  179 
Long-term debt, excluding currently due 37,788  41,192  24,989  21,697  19,320 
Shareowners’ equity 41,774  38,446  29,610  27,579  27,358 
Total capital 85,422  83,983  57,095  51,480  47,783 
Financial Ratios
Retention rate (RR)4 0.45 0.50 0.47 0.50 0.39
Return on invested capital (ROIC)5 7.98% 7.40% 9.26% 11.56% 9.70%
Averages
RR 0.46
ROIC 9.18%
 
FCFF growth rate (g)6 4.25%

Based on: 10-K (filing date: 2020-02-06), 10-K (filing date: 2019-02-07), 10-K (filing date: 2018-02-09), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-11).

1 See details »

2019 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 1,773 × (1 – 27.80%)
= 1,280

3 EBIT(1 – EITR) = Net income attributable to common shareowners – Net income (loss) from discontinued operations + Interest expense, after tax
= 5,5370 + 1,280
= 6,817

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [6,8173,722] ÷ 6,817
= 0.45

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 6,817 ÷ 85,422
= 7.98%

6 g = RR × ROIC
= 0.46 × 9.18%
= 4.25%


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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (152,091 × 10.80%7,927) ÷ (152,091 + 7,927)
= 5.31%

where:

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


FCFF growth rate (g) forecast

Raytheon Technologies Corp., H-model

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Year Value gt
1 g1 4.25%
2 g2 4.52%
3 g3 4.78%
4 g4 5.05%
5 and thereafter g5 5.31%

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)
= 4.25% + (5.31%4.25%) × (2 – 1) ÷ (5 – 1)
= 4.52%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 4.25% + (5.31%4.25%) × (3 – 1) ÷ (5 – 1)
= 4.78%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 4.25% + (5.31%4.25%) × (4 – 1) ÷ (5 – 1)
= 5.05%