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 asset base.
Intrinsic Stock Value (Valuation Summary)
Best Buy Co. 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 18.19% |
|---|---|---|---|---|
| 01 | FCFE0 | 2,382 | ||
| 1 | FCFE1 | 3,043 | = 2,382 × (1 + 27.74%) | 2,575 |
| 2 | FCFE2 | 3,711 | = 3,043 × (1 + 21.97%) | 2,657 |
| 3 | FCFE3 | 4,312 | = 3,711 × (1 + 16.20%) | 2,612 |
| 4 | FCFE4 | 4,762 | = 4,312 × (1 + 10.43%) | 2,441 |
| 5 | FCFE5 | 4,984 | = 4,762 × (1 + 4.66%) | 2,161 |
| 5 | Terminal value (TV5) | 38,555 | = 4,984 × (1 + 4.66%) ÷ (18.19% – 4.66%) | 16,720 |
| Intrinsic value of Best Buy Co. Inc. common stock | 29,165 | |||
| Intrinsic value of Best Buy Co. Inc. common stock (per share) | $131.81 | |||
| Current share price | $83.28 | |||
Based on: 10-K (reporting date: 2022-01-29).
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 | 4.68% |
| Expected rate of return on market portfolio2 | E(RM) | 13.78% |
| Systematic risk of Best Buy Co. Inc. common stock | βBBY | 1.48 |
| Required rate of return on Best Buy Co. Inc. common stock3 | rBBY | 18.19% |
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 rBBY = RF + βBBY [E(RM) – RF]
= 4.68% + 1.48 [13.78% – 4.68%]
= 18.19%
FCFE Growth Rate (g)
FCFE growth rate (g) implied by PRAT model
Best Buy Co. Inc., PRAT model
Based on: 10-K (reporting date: 2022-01-29), 10-K (reporting date: 2021-01-30), 10-K (reporting date: 2020-02-01), 10-K (reporting date: 2019-02-02), 10-K (reporting date: 2018-02-03), 10-K (reporting date: 2017-01-28).
2022 Calculations
1 Retention rate = (Net earnings – Common stock dividends) ÷ Net earnings
= (2,454 – 688) ÷ 2,454
= 0.72
2 Profit margin = 100 × Net earnings ÷ Revenue
= 100 × 2,454 ÷ 51,761
= 4.74%
3 Asset turnover = Revenue ÷ Total assets
= 51,761 ÷ 17,504
= 2.96
4 Financial leverage = Total assets ÷ Total Best Buy Co., Inc. shareholders’ equity
= 17,504 ÷ 3,020
= 5.80
5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.65 × 3.50% × 2.94 × 4.15
= 27.74%
FCFE growth rate (g) implied by single-stage model
g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (18,427 × 18.19% – 2,382) ÷ (18,427 + 2,382)
= 4.66%
where:
Equity market value0 = current market value of Best Buy Co. Inc. common stock (US$ in millions)
FCFE0 = the last year Best Buy Co. Inc. free cash flow to equity (US$ in millions)
r = required rate of return on Best Buy Co. Inc. common stock
FCFE growth rate (g) forecast
Best Buy Co. Inc., H-model
| Year | Value | gt |
|---|---|---|
| 1 | g1 | 27.74% |
| 2 | g2 | 21.97% |
| 3 | g3 | 16.20% |
| 4 | g4 | 10.43% |
| 5 and thereafter | g5 | 4.66% |
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)
= 27.74% + (4.66% – 27.74%) × (2 – 1) ÷ (5 – 1)
= 21.97%
g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 27.74% + (4.66% – 27.74%) × (3 – 1) ÷ (5 – 1)
= 16.20%
g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 27.74% + (4.66% – 27.74%) × (4 – 1) ÷ (5 – 1)
= 10.43%