Intrinsic value of Frontier Communications - FTR

Previous Close

$13.56

  Intrinsic Value

$98.87

stock screener

  Rating & Target

str. buy

+629%

  Value-price divergence*

+1068%

Previous close

$13.56

 
Intrinsic value

$98.87

 
Up/down potential

+629%

 
Rating

str. buy

 
Value-price divergence*

+1068%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of FTR stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 14.2

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  59.54
  60.00
  54.50
  49.55
  45.10
  41.09
  37.48
  34.23
  31.31
  28.68
  26.31
  24.18
  22.26
  20.53
  18.98
  17.58
  16.32
  15.19
  14.17
  13.26
  12.43
  11.69
  11.02
  10.42
  9.87
  9.39
  8.95
  8.55
  8.20
  7.88
  7.59
Revenue, $m
  8,896
  14,234
  21,991
  32,887
  47,718
  67,323
  92,554
  124,234
  163,128
  209,905
  265,128
  329,228
  402,513
  485,164
  577,249
  678,743
  789,541
  909,484
  1,038,381
  1,176,020
  1,322,196
  1,476,717
  1,639,422
  1,810,189
  1,988,938
  2,175,642
  2,370,328
  2,573,077
  2,784,024
  3,003,360
  3,231,333
Variable operating expenses, $m
 
  11,746
  17,620
  25,872
  37,102
  51,948
  71,054
  95,044
  124,496
  159,919
  201,737
  249,310
  304,805
  367,393
  437,125
  513,981
  597,883
  688,711
  786,318
  890,547
  1,001,239
  1,118,251
  1,241,460
  1,370,773
  1,506,132
  1,647,515
  1,794,942
  1,948,474
  2,108,214
  2,274,308
  2,446,941
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  7,994
  11,746
  17,620
  25,872
  37,102
  51,948
  71,054
  95,044
  124,496
  159,919
  201,737
  249,310
  304,805
  367,393
  437,125
  513,981
  597,883
  688,711
  786,318
  890,547
  1,001,239
  1,118,251
  1,241,460
  1,370,773
  1,506,132
  1,647,515
  1,794,942
  1,948,474
  2,108,214
  2,274,308
  2,446,941
Operating income, $m
  902
  2,488
  4,371
  7,016
  10,616
  15,375
  21,500
  29,190
  38,631
  49,986
  63,391
  79,919
  97,708
  117,771
  140,125
  164,762
  191,657
  220,773
  252,062
  285,474
  320,957
  358,466
  397,962
  439,415
  482,806
  528,127
  575,387
  624,603
  675,809
  729,052
  784,391
EBITDA, $m
  2,933
  5,470
  8,452
  12,639
  18,339
  25,874
  35,570
  47,746
  62,693
  80,671
  101,894
  126,529
  154,694
  186,458
  221,848
  260,854
  303,436
  349,533
  399,070
  451,968
  508,146
  567,531
  630,062
  695,691
  764,388
  836,142
  910,964
  988,884
  1,069,955
  1,154,250
  1,241,864
Interest expense (income), $m
  1,467
  1,554
  2,813
  4,647
  7,223
  10,729
  15,365
  21,330
  28,820
  38,016
  49,075
  62,132
  77,287
  94,614
  114,155
  135,927
  159,923
  186,119
  214,477
  244,952
  277,494
  312,054
  348,588
  387,056
  427,430
  469,692
  513,835
  559,864
  607,800
  657,674
  709,532
Earnings before tax, $m
  -623
  934
  1,558
  2,369
  3,393
  4,645
  6,135
  7,860
  9,811
  11,970
  14,316
  17,787
  20,421
  23,158
  25,970
  28,835
  31,735
  34,655
  37,585
  40,522
  43,463
  46,412
  49,375
  52,359
  55,375
  58,435
  61,552
  64,739
  68,009
  71,378
  74,860
Tax expense, $m
  -250
  252
  421
  640
  916
  1,254
  1,656
  2,122
  2,649
  3,232
  3,865
  4,803
  5,514
  6,253
  7,012
  7,785
  8,568
  9,357
  10,148
  10,941
  11,735
  12,531
  13,331
  14,137
  14,951
  15,778
  16,619
  17,479
  18,362
  19,272
  20,212
Net income, $m
  -373
  682
  1,137
  1,729
  2,477
  3,391
  4,478
  5,738
  7,162
  8,738
  10,450
  12,985
  14,908
  16,905
  18,958
  21,050
  23,166
  25,298
  27,437
  29,581
  31,728
  33,881
  36,044
  38,222
  40,424
  42,658
  44,933
  47,259
  49,647
  52,106
  54,647

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  522
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  29,013
  46,364
  71,632
  107,125
  155,433
  219,294
  301,478
  404,672
  531,360
  683,731
  863,608
  1,072,405
  1,311,118
  1,580,338
  1,880,291
  2,210,888
  2,571,793
  2,962,490
  3,382,348
  3,830,685
  4,306,827
  4,810,153
  5,340,138
  5,896,380
  6,478,625
  7,086,783
  7,720,939
  8,381,357
  9,068,481
  9,782,933
  10,525,514
Adjusted assets (=assets-cash), $m
  28,491
  46,364
  71,632
  107,125
  155,433
  219,294
  301,478
  404,672
  531,360
  683,731
  863,608
  1,072,405
  1,311,118
  1,580,338
  1,880,291
  2,210,888
  2,571,793
  2,962,490
  3,382,348
  3,830,685
  4,306,827
  4,810,153
  5,340,138
  5,896,380
  6,478,625
  7,086,783
  7,720,939
  8,381,357
  9,068,481
  9,782,933
  10,525,514
Revenue / Adjusted assets
  0.312
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
  0.307
Average production assets, $m
  13,600
  21,763
  33,624
  50,285
  72,961
  102,937
  141,515
  189,954
  249,422
  320,945
  405,380
  503,390
  615,443
  741,816
  882,614
  1,037,797
  1,207,207
  1,390,602
  1,587,684
  1,798,135
  2,021,637
  2,257,900
  2,506,677
  2,767,778
  3,041,086
  3,326,557
  3,624,232
  3,934,234
  4,256,772
  4,592,138
  4,940,708
Working capital, $m
  -788
  -1,423
  -2,199
  -3,289
  -4,772
  -6,732
  -9,255
  -12,423
  -16,313
  -20,991
  -26,513
  -32,923
  -40,251
  -48,516
  -57,725
  -67,874
  -78,954
  -90,948
  -103,838
  -117,602
  -132,220
  -147,672
  -163,942
  -181,019
  -198,894
  -217,564
  -237,033
  -257,308
  -278,402
  -300,336
  -323,133
Total debt, $m
  18,070
  32,707
  54,033
  83,990
  124,762
  178,660
  248,024
  335,119
  442,044
  570,645
  722,461
  898,686
  1,100,160
  1,327,381
  1,580,541
  1,859,565
  2,164,170
  2,493,918
  2,848,277
  3,226,674
  3,628,538
  4,053,345
  4,500,653
  4,970,120
  5,461,535
  5,974,821
  6,510,049
  7,067,442
  7,647,374
  8,250,372
  8,877,109
Total liabilities, $m
  24,494
  39,131
  60,457
  90,414
  131,186
  185,084
  254,448
  341,543
  448,468
  577,069
  728,885
  905,110
  1,106,584
  1,333,805
  1,586,965
  1,865,989
  2,170,594
  2,500,342
  2,854,701
  3,233,098
  3,634,962
  4,059,769
  4,507,077
  4,976,544
  5,467,959
  5,981,245
  6,516,473
  7,073,866
  7,653,798
  8,256,796
  8,883,533
Total equity, $m
  4,519
  7,233
  11,175
  16,712
  24,248
  34,210
  47,031
  63,129
  82,892
  106,662
  134,723
  167,295
  204,534
  246,533
  293,325
  344,898
  401,200
  462,148
  527,646
  597,587
  671,865
  750,384
  833,062
  919,835
  1,010,665
  1,105,538
  1,204,467
  1,307,492
  1,414,683
  1,526,138
  1,641,980
Total liabilities and equity, $m
  29,013
  46,364
  71,632
  107,126
  155,434
  219,294
  301,479
  404,672
  531,360
  683,731
  863,608
  1,072,405
  1,311,118
  1,580,338
  1,880,290
  2,210,887
  2,571,794
  2,962,490
  3,382,347
  3,830,685
  4,306,827
  4,810,153
  5,340,139
  5,896,379
  6,478,624
  7,086,783
  7,720,940
  8,381,358
  9,068,481
  9,782,934
  10,525,513
Debt-to-equity ratio
  3.999
  4.520
  4.840
  5.030
  5.150
  5.220
  5.270
  5.310
  5.330
  5.350
  5.360
  5.370
  5.380
  5.380
  5.390
  5.390
  5.390
  5.400
  5.400
  5.400
  5.400
  5.400
  5.400
  5.400
  5.400
  5.400
  5.400
  5.410
  5.410
  5.410
  5.410
Adjusted equity ratio
  0.140
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156
  0.156

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -373
  682
  1,137
  1,729
  2,477
  3,391
  4,478
  5,738
  7,162
  8,738
  10,450
  12,985
  14,908
  16,905
  18,958
  21,050
  23,166
  25,298
  27,437
  29,581
  31,728
  33,881
  36,044
  38,222
  40,424
  42,658
  44,933
  47,259
  49,647
  52,106
  54,647
Depreciation, amort., depletion, $m
  2,031
  2,983
  4,081
  5,623
  7,723
  10,499
  14,071
  18,556
  24,062
  30,685
  38,503
  46,610
  56,985
  68,687
  81,724
  96,092
  111,778
  128,759
  147,008
  166,494
  187,189
  209,065
  232,100
  256,276
  281,582
  308,015
  335,577
  364,281
  394,146
  425,198
  457,473
Funds from operations, $m
  1,710
  3,664
  5,218
  7,353
  10,200
  13,890
  18,549
  24,293
  31,224
  39,423
  48,953
  59,595
  71,893
  85,592
  100,682
  117,142
  134,945
  154,057
  174,445
  196,075
  218,917
  242,946
  268,143
  294,498
  322,006
  350,672
  380,510
  411,540
  443,792
  477,304
  512,120
Change in working capital, $m
  44
  -534
  -776
  -1,090
  -1,483
  -1,961
  -2,523
  -3,168
  -3,889
  -4,678
  -5,522
  -6,410
  -7,328
  -8,265
  -9,209
  -10,149
  -11,080
  -11,994
  -12,890
  -13,764
  -14,618
  -15,452
  -16,271
  -17,077
  -17,875
  -18,670
  -19,469
  -20,275
  -21,095
  -21,934
  -22,797
Cash from operations, $m
  1,666
  4,198
  5,994
  8,442
  11,683
  15,850
  21,072
  27,462
  35,113
  44,101
  54,475
  66,005
  79,221
  93,857
  109,890
  127,291
  146,025
  166,052
  187,335
  209,839
  233,534
  258,398
  284,414
  311,574
  339,881
  369,343
  399,979
  431,815
  464,887
  499,238
  534,918
Maintenance CAPEX, $m
  0
  -1,259
  -2,015
  -3,113
  -4,656
  -6,756
  -9,531
  -13,103
  -17,588
  -23,095
  -29,717
  -37,535
  -46,610
  -56,985
  -68,687
  -81,724
  -96,092
  -111,778
  -128,759
  -147,008
  -166,494
  -187,189
  -209,065
  -232,100
  -256,276
  -281,582
  -308,015
  -335,577
  -364,281
  -394,146
  -425,198
New CAPEX, $m
  -1,401
  -8,163
  -11,861
  -16,661
  -22,676
  -29,976
  -38,578
  -48,439
  -59,468
  -71,523
  -84,435
  -98,010
  -112,053
  -126,373
  -140,799
  -155,183
  -169,410
  -183,394
  -197,082
  -210,451
  -223,502
  -236,263
  -248,776
  -261,101
  -273,307
  -285,471
  -297,675
  -310,002
  -322,538
  -335,366
  -348,569
Cash from investing activities, $m
  -11,259
  -9,422
  -13,876
  -19,774
  -27,332
  -36,732
  -48,109
  -61,542
  -77,056
  -94,618
  -114,152
  -135,545
  -158,663
  -183,358
  -209,486
  -236,907
  -265,502
  -295,172
  -325,841
  -357,459
  -389,996
  -423,452
  -457,841
  -493,201
  -529,583
  -567,053
  -605,690
  -645,579
  -686,819
  -729,512
  -773,767
Free cash flow, $m
  -9,593
  -5,224
  -7,882
  -11,332
  -15,649
  -20,882
  -27,037
  -34,081
  -41,943
  -50,517
  -59,677
  -69,540
  -79,441
  -89,501
  -99,595
  -109,615
  -119,478
  -129,121
  -138,507
  -147,620
  -156,462
  -165,054
  -173,428
  -181,627
  -189,702
  -197,711
  -205,711
  -213,764
  -221,932
  -230,274
  -238,850
Issuance/(repayment) of debt, $m
  1,487
  14,638
  21,326
  29,956
  40,772
  53,898
  69,364
  87,096
  106,925
  128,601
  151,816
  176,225
  201,474
  227,222
  253,160
  279,024
  304,604
  329,748
  354,360
  378,397
  401,864
  424,808
  447,307
  469,468
  491,415
  513,286
  535,228
  557,393
  579,932
  602,998
  626,738
Issuance/(repurchase) of shares, $m
  0
  2,032
  2,804
  3,808
  5,059
  6,571
  8,342
  10,361
  12,601
  15,031
  17,610
  19,588
  22,332
  25,093
  27,835
  30,523
  33,135
  35,651
  38,060
  40,360
  42,550
  44,638
  46,634
  48,552
  50,406
  52,215
  53,995
  55,766
  57,545
  59,349
  61,195
Cash from financing (excl. dividends), $m  
  1,442
  16,670
  24,130
  33,764
  45,831
  60,469
  77,706
  97,457
  119,526
  143,632
  169,426
  195,813
  223,806
  252,315
  280,995
  309,547
  337,739
  365,399
  392,420
  418,757
  444,414
  469,446
  493,941
  518,020
  541,821
  565,501
  589,223
  613,159
  637,477
  662,347
  687,933
Total cash flow (excl. dividends), $m
  -8,151
  11,446
  16,249
  22,432
  30,182
  39,588
  50,669
  63,375
  77,583
  93,115
  109,750
  126,272
  144,364
  162,814
  181,399
  199,932
  218,261
  236,278
  253,913
  271,136
  287,952
  304,392
  320,514
  336,393
  352,119
  367,790
  383,513
  399,394
  415,545
  432,072
  449,083
Retained Cash Flow (-), $m
  1,095
  -2,714
  -3,942
  -5,537
  -7,536
  -9,962
  -12,821
  -16,098
  -19,763
  -23,770
  -28,061
  -32,572
  -37,239
  -41,998
  -46,793
  -51,573
  -56,301
  -60,949
  -65,498
  -69,941
  -74,278
  -78,519
  -82,678
  -86,774
  -90,830
  -94,873
  -98,928
  -103,025
  -107,191
  -111,455
  -115,843
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  8,732
  12,307
  16,895
  22,646
  29,625
  37,849
  47,277
  57,820
  69,346
  81,689
  93,700
  107,125
  120,815
  134,607
  148,359
  161,960
  175,329
  188,415
  201,196
  213,674
  225,873
  237,836
  249,619
  261,288
  272,917
  284,584
  296,369
  308,354
  320,618
  333,241
Discount rate, %
 
  11.90
  12.50
  13.12
  13.78
  14.46
  15.19
  15.95
  16.74
  17.58
  18.46
  19.38
  20.35
  21.37
  22.44
  23.56
  24.74
  25.98
  27.28
  28.64
  30.07
  31.57
  33.15
  34.81
  36.55
  38.38
  40.30
  42.31
  44.43
  46.65
  48.98
PV of cash for distribution, $m
 
  7,804
  9,725
  11,672
  13,514
  15,077
  16,204
  16,781
  16,757
  16,142
  15,011
  13,346
  11,599
  9,742
  7,910
  6,210
  4,714
  3,459
  2,453
  1,681
  1,112
  710
  437
  259
  148
  81
  43
  22
  10
  5
  2
Current shareholders' claim on cash, %
  100
  87.5
  77.8
  70.2
  64.0
  58.9
  54.7
  51.1
  48.0
  45.4
  43.1
  41.2
  39.5
  38.0
  36.7
  35.5
  34.5
  33.5
  32.7
  31.9
  31.2
  30.5
  29.9
  29.4
  28.9
  28.4
  28.0
  27.6
  27.2
  26.8
  26.5

Frontier Communications Corporation provides regulated and unregulated voice, data, and video services to residential, business, and wholesale customers in the United States. The company offers residential services, such as fiber-to-the-home and fiber-to-the-node broadband, as well as traditional copper-based broadband products; and commercial services, including Ethernet, dedicated Internet, multiprotocol label switching, time division multiplexing, data transport services, and optical transport services. It also provides Frontier Secure suite of products for computer security, cloud backup and sharing, identity protection, equipment insurance, and technical support; unified messaging services comprising call forwarding, conference calling, caller identification, voicemail, and call waiting services; long distance network services; and packages of communications services. In addition, the company offers switched access services that facilitate other carriers to use the company’s facilities to originate and terminate their local and long distance voice traffic; satellite TV video services; and a range of third-party communications equipment to small, medium, and enterprise business customers. As of December 31, 2015, it had approximately 3,124,200 residential customers; approximately 289,200 business customers; and 2,462,100 broadband subscribers. The company also operates a retail store in Southern California. The company was formerly known as Citizens Communications Company and changed its name to Frontier Communications Corporation in July 2008. Frontier Communications Corporation was founded in 1927 and is based in Norwalk, Connecticut.

FINANCIAL RATIOS  of  Frontier Communications (FTR)

Valuation Ratios
P/E Ratio -42.6
Price to Sales 1.8
Price to Book 3.5
Price to Tangible Book
Price to Cash Flow 9.5
Price to Free Cash Flow 60
Growth Rates
Sales Growth Rate 59.5%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 62.3%
Cap. Spend. - 3 Yr. Gr. Rate 17.1%
Financial Strength
Quick Ratio 1
Current Ratio 0
LT Debt to Equity 391%
Total Debt to Equity 399.9%
Interest Coverage 1
Management Effectiveness
Return On Assets 1.8%
Ret/ On Assets - 3 Yr. Avg. 2.1%
Return On Total Capital -1.7%
Ret/ On T. Cap. - 3 Yr. Avg. -0.6%
Return On Equity -7.4%
Return On Equity - 3 Yr. Avg. -2.7%
Asset Turnover 0.3
Profitability Ratios
Gross Margin 62.3%
Gross Margin - 3 Yr. Avg. 64.8%
EBITDA Margin 32.3%
EBITDA Margin - 3 Yr. Avg. 34.5%
Operating Margin 10.1%
Oper. Margin - 3 Yr. Avg. 13.6%
Pre-Tax Margin -7%
Pre-Tax Margin - 3 Yr. Avg. -3.4%
Net Profit Margin -4.2%
Net Profit Margin - 3 Yr. Avg. -1.6%
Effective Tax Rate 40.1%
Eff/ Tax Rate - 3 Yr. Avg. 34.7%
Payout Ratio -189.5%

FTR stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the FTR stock intrinsic value calculation we used $8896 million for the last fiscal year's total revenue generated by Frontier Communications. The default revenue input number comes from 2016 income statement of Frontier Communications. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our FTR stock valuation model: a) initial revenue growth rate of 60% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 11.9%, whose default value for FTR is calculated based on our internal credit rating of Frontier Communications, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Frontier Communications.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of FTR stock the variable cost ratio is equal to 86.6%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for FTR stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 8.6% for Frontier Communications.

Corporate tax rate of 27% is the nominal tax rate for Frontier Communications. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the FTR stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for FTR are equal to 152.9%.

Life of production assets of 10.8 years is the average useful life of capital assets used in Frontier Communications operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for FTR is equal to -10%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $4519 million for Frontier Communications - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 1044.52 million for Frontier Communications is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Frontier Communications at the current share price and the inputted number of shares is $14.2 billion.

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▶ Frontier Communications Stock Fell 30.3% in May 2017   [Jun-05-17 04:50PM  Market Realist]
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Stock chart of FTR Financial statements of FTR
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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