# salesforce.com inc. (NYSE:CRM)

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

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 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)

salesforce.com inc., free cash flow to equity (FCFE) forecast

US\$ in millions, except per share data

Year Value FCFEt or Terminal value (TVt) Calculation Present value at 14.87%
01 FCFE0 3,012
1 FCFE1 3,002  = 3,012 × (1 + -0.33%) 2,614
2 FCFE2 3,085  = 3,002 × (1 + 2.77%) 2,338
3 FCFE3 3,266  = 3,085 × (1 + 5.86%) 2,155
4 FCFE4 3,559  = 3,266 × (1 + 8.96%) 2,044
5 FCFE5 3,988  = 3,559 × (1 + 12.06%) 1,994
5 Terminal value (TV5) 159,159  = 3,988 × (1 + 12.06%) ÷ (14.87%12.06%) 79,595
Intrinsic value of salesforce.com inc.’s common stock 90,740

Intrinsic value of salesforce.com inc.’s common stock (per share) \$101.39
Current share price \$134.31

Based on: 10-K (filing date: 2020-03-05).

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 Composite1 RF 1.14% Expected rate of return on market portfolio2 E(RM) 12.13% Systematic risk of salesforce.com inc.’s common stock βCRM 1.25 Required rate of return on salesforce.com inc.’s common stock3 rCRM 14.87%

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).

3 rCRM = RF + βCRM [E(RM) – RF]
= 1.14% + 1.25 [12.13%1.14%]
= 14.87%

### FCFE Growth Rate (g)

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

salesforce.com inc., PRAT model

Average Jan 31, 2020 Jan 31, 2019 Jan 31, 2018 Jan 31, 2017 Jan 31, 2016 Jan 31, 2015
Selected Financial Data (US\$ in millions)
Net income (loss) 126  1,110  127  180  (47) (263)
Revenues 17,098  13,282  10,480  8,392  6,667  5,374
Total assets 55,126  30,737  21,010  17,585  12,771  10,693
Stockholders’ equity 33,885  15,605  9,388  7,500  5,003  3,975
Financial Ratios
Retention rate1 1.00 1.00 1.00 1.00 1.00 1.00
Profit margin2 0.74% 8.36% 1.22% 2.14% -0.71% -4.89%
Asset turnover3 0.31 0.43 0.50 0.48 0.52 0.50
Financial leverage4 1.63 1.97 2.24 2.34 2.55 2.69
Averages
Retention rate 1.00
Profit margin -0.30%
Asset turnover 0.49
Financial leverage 2.24

FCFE growth rate (g)5 -0.33%

Based on: 10-K (filing date: 2020-03-05), 10-K (filing date: 2019-03-08), 10-K (filing date: 2018-03-09), 10-K (filing date: 2017-03-06), 10-K (filing date: 2016-03-07), 10-K (filing date: 2015-03-06).

2020 Calculations

1 Company does not pay dividends

2 Profit margin = 100 × Net income (loss) ÷ Revenues
= 100 × 126 ÷ 17,098 = 0.74%

3 Asset turnover = Revenues ÷ Total assets
= 17,098 ÷ 55,126 = 0.31

4 Financial leverage = Total assets ÷ Stockholders’ equity
= 55,126 ÷ 33,885 = 1.63

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 1.00 × -0.30% × 0.49 × 2.24 = -0.33%

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (120,207 × 14.87%3,012) ÷ (120,207 + 3,012) = 12.06%

where:
Equity market value0 = current market value of salesforce.com inc.’s common stock (US\$ in millions)
FCFE0 = the last year salesforce.com inc.’s free cash flow to equity (US\$ in millions)
r = required rate of return on salesforce.com inc.’s common stock

#### FCFE growth rate (g) forecast

salesforce.com inc., H-model

Year Value gt
1 g1 -0.33%
2 g2 2.77%
3 g3 5.86%
4 g4 8.96%
5 and thereafter g5 12.06%

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)
= -0.33% + (12.06%-0.33%) × (2 – 1) ÷ (5 – 1) = 2.77%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= -0.33% + (12.06%-0.33%) × (3 – 1) ÷ (5 – 1) = 5.86%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= -0.33% + (12.06%-0.33%) × (4 – 1) ÷ (5 – 1) = 8.96%