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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)
Verizon Communications Inc., free cash flow to equity (FCFE) forecast
US$ in millions, except per share data
Year | Value | FCFE_{t} or Terminal value (TV_{t}) | Calculation | Present value at |
---|---|---|---|---|
0^{1} | FCFE_{0} | |||
1 | FCFE_{1} | = × (1 + ) | ||
2 | FCFE_{2} | = × (1 + ) | ||
3 | FCFE_{3} | = × (1 + ) | ||
4 | FCFE_{4} | = × (1 + ) | ||
5 | FCFE_{5} | = × (1 + ) | ||
5 | Terminal value (TV_{5}) | = × (1 + ) ÷ ( – ) | ||
Intrinsic value of Verizon Communications Inc.’s common stock | ||||
Intrinsic value of Verizon Communications Inc.’s common stock (per share) | ||||
Current share price |
Based on: 10-K (filing date: 2020-02-21).
^{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} | |
Expected rate of return on market portfolio^{2} | E(R_{M}) | |
Systematic risk of Verizon Communications Inc.’s common stock | β_{VZ} | |
Required rate of return on Verizon Communications Inc.’s common stock^{3} | r_{VZ} |
^{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_{VZ} = R_{F} + β_{VZ} [E(R_{M}) – R_{F}]
= + [ – ]
=
FCFE Growth Rate (g)
FCFE growth rate (g) implied by PRAT model
Verizon Communications Inc., PRAT model
Based on: 10-K (filing date: 2020-02-21), 10-K (filing date: 2019-02-15), 10-K (filing date: 2018-02-23), 10-K (filing date: 2017-02-21), 10-K (filing date: 2016-02-23).
2019 Calculations
^{1} Retention rate = (Net income attributable to Verizon – Dividends declared) ÷ Net income attributable to Verizon
= ( – ) ÷ =
^{2} Profit margin = 100 × Net income attributable to Verizon ÷ Operating revenues
= 100 × ÷ =
^{3} Asset turnover = Operating revenues ÷ Total assets
= ÷ =
^{4} Financial leverage = Total assets ÷ Equity attributable to Verizon
= ÷ =
^{5} g = Retention rate × Profit margin × Asset turnover × Financial leverage
= × × × =
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 × ( × – ) ÷ ( + ) =
where:
Equity market value_{0} = current market value of Verizon Communications Inc.’s common stock (US$ in millions)
FCFE_{0} = the last year Verizon Communications Inc.’s free cash flow to equity (US$ in millions)
r = required rate of return on Verizon Communications Inc.’s common stock
FCFE growth rate (g) forecast
Verizon Communications Inc., H-model
Year | Value | g_{t} |
---|---|---|
1 | g_{1} | |
2 | g_{2} | |
3 | g_{3} | |
4 | g_{4} | |
5 and thereafter | g_{5} |
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)
= + ( – ) × (2 – 1) ÷ (5 – 1) =
g_{3} = g_{1} + (g_{5} – g_{1}) × (3 – 1) ÷ (5 – 1)
= + ( – ) × (3 – 1) ÷ (5 – 1) =
g_{4} = g_{1} + (g_{5} – g_{1}) × (4 – 1) ÷ (5 – 1)
= + ( – ) × (4 – 1) ÷ (5 – 1) =