Intrinsic Stock Value (Valuation Summery)

Johnson & Johnson, free cash flow to the firm (FCFF) forecast
USD $ in millions, except per share data
Year

Value

FCFFt or Terminal value (TVt)

Calculation

01

FCFF0

14,352

FCFF1

15,408

= 14,352 (1 + 7.36%)

14,164

FCFF2

16,401

= 15,408 (1 + 6.44%)

13,859

FCFF3

17,307

= 16,401 (1 + 5.53%)

13,444

FCFF4

18,106

= 17,307 (1 + 4.61%)

12,929

FCFF5

18,775

= 18,106 (1 + 3.70%)

12,324

Terminal value
(TV5)

382,681

= 18,775 (1 + 3.70%) (8.78% 3.70%)

Intrinsic value of Johnson & Johnson's capital

Less: Debt (fair value)

Present value at 8.78%

251,198
317,919
19,580

Intrinsic value of Johnson & Johnson's common stock

298,339

Intrinsic value of Johnson & Johnson's common stock (per share)

$105.78

Current share price

See Details

$96.78

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.
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Weighted Average Cost of Capital (WACC)

Johnson & Johnson, cost of capital
Value1
Equity (fair value)
1

Debt (fair value)

USD $ in millions

Weight

Required rate of return2

272,947

0.93

9.18%

19,580

0.07

3.21% = 4.00% (1 19.78%)

Equity (fair value) = No. shares of common stock outstanding Current share price
= 2,820,287,326 $96.78 = $272,947,407,410.28
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 tax rate
= (10.60% + 23.10% + 21.75% + 21.32% + 22.15%) 5 = 19.78%
WACC = 8.78%

Calculation

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FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model
Johnson & Johnson, PRAT model
Average

Dec 29, 2013

Dec 30, 2012

Dec 31, 2011

Dec 31, 2010

Dec 31, 2009

1,640

3,261

2,689

3,613

3,489

Net earnings attributable to Johnson &

Johnson

13,831

10,853

9,672

13,334

12,266

Tax rate1

10.60%

23.10%

21.75%

21.32%

22.15%

Interest expense, net of portion capitalized

482

532

571

455

451

Interest expense, net of portion capitalized,

after tax2

431

409

447

358

351

7,286

6,614

6,156

5,804

5,327

Selected Financial Data (USD $ in millions)

Provision for taxes on income

Add: Cash dividends paid

Interest expense (after tax) and
dividends

7,717

7,023

6,603

6,162

5,678

EBIT(1 Tax Rate)3

14,262

11,262

10,119

13,692

12,617

4,852

4,676

6,658

7,617

6,318

Long-term debt

13,328

11,489

12,969

9,156

8,223

Shareholders equity

74,053

64,826

57,080

56,579

50,588

Loans and notes payable

Total capital

92,233

80,991

76,707

73,352

65,129

Ratios
Retention rate (RR)4
Return on invested capital (ROIC)5

0.46

0.38

0.35

0.55

0.55

15.46%

13.91%

13.19%

18.67%

19.37%

Averages
RR
ROIC
Growth rate of FCFF (g)6
2013 Calculations
1

0.46
16.12%
7.36%

Tax rate = 100 Provision for taxes on income (Net earnings attributable to Johnson & Johnson + Provision for taxes on income)
= 100 1,640 (13,831 + 1,640) = 10.60%
Interest expense, net of portion capitalized, after tax = Interest expense, net of portion capitalized (1 Tax rate)
= 482 (1 10.60%) = 431
EBIT(1 Tax Rate) = Net earnings attributable to Johnson & Johnson + Interest expense, net of portion capitalized, after tax
= 13,831 + 431 = 14,262

RR = [EBIT(1 Tax Rate) Interest expense (after tax) and dividends] EBIT(1 Tax Rate)
= [14,262 7,717] 14,262 = 0.46
ROIC = 100 EBIT(1 Tax Rate) Total capital
= 100 14,262 92,233 = 15.46%
g = RR ROIC
= 0.46 16.12% = 7.36%
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FCFF growth rate (g) implied by single-stage model

g = 100 (Total capital, fair value0 WACC FCFF0) (Total capital, fair value0 + FCFF0)
= 100 (292,527 8.78% 14,352) (292,527 + 14,352) = 3.70%
where:
Total capital, fair value0 = current fair value of Johnson & Johnson's debt and equity (USD $ in millions)
FCFF0 = last year Johnson & Johnson's free cash flow to the firm (USD $ in millions)
WACC = weighted average cost of Johnson & Johnson's capital
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FCFF growth rate (g) forecast

Johnson & Johnson, H-model
Year
1

Value
g1

gt
7.36%

g2

6.44%

g3

5.53%

g4

4.61%

5 and thereafter g5
3.70%
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)
= 7.36% + (3.70% 7.36%) (2 1) (5 1) = 6.44%
g2 = g1 + (g5 g1) (3 1) (5 1)
= 7.36% + (3.70% 7.36%) (3 1) (5 1) = 5.53%
g2 = g1 + (g5 g1) (4 1) (5 1)
= 7.36% + (3.70% 7.36%) (4 1) (5 1) = 4.61%