## Present Value of Free Cash Flow to Equity (FCFE)

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)

**TJX Cos. Inc., free cash flow to equity (FCFE) forecast**

US$ in thousands, except per share data

Year | Value | FCFE_{t} or Terminal value (TV_{t}) |
Calculation | Present value at 9.08% |
---|---|---|---|---|

0^{1} |
FCFE_{0} |
2,843,424 | ||

1 | FCFE_{1} |
3,936,487 | = 2,843,424 × (1 + 38.44%) | 3,608,758 |

2 | FCFE_{2} |
5,124,907 | = 3,936,487 × (1 + 30.19%) | 4,307,090 |

3 | FCFE_{3} |
6,249,206 | = 5,124,907 × (1 + 21.94%) | 4,814,729 |

4 | FCFE_{4} |
7,104,475 | = 6,249,206 × (1 + 13.69%) | 5,017,970 |

5 | FCFE_{5} |
7,490,542 | = 7,104,475 × (1 + 5.43%) | 4,850,185 |

5 | Terminal value (TV_{5}) |
216,530,032 | = 7,490,542 × (1 + 5.43%) ÷ (9.08% – 5.43%) | 140,204,891 |

Intrinsic value of TJX Cos. Inc.’s common stock | 162,803,623 | |||

Intrinsic value of TJX Cos. Inc.’s common stock (per share) | $135.60 | |||

Current share price | $68.46 |

Based on: 10-K (filing date: 2020-03-27).

^{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.

### Required Rate of Return (*r*)

Assumptions | ||

Rate of return on LT Treasury Composite^{1} |
R_{F} |
1.66% |

Expected rate of return on market portfolio^{2} |
E(R)_{M} |
12.16% |

Systematic risk of TJX Cos. Inc.’s common stock | β_{TJX} |
0.71 |

Required rate of return on TJX Cos. Inc.’s common stock^{3} |
r_{TJX} |
9.08% |

^{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} *r*_{TJX} = *R _{F}* + β

_{TJX}[

*E*(

*R*) –

_{M}*R*]

_{F}= 1.66% + 0.71 [12.16% – 1.66%]

= 9.08%

### FCFE Growth Rate (*g*)

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

**TJX Cos. Inc., PRAT model**

Based on: 10-K (filing date: 2020-03-27), 10-K (filing date: 2019-04-03), 10-K (filing date: 2018-04-04), 10-K (filing date: 2017-03-28), 10-K (filing date: 2016-03-29), 10-K (filing date: 2015-03-31).

*2020 Calculations*

^{1} Retention rate = (Net income – Cash dividends declared on common stock) ÷ Net income

= (3,272,193 – 1,111,788) ÷ 3,272,193

= 0.66

^{2} Profit margin = 100 × Net income ÷ Net sales

= 100 × 3,272,193 ÷ 41,716,977

= 7.84%

^{3} Asset turnover = Net sales ÷ Total assets

= 41,716,977 ÷ 24,145,003

= 1.73

^{4} Financial leverage = Total assets ÷ Shareholders’ equity

= 24,145,003 ÷ 5,948,212

= 4.06

^{5} *g* = Retention rate × Profit margin × Asset turnover × Financial leverage

= 0.71 × 7.48% × 2.63 × 2.74

= 38.44%

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

*g* = 100 × (Equity market value_{0} × *r* – FCFE_{0}) ÷ (Equity market value_{0} + FCFE_{0})

= 100 × (82,195,211 × 9.08% – 2,843,424) ÷ (82,195,211 + 2,843,424)

= **5.43%**

where:

Equity market value_{0} = current market value of TJX Cos. Inc.’s common stock (US$ in thousands)

FCFE_{0} = the last year TJX Cos. Inc.’s free cash flow to equity (US$ in thousands)

*r* = required rate of return on TJX Cos. Inc.’s common stock

#### FCFE growth rate (*g*) forecast

**TJX Cos. Inc., H-model**

Year | Value | g_{t} |
---|---|---|

1 | g_{1} |
38.44% |

2 | g_{2} |
30.19% |

3 | g_{3} |
21.94% |

4 | g_{4} |
13.69% |

5 and thereafter | g_{5} |
5.43% |

where:

*g*_{1} is implied by PRAT model

*g*_{5} is implied by single-stage model

*g*_{2}, *g*_{3} and *g*_{4} are calculated using linear interpoltion between *g*_{1} and *g*_{5}

*Calculations*

*g*_{2} = *g*_{1} + (*g*_{5} – *g*_{1}) × (2 – 1) ÷ (5 – 1)

= 38.44% + (5.43% – 38.44%) × (2 – 1) ÷ (5 – 1)

= 30.19%

*g*_{3} = *g*_{1} + (*g*_{5} – *g*_{1}) × (3 – 1) ÷ (5 – 1)

= 38.44% + (5.43% – 38.44%) × (3 – 1) ÷ (5 – 1)

= 21.94%

*g*_{4} = *g*_{1} + (*g*_{5} – *g*_{1}) × (4 – 1) ÷ (5 – 1)

= 38.44% + (5.43% – 38.44%) × (4 – 1) ÷ (5 – 1)

= 13.69%