# United Parcel Service Inc. (NYSE:UPS)

## 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)

United Parcel Service Inc., free cash flow to the firm (FCFF) forecast

US\$ in millions, except per share data

Year Value FCFFt or Terminal value (TVt) Calculation Present value at 10.41%
01 FCFF0 5,653
1 FCFF1 5,632 = 5,653 × (1 + -0.37%) 5,101
2 FCFF2 5,724 = 5,632 × (1 + 1.62%) 4,695
3 FCFF3 5,931 = 5,724 × (1 + 3.62%) 4,407
4 FCFF4 6,264 = 5,931 × (1 + 5.61%) 4,216
5 FCFF5 6,740 = 6,264 × (1 + 7.61%) 4,109
5 Terminal value (TV5) 259,482 = 6,740 × (1 + 7.61%) ÷ (10.41%7.61%) 158,179
Intrinsic value of United Parcel Service Inc.’s capital 180,707
Less: Long-term debt, including current maturities (fair value) 28,300
Intrinsic value of United Parcel Service Inc.’s common stock 152,407

Intrinsic value of United Parcel Service Inc.’s common stock (per share) \$175.07
Current share price \$217.50

Based on: 10-K (filing date: 2021-02-22).

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)

United Parcel Service Inc., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 189,341 0.87 11.59%
Long-term debt, including current maturities (fair value) 28,300 0.13 2.47% = 3.40% × (1 – 27.42%)

Based on: 10-K (filing date: 2021-02-22).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 870,532,608 × \$217.50
= \$189,340,842,240.00

Long-term debt, including current maturities (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
= (27.20% + 21.40% + 20.40% + 34.90% + 33.20%) ÷ 5
= 27.42%

WACC = 10.41%

### FCFF Growth Rate (g)

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

United Parcel Service Inc., PRAT model

Average Dec 31, 2020 Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016
Selected Financial Data (US\$ in millions)
Interest expense 701  653  605  453  381
Net income 1,343  4,440  4,791  4,910  3,431

Effective income tax rate (EITR)1 27.20% 21.40% 20.40% 34.90% 33.20%

Interest expense, after tax2 510  513  482  295  255
Add: Dividends 3,552  3,341  3,189  2,928  2,771
Interest expense (after tax) and dividends 4,062  3,854  3,671  3,223  3,026

EBIT(1 – EITR)3 1,853  4,953  5,273  5,205  3,686

Current maturities of long-term debt, commercial paper and finance leases 2,623  3,420  2,805  4,011  3,681
Long-term debt and finance leases, excluding current maturities 22,031  21,818  19,931  20,278  12,394
Equity for controlling interests 657  3,267  3,021  1,000  405
Total capital 25,311  28,505  25,757  25,289  16,480
Financial Ratios
Retention rate (RR)4 -1.19 0.22 0.30 0.38 0.18
Return on invested capital (ROIC)5 7.32% 17.38% 20.47% 20.58% 22.36%
Averages
RR -0.02
ROIC 17.62%

FCFF growth rate (g)6 -0.37%

Based on: 10-K (filing date: 2021-02-22), 10-K (filing date: 2020-02-20), 10-K (filing date: 2019-02-21), 10-K (filing date: 2018-02-21), 10-K (filing date: 2017-02-21).

2020 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 701 × (1 – 27.20%)
= 510

3 EBIT(1 – EITR) = Net income + Interest expense, after tax
= 1,343 + 510
= 1,853

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [1,8534,062] ÷ 1,853
= -1.19

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 1,853 ÷ 25,311
= 7.32%

6 g = RR × ROIC
= -0.02 × 17.62%
= -0.37%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (217,641 × 10.41%5,653) ÷ (217,641 + 5,653)
= 7.61%

where:

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

#### FCFF growth rate (g) forecast

United Parcel Service Inc., H-model

Year Value gt
1 g1 -0.37%
2 g2 1.62%
3 g3 3.62%
4 g4 5.61%
5 and thereafter g5 7.61%

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)
= -0.37% + (7.61%-0.37%) × (2 – 1) ÷ (5 – 1)
= 1.62%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= -0.37% + (7.61%-0.37%) × (3 – 1) ÷ (5 – 1)
= 3.62%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= -0.37% + (7.61%-0.37%) × (4 – 1) ÷ (5 – 1)
= 5.61%