Present Value of Free Cash Flow to the Firm (FCFF)
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)
UnitedHealth Group 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 8.81% |
|---|---|---|---|---|
| 01 | FCFF0 | 28,095 | ||
| 1 | FCFF1 | 30,959 | = 28,095 × (1 + 10.20%) | 28,453 |
| 2 | FCFF2 | 33,530 | = 30,959 × (1 + 8.30%) | 28,320 |
| 3 | FCFF3 | 35,678 | = 33,530 × (1 + 6.41%) | 27,695 |
| 4 | FCFF4 | 37,289 | = 35,678 × (1 + 4.51%) | 26,602 |
| 5 | FCFF5 | 38,266 | = 37,289 × (1 + 2.62%) | 25,089 |
| 5 | Terminal value (TV5) | 634,511 | = 38,266 × (1 + 2.62%) ÷ (8.81% – 2.62%) | 416,005 |
| Intrinsic value of UnitedHealth Group Inc. capital | 552,163 | |||
| Less: Commercial paper, long-term debt and other financing obligations (fair value) | 60,939 | |||
| Intrinsic value of UnitedHealth Group Inc. common stock | 491,224 | |||
| Intrinsic value of UnitedHealth Group Inc. common stock (per share) | $532.82 | |||
| Current share price | $439.20 | |||
Based on: 10-K (reporting date: 2023-12-31).
Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.
Weighted Average Cost of Capital (WACC)
UnitedHealth Group Inc., cost of capital
| Value1 | Weight | Required rate of return2 | Calculation | |
|---|---|---|---|---|
| Equity (fair value) | 404,913 | 0.87 | 9.64% | |
| Commercial paper, long-term debt and other financing obligations (fair value) | 60,939 | 0.13 | 3.27% | = 4.16% × (1 – 21.50%) |
Based on: 10-K (reporting date: 2023-12-31).
1 US$ in millions
Equity (fair value) = No. shares of common stock outstanding × Current share price
= 921,934,109 × $439.20
= $404,913,460,672.80
Commercial paper, long-term debt and other financing obligations (fair value). See details »
2 Required rate of return on equity is estimated by using CAPM. See details »
Required rate of return on debt. See details »
Required rate of return on debt is after tax.
Estimated (average) effective income tax rate
= (20.50% + 21.70% + 20.50% + 24.00% + 20.80%) ÷ 5
= 21.50%
WACC = 8.81%
FCFF Growth Rate (g)
FCFF growth rate (g) implied by PRAT model
UnitedHealth Group Inc., PRAT model
Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).
2023 Calculations
2 Interest expense, after tax = Interest expense × (1 – EITR)
= 3,246 × (1 – 20.50%)
= 2,581
3 EBIT(1 – EITR)
= Net earnings attributable to UnitedHealth Group common shareholders + Interest expense, after tax
= 22,381 + 2,581
= 24,962
4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [24,962 – 9,342] ÷ 24,962
= 0.63
5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 24,962 ÷ 151,293
= 16.50%
6 g = RR × ROIC
= 0.64 × 15.82%
= 10.20%
FCFF growth rate (g) implied by single-stage model
g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (465,852 × 8.81% – 28,095) ÷ (465,852 + 28,095)
= 2.62%
where:
Total capital, fair value0 = current fair value of UnitedHealth Group Inc. debt and equity (US$ in millions)
FCFF0 = the last year UnitedHealth Group Inc. free cash flow to the firm (US$ in millions)
WACC = weighted average cost of UnitedHealth Group Inc. capital
FCFF growth rate (g) forecast
UnitedHealth Group Inc., H-model
| Year | Value | gt |
|---|---|---|
| 1 | g1 | 10.20% |
| 2 | g2 | 8.30% |
| 3 | g3 | 6.41% |
| 4 | g4 | 4.51% |
| 5 and thereafter | g5 | 2.62% |
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)
= 10.20% + (2.62% – 10.20%) × (2 – 1) ÷ (5 – 1)
= 8.30%
g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 10.20% + (2.62% – 10.20%) × (3 – 1) ÷ (5 – 1)
= 6.41%
g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 10.20% + (2.62% – 10.20%) × (4 – 1) ÷ (5 – 1)
= 4.51%