Stock Analysis on Net

Reynolds American Inc. (NYSE:RAI)

This company has been moved to the archive! The financial data has not been updated since May 3, 2017.

Present Value of Free Cash Flow to Equity (FCFE)

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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 asset base.


Intrinsic Stock Value (Valuation Summary)

Reynolds American Inc., free cash flow to equity (FCFE) forecast

US$ in millions, except per share data

Microsoft Excel
Year Value FCFEt or Terminal value (TVt) Calculation Present value at 8.25%
01 FCFE0 -3,291
1 FCFE1 = -3,291 × (1 + 0.00%)
2 FCFE2 = × (1 + 0.00%)
3 FCFE3 = × (1 + 0.00%)
4 FCFE4 = × (1 + 0.00%)
5 FCFE5 = × (1 + 0.00%)
5 Terminal value (TV5) = × (1 + 0.00%) ÷ (8.25%0.00%)
Intrinsic value of Reynolds American Inc. common stock
 
Intrinsic value of Reynolds American Inc. common stock (per share) $—
Current share price $64.47

Based on: 10-K (reporting date: 2016-12-31).

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)

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Assumptions
Rate of return on LT Treasury Composite1 RF 4.43%
Expected rate of return on market portfolio2 E(RM) 13.61%
Systematic risk of Reynolds American Inc. common stock βRAI 0.42
 
Required rate of return on Reynolds American Inc. common stock3 rRAI 8.25%

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).

2 See details »

3 rRAI = RF + βRAI [E(RM) – RF]
= 4.43% + 0.42 [13.61%4.43%]
= 8.25%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Reynolds American Inc., PRAT model

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Average Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013 Dec 31, 2012
Selected Financial Data (US$ in millions)
Dividends 2,521 1,751 1,436 1,359 1,319
Net income 6,073 3,253 1,470 1,718 1,272
Net sales, includes excise taxes 16,846 14,884 12,096 11,966 12,227
Total assets 51,095 53,224 15,196 15,402 16,557
Shareholders’ equity 21,711 18,252 4,522 5,167 5,257
Financial Ratios
Retention rate1 0.58 0.46 0.02 0.21 -0.04
Profit margin2 36.05% 21.86% 12.15% 14.36% 10.40%
Asset turnover3 0.33 0.28 0.80 0.78 0.74
Financial leverage4 2.35 2.92 3.36 2.98 3.15
Averages
Retention rate 0.25
Profit margin 18.96%
Asset turnover 0.58
Financial leverage 2.95
 
FCFE growth rate (g)5 0.00%

Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).

2016 Calculations

1 Retention rate = (Net income – Dividends) ÷ Net income
= (6,0732,521) ÷ 6,073
= 0.58

2 Profit margin = 100 × Net income ÷ Net sales, includes excise taxes
= 100 × 6,073 ÷ 16,846
= 36.05%

3 Asset turnover = Net sales, includes excise taxes ÷ Total assets
= 16,846 ÷ 51,095
= 0.33

4 Financial leverage = Total assets ÷ Shareholders’ equity
= 51,095 ÷ 21,711
= 2.35

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.25 × 18.96% × 0.58 × 2.95
= 0.00%


FCFE growth rate (g) forecast

Reynolds American Inc., H-model

Microsoft Excel
Year Value gt
1 g1 0.00%
2 g2 0.00%
3 g3 0.00%
4 g4 0.00%
5 and thereafter g5 0.00%

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)
= 0.00% + (0.00%0.00%) × (2 – 1) ÷ (5 – 1)
= 0.00%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 0.00% + (0.00%0.00%) × (3 – 1) ÷ (5 – 1)
= 0.00%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 0.00% + (0.00%0.00%) × (4 – 1) ÷ (5 – 1)
= 0.00%