Stock Analysis on Net
Stock Analysis on Net

Time Warner Inc. (NYSE:TWX)

This company has been moved to the archive! The financial data has not been updated since April 26, 2018.

Present Value of Free Cash Flow to the Firm (FCFF)

Microsoft Excel

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)

Time Warner Inc., free cash flow to the firm (FCFF) forecast

US$ in millions, except per share data

Microsoft Excel
Year Value FCFFt or Terminal value (TVt) Calculation Present value at 10.63%
01 FCFF0 5,498
1 FCFF1 5,816 = 5,498 × (1 + 5.78%) 5,257
2 FCFF2 6,138 = 5,816 × (1 + 5.53%) 5,015
3 FCFF3 6,462 = 6,138 × (1 + 5.28%) 4,772
4 FCFF4 6,787 = 6,462 × (1 + 5.04%) 4,531
5 FCFF5 7,113 = 6,787 × (1 + 4.79%) 4,292
5 Terminal value (TV5) 127,557 = 7,113 × (1 + 4.79%) ÷ (10.63% – 4.79%) 76,966
Intrinsic value of Time Warner Inc. capital 100,832
Less: Debt (fair value) 25,327
Intrinsic value of Time Warner Inc. common stock 75,505
 
Intrinsic value of Time Warner Inc. common stock (per share) $96.51
Current share price $93.67

Based on: 10-K (reporting date: 2017-12-31).

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.

Weighted Average Cost of Capital (WACC)

Time Warner Inc., cost of capital

Microsoft Excel
Value1 Weight Required rate of return2 Calculation
Equity (fair value) 73,280 0.74 13.16%
Debt (fair value) 25,327 0.26 3.31% = 4.32% × (1 – 23.36%)

Based on: 10-K (reporting date: 2017-12-31).

1 US$ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 782,319,431 × $93.67
= $73,279,861,101.77

   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
= (11.79% + 25.00% + 30.00% + 17.00% + 33.00%) ÷ 5
= 23.36%

WACC = 10.63%

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Time Warner Inc., PRAT model

Microsoft Excel
Average Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Selected Financial Data (US$ in millions)
Interest expense 1,214 1,388 1,382 1,353 1,283
Discontinued operations, net of tax — 11 37 (67) 137
Net income attributable to Time Warner Inc. shareholders 5,247 3,926 3,833 3,827 3,691
 
Effective income tax rate (EITR)1 11.79% 25.00% 30.00% 17.00% 33.00%
 
Interest expense, after tax2 1,071 1,041 967 1,123 860
Add: Cash dividends 1,583 1,269 1,150 1,109 1,074
Interest expense (after tax) and dividends 2,654 2,310 2,117 2,232 1,934
 
EBIT(1 – EITR)3 6,318 4,956 4,763 5,017 4,414
 
Debt due within one year 5,450 1,947 198 1,118 66
Long-term debt, excluding due within one year 18,294 22,392 23,594 21,376 20,099
Total Time Warner Inc. shareholders’ equity 28,375 24,335 23,619 24,476 29,904
Total capital 52,119 48,674 47,411 46,970 50,069
Financial Ratios
Retention rate (RR)4 0.58 0.53 0.56 0.56 0.56
Return on invested capital (ROIC)5 12.12% 10.18% 10.05% 10.68% 8.82%
Averages
RR 0.56
ROIC 10.37%
 
FCFF growth rate (g)6 5.78%

Based on: 10-K (reporting date: 2017-12-31), 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).

1 See details »

2017 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 1,214 × (1 – 11.79%)
= 1,071

3 EBIT(1 – EITR) = Net income attributable to Time Warner Inc. shareholders – Discontinued operations, net of tax + Interest expense, after tax
= 5,247 – 0 + 1,071
= 6,318

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [6,318 – 2,654] ÷ 6,318
= 0.58

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 6,318 ÷ 52,119
= 12.12%

6 g = RR × ROIC
= 0.56 × 10.37%
= 5.78%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (98,607 × 10.63% – 5,498) ÷ (98,607 + 5,498)
= 4.79%

where:

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

FCFF growth rate (g) forecast

Time Warner Inc., H-model

Microsoft Excel
Year Value gt
1 g1 5.78%
2 g2 5.53%
3 g3 5.28%
4 g4 5.04%
5 and thereafter g5 4.79%

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 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= 5.78% + (4.79% – 5.78%) × (2 – 1) ÷ (5 – 1)
= 5.53%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 5.78% + (4.79% – 5.78%) × (3 – 1) ÷ (5 – 1)
= 5.28%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 5.78% + (4.79% – 5.78%) × (4 – 1) ÷ (5 – 1)
= 5.04%