7.6  Example: IBM

Valuation Tutor lets you immediately access current and past financial statements.  For example, consider the following cash flow statement for IBM:

By entering the stock ticker for IBM and selecting the reporting date and statement you can access IBM's cash flow statement as follows: 

Now suppose you want to estimate FCFF for 2009, you can verify the following information:

The next step requires getting additional information from IBM's statements:

First, the supplementary data part of the Cash Flow Statement usually provides the required additional information:

Here it is observed that:

Income Taxes Paid = 1567 in 2009

Interest Expense = 1240 in 2009.

The effective tax rate for IBM can be computed from taxes paid divided by net income before taxes.  From the Income Statement this number for 2009 is 18138 (see below).  As a result, the effective tax rate for IBM in 2009 is:

Effective Tax Rate = 1567/18138 = 0.087.

Alternatively, you can check IBM’s provision for taxes which 4713 for 2009.  From this provision the effective tax rate is:

Effective Tax Rate (Using the Provision for Taxes from the Income Statement below) = 4713/18138 = 0.259 or 26%.

The latter estimate seems to be more realistic for IBM’s effective tax rate.

Finally, we can get CAPEX directly from IBM’s Consolidated Statement of Cash Flows and in particular the Investing Activities section as follows:

CAPEX equals the purchases made for productive capacity for both goods and services.  As a first pass we can compute this as follows:

CAPEX comes from the Investing Activities part of the cash flow statement.

Finally, IBM’s FCFF for 2009 collecting together the above is:

When using FCFF for valuation purposes analysts usually apply additional adjustments to take into account that you are really interested in projecting what future CAPEX is.