Intrinsic value of Merck&Co - MRK

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$65.92

  Intrinsic Value

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  Value-price divergence*

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$65.92

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

We calculate the intrinsic value of MRK 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 181.8

 

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, %
  0.78
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  39,807
  40,603
  41,537
  42,605
  43,803
  45,131
  46,588
  48,175
  49,892
  51,742
  53,728
  55,853
  58,119
  60,533
  63,098
  65,820
  68,704
  71,758
  74,986
  78,398
  82,000
  85,801
  89,810
  94,035
  98,486
  103,175
  108,112
  113,308
  118,775
  124,528
  130,578
Variable operating expenses, $m
 
  34,883
  35,645
  36,515
  37,493
  38,576
  39,764
  41,058
  42,458
  43,967
  45,586
  45,547
  47,395
  49,363
  51,455
  53,675
  56,027
  58,517
  61,150
  63,932
  66,869
  69,969
  73,238
  76,683
  80,314
  84,137
  88,163
  92,400
  96,859
  101,550
  106,484
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
  35,053
  34,883
  35,645
  36,515
  37,493
  38,576
  39,764
  41,058
  42,458
  43,967
  45,586
  45,547
  47,395
  49,363
  51,455
  53,675
  56,027
  58,517
  61,150
  63,932
  66,869
  69,969
  73,238
  76,683
  80,314
  84,137
  88,163
  92,400
  96,859
  101,550
  106,484
Operating income, $m
  4,754
  5,720
  5,892
  6,089
  6,310
  6,555
  6,824
  7,117
  7,434
  7,775
  8,142
  10,306
  10,724
  11,170
  11,643
  12,145
  12,677
  13,241
  13,837
  14,466
  15,131
  15,832
  16,572
  17,352
  18,173
  19,038
  19,949
  20,908
  21,917
  22,978
  24,095
EBITDA, $m
  10,195
  11,979
  12,255
  12,570
  12,923
  13,315
  13,745
  14,213
  14,720
  15,266
  15,852
  16,478
  17,147
  17,859
  18,616
  19,419
  20,270
  21,171
  22,124
  23,130
  24,193
  25,314
  26,497
  27,744
  29,057
  30,440
  31,897
  33,430
  35,043
  36,740
  38,525
Interest expense (income), $m
  686
  834
  872
  917
  968
  1,026
  1,089
  1,159
  1,235
  1,317
  1,405
  1,500
  1,602
  1,711
  1,826
  1,949
  2,079
  2,217
  2,363
  2,518
  2,681
  2,853
  3,035
  3,227
  3,429
  3,642
  3,867
  4,103
  4,352
  4,613
  4,889
Earnings before tax, $m
  4,659
  4,886
  5,020
  5,172
  5,342
  5,530
  5,735
  5,958
  6,199
  6,458
  6,736
  8,806
  9,122
  9,459
  9,817
  10,196
  10,598
  11,024
  11,473
  11,948
  12,450
  12,979
  13,537
  14,124
  14,744
  15,396
  16,082
  16,805
  17,565
  18,365
  19,206
Tax expense, $m
  718
  1,319
  1,355
  1,396
  1,442
  1,493
  1,548
  1,609
  1,674
  1,744
  1,819
  2,377
  2,463
  2,554
  2,651
  2,753
  2,862
  2,976
  3,098
  3,226
  3,361
  3,504
  3,655
  3,814
  3,981
  4,157
  4,342
  4,537
  4,743
  4,959
  5,186
Net income, $m
  3,920
  3,567
  3,664
  3,776
  3,900
  4,037
  4,187
  4,349
  4,525
  4,715
  4,917
  6,428
  6,659
  6,905
  7,166
  7,443
  7,737
  8,047
  8,376
  8,722
  9,088
  9,475
  9,882
  10,311
  10,763
  11,239
  11,740
  12,268
  12,823
  13,406
  14,020

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  14,341
  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
  95,377
  89,830
  91,896
  94,258
  96,909
  99,847
  103,071
  106,581
  110,381
  114,474
  118,868
  123,568
  128,583
  133,922
  139,597
  145,619
  152,001
  158,756
  165,899
  173,447
  181,416
  189,826
  198,694
  208,041
  217,890
  228,264
  239,185
  250,681
  262,777
  275,504
  288,890
Adjusted assets (=assets-cash), $m
  81,036
  89,830
  91,896
  94,258
  96,909
  99,847
  103,071
  106,581
  110,381
  114,474
  118,868
  123,568
  128,583
  133,922
  139,597
  145,619
  152,001
  158,756
  165,899
  173,447
  181,416
  189,826
  198,694
  208,041
  217,890
  228,264
  239,185
  250,681
  262,777
  275,504
  288,890
Revenue / Adjusted assets
  0.491
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
  0.452
Average production assets, $m
  32,220
  35,000
  35,805
  36,725
  37,758
  38,903
  40,159
  41,527
  43,007
  44,602
  46,314
  48,145
  50,099
  52,179
  54,390
  56,737
  59,223
  61,855
  64,638
  67,579
  70,684
  73,961
  77,416
  81,058
  84,895
  88,937
  93,192
  97,671
  102,384
  107,343
  112,558
Working capital, $m
  13,410
  -528
  -540
  -554
  -569
  -587
  -606
  -626
  -649
  -673
  -698
  -726
  -756
  -787
  -820
  -856
  -893
  -933
  -975
  -1,019
  -1,066
  -1,115
  -1,168
  -1,222
  -1,280
  -1,341
  -1,405
  -1,473
  -1,544
  -1,619
  -1,698
Total debt, $m
  24,842
  24,926
  26,203
  27,662
  29,301
  31,117
  33,109
  35,278
  37,626
  40,156
  42,871
  45,776
  48,875
  52,175
  55,682
  59,404
  63,347
  67,522
  71,937
  76,601
  81,526
  86,723
  92,204
  97,981
  104,067
  110,478
  117,227
  124,332
  131,807
  139,672
  147,945
Total liabilities, $m
  55,289
  55,515
  56,792
  58,251
  59,890
  61,706
  63,698
  65,867
  68,215
  70,745
  73,460
  76,365
  79,464
  82,764
  86,271
  89,993
  93,936
  98,111
  102,526
  107,190
  112,115
  117,312
  122,793
  128,570
  134,656
  141,067
  147,816
  154,921
  162,396
  170,261
  178,534
Total equity, $m
  40,088
  34,315
  35,104
  36,006
  37,019
  38,142
  39,373
  40,714
  42,165
  43,729
  45,407
  47,203
  49,119
  51,158
  53,326
  55,626
  58,064
  60,645
  63,373
  66,257
  69,301
  72,513
  75,901
  79,472
  83,234
  87,197
  91,369
  95,760
  100,381
  105,242
  110,356
Total liabilities and equity, $m
  95,377
  89,830
  91,896
  94,257
  96,909
  99,848
  103,071
  106,581
  110,380
  114,474
  118,867
  123,568
  128,583
  133,922
  139,597
  145,619
  152,000
  158,756
  165,899
  173,447
  181,416
  189,825
  198,694
  208,042
  217,890
  228,264
  239,185
  250,681
  262,777
  275,503
  288,890
Debt-to-equity ratio
  0.620
  0.730
  0.750
  0.770
  0.790
  0.820
  0.840
  0.870
  0.890
  0.920
  0.940
  0.970
  1.000
  1.020
  1.040
  1.070
  1.090
  1.110
  1.140
  1.160
  1.180
  1.200
  1.210
  1.230
  1.250
  1.270
  1.280
  1.300
  1.310
  1.330
  1.340
Adjusted equity ratio
  0.318
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382
  0.382

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  3,920
  3,567
  3,664
  3,776
  3,900
  4,037
  4,187
  4,349
  4,525
  4,715
  4,917
  6,428
  6,659
  6,905
  7,166
  7,443
  7,737
  8,047
  8,376
  8,722
  9,088
  9,475
  9,882
  10,311
  10,763
  11,239
  11,740
  12,268
  12,823
  13,406
  14,020
Depreciation, amort., depletion, $m
  5,441
  6,259
  6,363
  6,481
  6,613
  6,760
  6,921
  7,096
  7,286
  7,491
  7,710
  6,172
  6,423
  6,690
  6,973
  7,274
  7,593
  7,930
  8,287
  8,664
  9,062
  9,482
  9,925
  10,392
  10,884
  11,402
  11,948
  12,522
  13,126
  13,762
  14,431
Funds from operations, $m
  7,775
  9,826
  10,027
  10,256
  10,513
  10,797
  11,108
  11,446
  11,811
  12,205
  12,627
  12,600
  13,082
  13,595
  14,139
  14,717
  15,329
  15,977
  16,663
  17,386
  18,150
  18,957
  19,807
  20,703
  21,647
  22,641
  23,688
  24,789
  25,949
  27,168
  28,451
Change in working capital, $m
  -2,601
  -10
  -12
  -14
  -16
  -17
  -19
  -21
  -22
  -24
  -26
  -28
  -29
  -31
  -33
  -35
  -37
  -40
  -42
  -44
  -47
  -49
  -52
  -55
  -58
  -61
  -64
  -68
  -71
  -75
  -79
Cash from operations, $m
  10,376
  10,630
  10,039
  10,270
  10,528
  10,814
  11,126
  11,466
  11,834
  12,229
  12,653
  12,628
  13,112
  13,626
  14,173
  14,753
  15,367
  16,017
  16,705
  17,431
  18,197
  19,006
  19,859
  20,758
  21,705
  22,702
  23,752
  24,857
  26,020
  27,243
  28,530
Maintenance CAPEX, $m
  0
  -4,399
  -4,487
  -4,590
  -4,708
  -4,841
  -4,988
  -5,149
  -5,324
  -5,514
  -5,718
  -5,938
  -6,172
  -6,423
  -6,690
  -6,973
  -7,274
  -7,593
  -7,930
  -8,287
  -8,664
  -9,062
  -9,482
  -9,925
  -10,392
  -10,884
  -11,402
  -11,948
  -12,522
  -13,126
  -13,762
New CAPEX, $m
  -1,614
  -684
  -805
  -920
  -1,033
  -1,145
  -1,256
  -1,368
  -1,480
  -1,595
  -1,712
  -1,831
  -1,954
  -2,080
  -2,211
  -2,346
  -2,486
  -2,632
  -2,783
  -2,941
  -3,105
  -3,276
  -3,455
  -3,642
  -3,837
  -4,042
  -4,255
  -4,479
  -4,713
  -4,958
  -5,215
Cash from investing activities, $m
  -3,210
  -5,083
  -5,292
  -5,510
  -5,741
  -5,986
  -6,244
  -6,517
  -6,804
  -7,109
  -7,430
  -7,769
  -8,126
  -8,503
  -8,901
  -9,319
  -9,760
  -10,225
  -10,713
  -11,228
  -11,769
  -12,338
  -12,937
  -13,567
  -14,229
  -14,926
  -15,657
  -16,427
  -17,235
  -18,084
  -18,977
Free cash flow, $m
  7,166
  5,546
  4,747
  4,760
  4,787
  4,828
  4,883
  4,950
  5,029
  5,121
  5,223
  4,859
  4,985
  5,123
  5,272
  5,433
  5,607
  5,792
  5,991
  6,203
  6,428
  6,668
  6,922
  7,191
  7,475
  7,776
  8,094
  8,430
  8,785
  9,158
  9,552
Issuance/(repayment) of debt, $m
  -1,307
  1,097
  1,277
  1,460
  1,639
  1,816
  1,992
  2,169
  2,348
  2,530
  2,715
  2,905
  3,099
  3,300
  3,507
  3,721
  3,944
  4,175
  4,415
  4,665
  4,925
  5,197
  5,481
  5,777
  6,087
  6,411
  6,750
  7,104
  7,476
  7,865
  8,272
Issuance/(repurchase) of shares, $m
  -2,495
  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 from financing (excl. dividends), $m  
  -3,920
  1,097
  1,277
  1,460
  1,639
  1,816
  1,992
  2,169
  2,348
  2,530
  2,715
  2,905
  3,099
  3,300
  3,507
  3,721
  3,944
  4,175
  4,415
  4,665
  4,925
  5,197
  5,481
  5,777
  6,087
  6,411
  6,750
  7,104
  7,476
  7,865
  8,272
Total cash flow (excl. dividends), $m
  3,115
  6,643
  6,024
  6,219
  6,426
  6,644
  6,875
  7,119
  7,378
  7,650
  7,938
  7,764
  8,084
  8,423
  8,779
  9,155
  9,550
  9,967
  10,406
  10,867
  11,353
  11,864
  12,402
  12,967
  13,562
  14,187
  14,844
  15,535
  16,260
  17,023
  17,825
Retained Cash Flow (-), $m
  4,588
  -695
  -789
  -902
  -1,013
  -1,122
  -1,231
  -1,341
  -1,451
  -1,564
  -1,678
  -1,795
  -1,916
  -2,040
  -2,168
  -2,300
  -2,438
  -2,580
  -2,729
  -2,883
  -3,044
  -3,212
  -3,388
  -3,571
  -3,762
  -3,963
  -4,172
  -4,391
  -4,621
  -4,861
  -5,113
Prev. year cash balance distribution, $m
 
  11,056
  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
 
  17,004
  5,235
  5,317
  5,413
  5,522
  5,644
  5,778
  5,926
  6,087
  6,260
  5,968
  6,169
  6,383
  6,611
  6,854
  7,113
  7,387
  7,677
  7,984
  8,309
  8,652
  9,014
  9,397
  9,800
  10,224
  10,672
  11,143
  11,640
  12,162
  12,711
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  16,303
  4,792
  4,627
  4,457
  4,280
  4,096
  3,904
  3,704
  3,496
  3,282
  2,834
  2,632
  2,427
  2,220
  2,012
  1,807
  1,607
  1,414
  1,229
  1,056
  895
  748
  616
  499
  398
  311
  239
  180
  133
  96
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Merck & Co., Inc. provides healthcare solutions worldwide. The company offers therapeutic and preventive agents to treat cardiovascular, type 2 diabetes, asthma, nasal allergy symptoms, allergic rhinitis, chronic hepatitis C virus, HIV-1 infection, fungal infections, intra-abdominal infections, hypertension, arthritis and pain, inflammatory, osteoporosis, male pattern hair loss, and fertility diseases. It also offers neuromuscular blocking agents; anti-bacterial products; cholesterol modifying medicines; non-sedating antihistamine; and vaginal contraceptive products. In addition, the company offers products to prevent chemotherapy-induced and post-operative nausea and vomiting; treat brain tumors; treat melanoma and metastatic non-small-cell lung cancer; prevent diseases caused by human papillomavirus; and vaccines for measles, mumps, rubella, varicella, chickenpox, shingles, rotavirus gastroenteritis, and pneumococcal diseases. Further, it offers antibiotic and anti-inflammatory drugs to treat infectious and respiratory diseases, fertility disorders, and pneumonia in cattle, horses, and swine; vaccines for poultry; parasiticide for sea lice in salmon; and antibiotics and vaccines for fishes. Additionally, the company offers companion animal products, such as ointments for otitis; diabetes mellitus treatment for dogs and cats; anthelmintic products; chewable tablets to treat fleas and ticks in dogs; and products for protection against bites from fleas, ticks, mosquitoes, and sandflies. It serves drug wholesalers and retailers, hospitals, government agencies and entities, physicians, physician distributors, veterinarians, distributors, animal producers, and managed health care providers. The company has collaboration agreements with Adaptimmune Therapeutics plc and Agenus; and a research agreement with Proteros Biostructures to develop molecule compounds for various cancer treatments. The company was founded in 1891 and is headquartered in Kenilworth, New Jersey.

FINANCIAL RATIOS  of  Merck&Co (MRK)

Valuation Ratios
P/E Ratio 46.2
Price to Sales 4.6
Price to Book 4.5
Price to Tangible Book
Price to Cash Flow 17.5
Price to Free Cash Flow 20.7
Growth Rates
Sales Growth Rate 0.8%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 25.8%
Cap. Spend. - 3 Yr. Gr. Rate 0.8%
Financial Strength
Quick Ratio 25
Current Ratio 0.3
LT Debt to Equity 60.6%
Total Debt to Equity 62%
Interest Coverage 8
Management Effectiveness
Return On Assets 4.6%
Ret/ On Assets - 3 Yr. Avg. 7.3%
Return On Total Capital 5.8%
Ret/ On T. Cap. - 3 Yr. Avg. 9.5%
Return On Equity 9.2%
Return On Equity - 3 Yr. Avg. 14.3%
Asset Turnover 0.4
Profitability Ratios
Gross Margin 75.7%
Gross Margin - 3 Yr. Avg. 74.9%
EBITDA Margin 27.1%
EBITDA Margin - 3 Yr. Avg. 39.1%
Operating Margin 11.9%
Oper. Margin - 3 Yr. Avg. 21.9%
Pre-Tax Margin 11.7%
Pre-Tax Margin - 3 Yr. Avg. 22.1%
Net Profit Margin 9.8%
Net Profit Margin - 3 Yr. Avg. 16.4%
Effective Tax Rate 15.4%
Eff/ Tax Rate - 3 Yr. Avg. 21.3%
Payout Ratio 130.7%

MRK stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the MRK stock intrinsic value calculation we used $39807 million for the last fiscal year's total revenue generated by Merck&Co. The default revenue input number comes from 2016 income statement of Merck&Co. 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 MRK stock valuation model: a) initial revenue growth rate of 2% 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 4.3%, whose default value for MRK is calculated based on our internal credit rating of Merck&Co, 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 Merck&Co.
    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 MRK stock the variable cost ratio is equal to 86%.

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 MRK 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 3.5% for Merck&Co.

Corporate tax rate of 27% is the nominal tax rate for Merck&Co. 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 MRK 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 MRK are equal to 86.2%.

Life of production assets of 7.8 years is the average useful life of capital assets used in Merck&Co 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 MRK is equal to -1.3%. 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 - $44676 million for Merck&Co - 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 2758.04 million for Merck&Co 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 Merck&Co at the current share price and the inputted number of shares is $181.8 billion.


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Stock chart of MRK Financial statements of MRK Annual reports of MRK
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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