Stock Analysis on Net
Stock Analysis on Net

Reynolds American Inc. (NYSE:RAI)

This company has been moved to the archive! The financial data has not been updated since May 3, 2017.

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)

Reynolds American Inc., free cash flow to the firm (FCFF) forecast

US$ in millions, except per share data

Microsoft Excel
Year Value FCFFt or Terminal value (TVt) Calculation Present value at 7.76%
01 FCFF0 1,520
1 FCFF1 1,574 = 1,520 × (1 + 3.52%) 1,461
2 FCFF2 1,640 = 1,574 × (1 + 4.20%) 1,412
3 FCFF3 1,720 = 1,640 × (1 + 4.88%) 1,375
4 FCFF4 1,816 = 1,720 × (1 + 5.56%) 1,347
5 FCFF5 1,929 = 1,816 × (1 + 6.24%) 1,328
5 Terminal value (TV5) 134,853 = 1,929 × (1 + 6.24%) ÷ (7.76% – 6.24%) 92,804
Intrinsic value of Reynolds American Inc. capital 99,726
Less: Long-term debt (fair value) 14,300
Intrinsic value of Reynolds American Inc. common stock 85,426
 
Intrinsic value of Reynolds American Inc. common stock (per share) $59.88
Current share price $64.47

Based on: 10-K (reporting date: 2016-12-31).

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.

Weighted Average Cost of Capital (WACC)

Reynolds American Inc., cost of capital

Microsoft Excel
Value1 Weight Required rate of return2 Calculation
Equity (fair value) 91,980 0.87 8.47%
Long-term debt (fair value) 14,300 0.13 3.18% = 5.00% × (1 – 36.40%)

Based on: 10-K (reporting date: 2016-12-31).

1 US$ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 1,426,711,959 × $64.47
= $91,980,119,996.73

   Long-term 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
= (37.30% + 49.00% + 36.10% + 37.30% + 34.90%) ÷ 5
= 36.40%

WACC = 7.76%

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Reynolds American Inc., PRAT model

Microsoft Excel
Average Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013 Dec 31, 2012
Selected Financial Data (US$ in millions)
Interest and debt expense 626 570 286 259 234
Income from discontinued operations, net of tax — — 25 — —
Net income 6,073 3,253 1,470 1,718 1,272
 
Effective income tax rate (EITR)1 37.30% 49.00% 36.10% 37.30% 34.90%
 
Interest and debt expense, after tax2 393 291 183 162 152
Add: Dividends 2,521 1,751 1,436 1,359 1,319
Interest expense (after tax) and dividends 2,914 2,042 1,619 1,521 1,471
 
EBIT(1 – EITR)3 6,466 3,544 1,628 1,880 1,424
 
Current maturities of long-term debt 501 506 450 — 60
Long-term debt, less current maturities 12,664 16,941 4,633 5,099 5,035
Shareholders’ equity 21,711 18,252 4,522 5,167 5,257
Total capital 34,876 35,699 9,605 10,266 10,352
Financial Ratios
Retention rate (RR)4 0.55 0.42 0.01 0.19 -0.03
Return on invested capital (ROIC)5 18.54% 9.93% 16.95% 18.32% 13.76%
Averages
RR 0.23
ROIC 15.50%
 
FCFF growth rate (g)6 3.52%

Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).

1 See details »

2016 Calculations

2 Interest and debt expense, after tax = Interest and debt expense × (1 – EITR)
= 626 × (1 – 37.30%)
= 393

3 EBIT(1 – EITR) = Net income – Income from discontinued operations, net of tax + Interest and debt expense, after tax
= 6,073 – 0 + 393
= 6,466

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [6,466 – 2,914] ÷ 6,466
= 0.55

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 6,466 ÷ 34,876
= 18.54%

6 g = RR × ROIC
= 0.23 × 15.50%
= 3.52%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (106,280 × 7.76% – 1,520) ÷ (106,280 + 1,520)
= 6.24%

where:

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

FCFF growth rate (g) forecast

Reynolds American Inc., H-model

Microsoft Excel
Year Value gt
1 g1 3.52%
2 g2 4.20%
3 g3 4.88%
4 g4 5.56%
5 and thereafter g5 6.24%

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)
= 3.52% + (6.24% – 3.52%) × (2 – 1) ÷ (5 – 1)
= 4.20%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 3.52% + (6.24% – 3.52%) × (3 – 1) ÷ (5 – 1)
= 4.88%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 3.52% + (6.24% – 3.52%) × (4 – 1) ÷ (5 – 1)
= 5.56%