Stock Analysis on Net
Stock Analysis on Net

Cadence Design Systems Inc. (NASDAQ:CDNS)

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)

Cadence Design Systems Inc., free cash flow to the firm (FCFF) forecast

US$ in thousands, except per share data

Microsoft Excel
Year Value FCFFt or Terminal value (TVt) Calculation Present value at 14.31%
01 FCFF0 1,274,970
1 FCFF1 1,573,051 = 1,274,970 × (1 + 23.38%) 1,376,163
2 FCFF2 1,898,329 = 1,573,051 × (1 + 20.68%) 1,452,865
3 FCFF3 2,239,588 = 1,898,329 × (1 + 17.98%) 1,499,509
4 FCFF4 2,581,696 = 2,239,588 × (1 + 15.28%) 1,512,213
5 FCFF5 2,906,322 = 2,581,696 × (1 + 12.57%) 1,489,287
5 Terminal value (TV5) 188,800,088 = 2,906,322 × (1 + 12.57%) ÷ (14.31% – 12.57%) 96,746,853
Intrinsic value of Cadence Design Systems Inc. capital 104,076,889
Less: Outstanding debt (fair value) 646,971
Intrinsic value of Cadence Design Systems Inc. common stock 103,429,918
 
Intrinsic value of Cadence Design Systems Inc. common stock (per share) $377.12
Current share price $299.63

Based on: 10-K (reporting date: 2023-12-31).

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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)

Cadence Design Systems Inc., cost of capital

Microsoft Excel
Value1 Weight Required rate of return2 Calculation
Equity (fair value) 82,177,423 0.99 14.38%
Outstanding debt (fair value) 646,971 0.01 4.44% = 5.22% × (1 – 15.00%)

Based on: 10-K (reporting date: 2023-12-31).

1 US$ in thousands

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 274,263,000 × $299.63
= $82,177,422,690.00

   Outstanding 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
= (19.00% + 19.00% + 9.00% + 7.00% + 21.00%) ÷ 5
= 15.00%

WACC = 14.31%

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Cadence Design Systems Inc., PRAT model

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Average Dec 31, 2023 Dec 31, 2022 Dec 31, 2021 Dec 31, 2020 Dec 28, 2019
Selected Financial Data (US$ in thousands)
Interest expense 36,185 22,934 16,980 20,749 18,829
Net income 1,041,144 848,952 695,955 590,644 988,979
 
Effective income tax rate (EITR)1 19.00% 19.00% 9.00% 7.00% 21.00%
 
Interest expense, after tax2 29,310 18,577 15,452 19,297 14,875
Interest expense (after tax) and dividends 29,310 18,577 15,452 19,297 14,875
 
EBIT(1 – EITR)3 1,070,454 867,529 711,407 609,941 1,003,854
 
Revolving credit facility — 100,000 — — —
Current portion of long-term debt 349,285 — — — —
Long-term debt, excluding current portion 299,771 648,078 347,588 346,793 346,019
Stockholders’ equity 3,404,271 2,745,113 2,740,675 2,493,018 2,102,894
Total capital 4,053,327 3,493,191 3,088,263 2,839,811 2,448,913
Financial Ratios
Retention rate (RR)4 0.97 0.98 0.98 0.97 0.99
Return on invested capital (ROIC)5 26.41% 24.83% 23.04% 21.48% 40.99%
Averages
RR 0.98
ROIC 23.94%
 
FCFF growth rate (g)6 23.38%

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: 2019-12-28).

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2023 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 36,185 × (1 – 19.00%)
= 29,310

3 EBIT(1 – EITR) = Net income + Interest expense, after tax
= 1,041,144 + 29,310
= 1,070,454

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [1,070,454 – 29,310] ÷ 1,070,454
= 0.97

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 1,070,454 ÷ 4,053,327
= 26.41%

6 g = RR × ROIC
= 0.98 × 23.94%
= 23.38%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (82,824,394 × 14.31% – 1,274,970) ÷ (82,824,394 + 1,274,970)
= 12.57%

where:

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

FCFF growth rate (g) forecast

Cadence Design Systems Inc., H-model

Microsoft Excel
Year Value gt
1 g1 23.38%
2 g2 20.68%
3 g3 17.98%
4 g4 15.28%
5 and thereafter g5 12.57%

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)
= 23.38% + (12.57% – 23.38%) × (2 – 1) ÷ (5 – 1)
= 20.68%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 23.38% + (12.57% – 23.38%) × (3 – 1) ÷ (5 – 1)
= 17.98%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 23.38% + (12.57% – 23.38%) × (4 – 1) ÷ (5 – 1)
= 15.28%