Caterpillar Inc.

, free cash flow to the firm (FCFF) forecast

US$ in millions, except per share data
 
Year Value FCFFt or Calculation Present
Terminal value value
(TVt) at 9.11%

01 FCFF0 5,799    

1 FCFF1 5,259 = 5,799 × (1 + -9.31%) 4,820

2 FCFF2 4,962 = 5,259 × (1 + -5.65%) 4,168

3 FCFF3 4,863 = 4,962 × (1 + -1.99%) 3,744

4 FCFF4 4,944 = 4,863 × (1 + 1.67%) 3,488

5 FCFF5 5,207 = 4,944 × (1 + 5.32%) 3,367

5 Terminal 144,795 = 5,207 × (1 + 5.32%) ÷ 93,623

value (TV5) (9.11% - 5.32%)

Intrinsic value of 113,210

Caterpillar Inc.'s capital

Less: Borrowings (fair 41,178

value)

Intrinsic value of 72,032

Caterpillar Inc.'s common
stock

Intrinsic value of $132.09

Caterpillar Inc.'s common
stock (per share)

Current share price $220.16

Based on: 10-K (filing date: 2021-02-17).

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)
Caterpillar Inc., cost of capital
 
   Value1 Weight Required rate of return2 Calculation

Equity (fair value) 120,054 0.74 11.36%  

Borrowings (fair value) 41,178 0.26 2.55% = 3.91% × (1 - 34.70%)

Based on: 10-K (filing date: 2021-02-17).
 US$ in millions
 
 Equity (fair value) = No. shares of common stock outstanding × Current share price
= 545,303,847 × $220.16
= $120,054,094,955.52
 
 Borrowings (fair value). See details »
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
= (25.20% + 22.40% + 23.70% + 67.20% + 35.00%) ÷ 5
= 34.70%
WACC = 9.11%
FCFF Growth Rate (g)
FCFF growth rate (g) implied by PRAT model
Caterpillar Inc., PRAT model
 
    Average Dec 31, Dec 31, Dec 31, Dec 31, Dec 31,
2020 2019 2018 2017 2016

  Selected Financial Data (US$

in millions)

  Interest expense excluding   514  421  404  531  505 

Financial Products

  Profit (loss) attributable to   2,998  6,093  6,147  754  (67)

common stockholders

  Effective income tax rate   25.20% 22.40% 23.70% 67.20% 35.00%

(EITR)1

  Interest expense excluding   384  327  308  174  328 

Financial Products, after tax2

  Add: Dividends declared   2,247  2,210  1,985  1,845  1,802 

  Interest expense (after tax)   2,631  2,537  2,293  2,019  2,130 

and dividends
 

  EBIT(1 - EITR)3   3,382  6,420  6,455  928  261 

  Short-term borrowings   2,015  5,166  5,723  4,837  7,303 

  Long-term debt due within   9,149  6,210  5,830  6,194  6,662 

one year

  Long-term debt due after one   25,999  26,281  25,000  23,847  22,818 
year

  Equity attributable to   15,331  14,588  14,039  13,697  13,137 

common stockholders

  Total capital   52,494  52,245  50,592  48,575  49,920 

  Financial Ratios

  Retention rate (RR)4   0.22 0.60 0.64 -1.18 -7.15

  Return on invested capital   6.44% 12.29% 12.76% 1.91% 0.52%

(ROIC)5

  Averages

  RR -1.37          

  ROIC 6.78%          

  FCFF growth rate (g)6 -9.31%          

Based on: 10-K (filing date: 2021-02-17), 10-K (filing date: 2020-02-19), 10-K (filing date:
2019-02-14), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-15).

2020 Calculations
Interest expense excluding Financial Products, after tax = Interest expense excluding
Financial Products × (1 - EITR)
= 514 × (1 - 25.20%)
= 384
 EBIT(1 - EITR) = Profit (loss) attributable to common stockholders + Interest expense
excluding Financial Products, after tax
= 2,998 + 384
= 3,382
4
 RR = [EBIT(1 - EITR) - Interest expense (after tax) and dividends] ÷ EBIT(1 - EITR)
= [3,382 - 2,631] ÷ 3,382
= 0.22
ROIC = 100 × EBIT(1 - EITR) ÷ Total capital
= 100 × 3,382 ÷ 52,494
= 6.44%
g = RR × ROIC
= -1.37 × 6.78%
= -9.31%
FCFF growth rate (g) implied by single-stage model
g = 100 × (Total capital, fair value0 × WACC - FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (161,232 × 9.11% - 5,799) ÷ (161,232 + 5,799)
= 5.32%
where:
 
Total capital, fair value0 = current fair value of Caterpillar Inc.'s debt and equity (US$ in
millions)
FCFF0 = the last year Caterpillar Inc.'s free cash flow to the firm (US$ in millions)
WACC = weighted average cost of Caterpillar Inc.'s capital
FCFF growth rate (g) forecast
Caterpillar Inc., H-model
 
Year Value gt

1 g1 -9.31%

2 g2 -5.65%

3 g3 -1.99%

4 g4 1.67%

5 and thereafter g5 5.32%

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)
= -9.31% + (5.32% - -9.31%) × (2 - 1) ÷ (5 - 1)
= -5.65%
g3 = g1 + (g5 - g1) × (3 - 1) ÷ (5 - 1)
= -9.31% + (5.32% - -9.31%) × (3 - 1) ÷ (5 - 1)
= -1.99%
g4 = g1 + (g5 - g1) × (4 - 1) ÷ (5 - 1)
= -9.31% + (5.32% - -9.31%) × (4 - 1) ÷ (5 - 1)
= 1.67%