Estimating Free Cash Flow to the Firm (FCFF)

The Free Cash flows to the firm can be calculated by the following equation:
FCFF = EBIT (1-t) + depreciation Cap Ex WC
Note: To limit the uncertainty in valuation, we have decided not to forecast the balance
sheet and income statement of Boeing. Only FCFF has been forecasted.
The estimation of the free cash flows would require forecasting the values of the following
parameters in the future:

EBIT

Depreciation

Capital Expenditure

Change in Working Capital

Forecasting EBIT
EBIT = Gross Margin Operating Expenses
Gross Margin = Sales Cost of Goods Sold

Forecasting Sales: The compounded annual growth rate (CAGR) of sales from 2008
to 2012 was calculated at 7.617%. Sales up to year 2020 were estimated using the
CAGR of 7.617%.
Year
2013
2014
2015
2016
2017
2018
2019
2020

Sales
87921.26
94618.57
101826.04
109582.54
117929.88
126913.07
136580.54
146984.43

Forecasting the Cost of Goods Sold (COGS): The cost of Goods sold (COGS) were
pegged to the Sales of the company and linear regression analysis was done from

years 2001 to 2012. After the analysis, the following relation between sales and
COGS was observed:
o COGS = 4295.94 + 0.762 * Sales
The COGS was then forecasted up to year 2020 using the above equation.
Year
2013
2014
2015
2016
2017
2018
2019
2020

Sales
87921.26
94618.57
101826.04
109582.54
117929.88
126913.07
136580.54
146984.43

COGS
71317.07
76422.33
81916.49
87829.16
94192.21
101039.97
108409.35
116340.08

Forecasting Operating Expenses: The Operating Expenses were pegged to the Sales of
the company and linear regression analysis was done from years 2001 to 2012. After
the analysis, the following relation between sales and Operating Expenses was
observed:
o Op Ex = 505.05 + 0.0971 * Sales
The Operating Expenses were then forecasted up to year 2020 using the above
equation.
Year
2013
2014
2015
2016
2017
2018
2019
2020

Sales
Op Expenses
87921.2621
9049.033
94618.5749
9699.86
101826.049
10400.26
109582.545
11154.02
117929.883
11965.20
126913.073
12838.16
136580.547
13777.62
146984.431
14788.65

EBIT was calculated using the formula: EBIT = Revenue - COGS Operating Expenses

Tax rate was assumed to be 30 % and EBIT (1-tax rate) was calculated.

Forecasting Capital Expenditure

The compounded annual growth rate (CAGR) of Capital Expenditures from 2003 to
2012 was calculated at 9.687%. Sales up to year 2020 were estimated using the
CAGR of 9.687%.
Year
2013
2014
2015
2016
2017
2018
2019
2020

Cap Ex
1867.97
2048.92
2247.39
2465.10
2703.89
2965.82
3253.12
3568.25

Forecasting Depreciation
The depreciation of assets was pegged to the Capital Expenditure and linear regression
analysis was done from years 2003 to 2012. After the analysis, the following relation
between cap ex and depreciation was observed:
o Depreciation = 1509.80 + 0.0522 * Cap Ex
The depreciation was then forecasted up to year 2020 using the above equation.

Year
2013
2014
2015
2016
2017
2018
2019
2020

Cap EX
1867.97
2048.92
2247.399
2465.104
2703.899
2965.826
3253.125
3568.255

Depreciation
1607.44
1616.90
1627.28
1638.66
1651.14
1664.83
1679.85
1696.32

Forecasting Change in Working Capital

The incremental change in Working Capital was pegged to the incremental change in Sales
each year. After the analysis, the following relation between incremental sales and
incremental working capital was observed:

WC = 951.58 + 0.230 * Sales

The WC was then forecasted up to year 2020 using the above equation.
Forecast of WC
Year
2013
2014
2015
2016
2017
2018
2019
2020

Sales
87921.26
94618.57
101826.04
109582.54
117929.88
126913.07
136580.54
146984.43

Sales
6223.26
6697.31
7207.47
7756.49
8347.33
8983.18
9667.47
10403.88

WC
2387.65
2497.04
2614.77
2741.46
2877.80
3024.53
3182.44
3352.37

Calculation of Free Cash Flows to the Firm

The free cash flow to the firm is calculated as follows:
FCFF = EBIT (1-t) + depreciation Cap Ex WC
Year

FCFF
2013
2014
2015
2016
2017
2018
2019
2020

2640.43
3018.40
3421.61
3851.64
4310.16
4798.92
5319.78
5874.68

Sum of Discounted Cash Flows = $ 26456.09 mn

WACC
4.70%
4.70%
4.70%
4.70%
4.70%
4.70%
4.70%
4.70%

Discounted
2521.90
2753.49
2981.19
3205.23
3425.78
3643.04
3857.15
4068.27

Terminal Value
Terminal Value was calculated in the year 2020 and WACC was taken as discount rate.
Sum of FCFF
Terminal Value

$ 26456.0911mn
$ 124993.203 mn

Discounted terminal value

$ 86559.142 mn

Value of the firm

$ 113015.233 mn