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# FCFF VALUATION MODEL

Before you start The spreadsheet has circular reasoning. This is not a problem. Go into calculation options (in excel) and check
the iteration box.
What the model doesThis model is designed to value firms with operating income that is either positive or can be normalized to be
positive. It allows for up to 15 years of high growth, and can be used either as a 2-stage or a 3-stage model.
Inputs The inputs are in the following pages:
1. The bulk of the inputs are in the master inputs page. Here, you can input the numbers from the current
financial statements, and review and change the inputs for the valuation.
2. If you want to normalized operating income, use the earnings normalizer worksheet.
3. If you have R&D or operating leases, you will need to input the required numbers in those worksheets.
Important: Be consistent about the units you use. If you use millions, use millions for all of your inputs.
Options The spreadsheet can be used to value a company, with fixed inputs for a high growth phase and different inputs
for a stable growth phase (2-stage model) or it can be adjusted to allow for a transition phase (3-stage model).
To switch from one to the other, enter yes in the master input page to the question of whether you want the
inputs adjusted during the second half of the high growth phase.
You can even make it a stable growth model, by setting the length of the high growth period to zero.
Other worksheets There are two other worksheets that you might find useful at the end of this spreadsheet
1. Bottom-up beta estimator: will estimate your levered beta, given an unlevered beta (which you will have to
input.
2. Industry averages: Here, you can look up industry averages for variables such as beta, return on capital,
reinvestment rates and working capital.
Output The output is contained in the valuation model worksheet.
ODEL
(in excel) and check

be normalized to be
r a 3-stage model.

## rom the current

ose worksheets.
se and different inputs
ase (3-stage model).
ther you want the

## ich you will have to

eturn on capital,
Normalizing Earnings
Approach used to normalize earnings = 3

If historical average,
Average Earnings before interest and taxes = 3500

## If historical average ROC,

Historical average pre-tax return on capital = 22%

If sector margin
Pre-tax Operating Margin for Sector = 14.72% ! Look at industry average

## Worksheet for normalization (Last 5 years of data)

-5 -4 -3 -2 -1 Total
Revenues 2032 2376 2779 3155 3248 13590
EBIT 186 454 529 448 383 2000
Operating Margin 9.15% 19.11% 19.04% 14.20% 11.79% 14.72%
An apology: I apologize for the number of inputs that are required on this sheet. Many of the inputs are required
If you have negative operating income, you will either have to normalize it to make it positive, or use the highg
Master Input Sheet
Do you want to capitalize R&D expenses? Yes ! Yes or No
Do you want to convert operating leases to debt? Yes ! Yes or No
Do you want to normalize operating income? No

Inputs
From Current Financials
Current EBIT = \$3,455.00 ! If negative, go back and choose to normal
Current Interest Expense = \$0.00
Current Capital Spending \$3,100.00
Current Depreciation & Amort'n = \$486.00
Tax Rate on Income = 35.00% Previous year-end
Current Revenues = \$12,154.00 8488
Current Non-cash Working Capital = (\$404.00)
Chg. Working Capital = (\$700.00) Previous year-end
Book Value of Debt = \$0.00 0
Book Value of Equity = \$11,722.00 7191

## Current riskfree (long term government bond) rate 5.10%

Enter the type of firm you are analyzing = 1
. Many of the inputs are required only if you choose the appropriate option, though.
ake it positive, or use the highgrowth.xls spreadsheet.

Go to R&D Converter
Go to Operating lease converter
Go to Earnings Normalizer

## negative, go back and choose to normalize earnings.

vious year-end

vious year-end
R & D Converter
This spreadsheet converts R&D expenses from operating to capital expenses. It makes the appropriate adjustments to operating income, net
income, the book value of assets and the book value of equity.

Inputs
Over how many years do you want to amortize R&D expenses 5 ! If in doubt, use the lookup table below
Enter the current year's R&D expense = \$1,594.00 The maximum allowed is ten years
Enter R& D expenses for past years: the number of years that you will need to enter will be determined by the amortization period
Do not input numbers in the first column (Year). It will get automatically updated based on the input above.
Year R& D Expenses
-1 1026.00 ! Year -1 is the year prior to the current year
-2 698.00 ! Year -2 is the two years prior to the current year
-3 399.00
-4 211.00
-5 89.00
0
0
0
0
0

Output
Year R&D Expense Unamortized portion Amortization this year
Current 1594.00 1.00 1594.00
-1 1026.00 0.80 820.80 \$205.20
-2 698.00 0.60 418.80 \$139.60
-3 399.00 0.40 159.60 \$79.80
-4 211.00 0.20 42.20 \$42.20
-5 89.00 0.00 0.00 \$17.80
0 0.00 0.00 0.00 \$0.00
0 0.00 0.00 0.00 \$0.00
0 0.00 0.00 0.00 \$0.00
0 0.00 0.00 0.00 \$0.00
0 0.00 0.00 0.00 \$0.00
Value of Research Asset = \$3,035.40 \$484.60

## Amortization of asset for current year = \$484.60

Adjustment to Operating Income = \$1,109.40 ! A positive number indicates an increase in operating income (add to reported EBIT)
Tax Effect of R&D Expensing \$388

## Look Up Table for Amortization Periods

Industry Name Amortization Period
Aerospace/Defense 10 Non-technological Service 2 years
Air Transport 10 Retail, Tech Service 3 years
Aluminum 5 Light Manufacturing 5 years
Apparel 3 Heavy Manufacturing 10 years
Auto & Truck 10 Research, with Patenting 10 years
Auto Parts (OEM) 5 Long Gestation Period 10 years
Auto Parts (Replacement) 5
Bank 2
Bank (Foreign) 2
Bank (Midwest) 2
Beverage (Alcoholic) 3
Beverage (Soft Drink) 3
Building Materials 5
Cable TV 10
Cement & Aggregates 10
Chemical (Basic) 10
Chemical (Diversified) 10
Chemical (Specialty) 10
Coal/Alternate Energy 5
Computer & Peripherals 5
Computer Software & Svcs 3
Copper 5
Diversified Co. 5
Drug 10
Drugstore 3
Educational Services 3
Electric Util. (Central) 10
Electric Utility (East) 10
Electric Utility (West) 10
Electrical Equipment 10
Electronics 5
Entertainment 3
Environmental 5
Financial Services 2
Food Processing 3
Food Wholesalers 3
Foreign Electron/Entertn 5
Foreign Telecom. 10
Furn./Home Furnishings 3
Gold/Silver Mining 5
Grocery 2
Healthcare Info Systems 3
Home Appliance 5
Homebuilding 5
Hotel/Gaming 3
Household Products 3
Industrial Services 3
Insurance (Diversified) 3
Insurance (Life) 3
Insurance (Prop/Casualty) 3
Internet 3
Investment Co. (Domestic) 3
Investment Co. (Foreign) 3
Investment Co. (Income) 3
Machinery 10
Manuf. Housing/Rec Veh 5
Maritime 10
Medical Services 3
Medical Supplies 5
Metal Fabricating 10
Metals & Mining (Div.) 5
Natural Gas (Distrib.) 10
Natural Gas (Diversified) 10
Newspaper 3
Office Equip & Supplies 5
Oilfield Services/Equip. 5
Packaging & Container 5
Paper & Forest Products 10
Petroleum (Integrated) 5
Petroleum (Producing) 5
Precision Instrument 5
Publishing 3
R.E.I.T. 3
Recreation 5
Restaurant 2
Retail (Special Lines) 2
Retail Building Supply 2
Retail Store 2
Securities Brokerage 2
Semiconductor 5
Semiconductor Cap Equip 5
Shoe 3
Steel (General) 5
Steel (Integrated) 5
Telecom. Equipment 10
Telecom. Services 5
Textile 5
Thrift 2
Tire & Rubber 5
Tobacco 5
Toiletries/Cosmetics 3
Trucking/Transp. Leasing 5
Utility (Foreign) 10
Water Utility 10
Operating Lease Converter
Inputs
Operating lease expense in current year = \$121.00
Operating Lease Commitments (From footnote to financials)
Year Commitment ! Year 1 is next year, ….
1 \$156.00
2 \$143.00
3 \$122.00
4 \$109.00
5 \$97.00
6 and beyond \$448.00

Output
Pre-tax Cost of Debt = 5.85% ! If you do not have a cost of debt, use the ratings estimator

## From the current financial statements, enter the following

Reported Operating Income (EBIT) = \$3,455.00 ! This is the EBIT reported in the current income statement
Reported Debt = \$0.00 ! This is the interest-bearing debt reported on the balance sheet

Number of years embedded in yr 6 estimate = 3 ! I use the average lease expense over the first five years
to estimate the number of years of expenses in yr 6
Converting Operating Leases into debt
Year Commitment Present Value
1 \$156.00 \$147.38
2 \$143.00 \$127.63
3 \$122.00 \$102.87
4 \$109.00 \$86.83
5 \$97.00 \$73.00
6 and beyond \$149.33 \$301.24 ! Commitment beyond year 6 converted into an annuity for ten years
Debt Value of leases = \$838.94

Restated Financials
Depreciation on Operating Lease Asset = \$104.87 ! I use straight line depreciation
Adjustment to Operating Earnings = \$49.08 ! PV of operating leases * Pre-tax cost of debt
Adjustment to Total Debt outstanding = \$838.94
Inputs for synthetic rating estimation
Enter the type of firm = 1 (Enter 1 if large manufacturing firm, 2 if smaller or riskier firm, 3 if financial service fir
Enter normalized Earnings before interest and taxes (EBIT) = \$1,788.67 (Add back only long term interest e
Enter current interest expenses = \$121.00 (Use only long term interest expens
Enter current long term government bond rate = 5.10%
Output
Interest coverage ratio = 14.78
Estimated Bond Rating = AAA
Estimated Cost of Debt = 5.85%

## For large manufacturing firms For financial service firms

If interest coverage ratio is If long term interest coverage ratio is
> ≤ to Rating is Spread is greater than ≤ to
-100000 0.2 D 14.00% -100000 0.05
0.2 0.65 C 12.70% 0.05 0.1
0.65 0.8 CC 11.50% 0.1 0.2
0.8 1.25 CCC 10.00% 0.2 0.3
1.25 1.5 B- 8.00% 0.3 0.4
1.5 1.75 B 6.50% 0.4 0.5
1.75 2 B+ 4.75% 0.5 0.6
2 2.5 BB 3.50% 0.6 0.8
2.5 3 BBB 2.25% 0.8 1
3 4.25 A- 2.00% 1 1.5
4.25 5.5 A 1.80% 1.5 2
5.5 6.5 A+ 1.50% 2 2.5
6.5 8.5 AA 1.00% 2.5 3
8.50 100000 AAA 0.75% 3 100000

## For smaller and riskier firms

If interest coverage ratio is
greater than ≤ to Rating is Spread is
-100000 0.5 D 14.00%
0.5 0.8 C 12.70%
0.8 1.25 CC 11.50%
1.25 1.5 CCC 10.00%
1.5 2 B- 8.00%
2 2.5 B 6.50%
2.5 3 B+ 4.75%
3 3.5 BB 3.50%
3.5 4.5 BBB 2.25%
4.5 6 A- 2.00%
6 7.5 A 1.80%
7.5 9.5 A+ 1.50%
9.5 12.5 AA 1.00%
12.5 100000 AAA 0.75%
er firm, 3 if financial service firm)
dd back only long term interest expense for financial firms)
e only long term interest expense for financial firms)

coverage ratio is
Rating is Spread isOperating Income Decline
D 14.00% -50.00%
C 12.70% -40.00%
CC 11.50% -40.00%
CCC 10.00% -40.00%
B- 8.00% -25.00%
B 6.50% -20.00%
B+ 4.75% -20.00%
BB 3.50% -20.00%
BBB 2.25% -20.00%
A- 2.00% -17.50%
A 1.80% -15.00%
A+ 1.50% -10.00%
AA 1.00% -5.00%
AAA 0.75% 0.00%
Inudstry Number of firms Cap Ex/Depreciation ROC Reinvestment Rate Unlevered Beta
Advertising 31 86.11% 12.31% -12.48% 1.06
Aerospace/Defense 41 83.42% 11.93% 4.34% 0.67
Air Transport 38 263.10% 12.60% 29.23% 0.84
Apparel 46 126.18% 15.10% 20.25% 0.65
Auto & Truck 20 89.19% 8.96% 8.57% 0.60
Auto Parts (OEM) 31 148.26% 16.28% 16.84% 0.59
Auto Parts (Replacement) 28 116.64% 12.47% 23.90% 0.39
Bank 178 NA 21.74% 0.00% 0.70
Bank (Canadian) 7 NA 34.07% 0.00% 0.99
Bank (Foreign) 2 NA 41.81% 0.00% 1.33
Bank (Midwest) 34 NA 20.26% 0.00% 0.71
Beverage (Alcoholic) 22 98.00% 8.52% 1.01% 0.53
Beverage (Soft Drink) 15 110.83% 17.54% 2.20% 0.70
Building Materials 42 172.40% 17.96% 18.60% 0.66
Cable TV 21 103.64% 4.74% -28.25% 1.01
Canadian Energy 16 212.03% 9.20% 26.80% 0.58
Cement & Aggregates 13 201.22% 17.98% 24.94% 0.68
Chemical (Basic) 14 119.47% 13.66% 7.07% 0.74
Chemical (Diversified) 34 112.94% 15.33% 3.39% 0.68
Chemical (Specialty) 83 112.51% 13.20% 7.38% 0.62
Computer & Peripherals 155 94.70% 13.49% 0.24% 1.12
Computer Software & Svcs 418 90.33% 18.71% -2.74% 1.08
Copper 2 302.54% 7.41% 75.02% 0.50
Diversified Co. 93 123.80% 12.61% 6.11% 0.72
Drug 272 145.87% 23.81% 10.70% 0.88
Drugstore 10 248.97% 14.22% 38.47% 0.83
Educational Services 29 121.54% 11.86% 5.95% 0.86
Electric Util. (Central) 34 147.80% 10.75% 13.28% 0.31
Electric Utility (East) 36 115.38% 11.35% 4.37% 0.35
Electric Utility (West) 17 114.85% 11.90% 3.76% 0.33
Electrical Equipment 87 103.96% 16.67% 2.46% 0.85
Electronics 142 115.28% 7.94% 10.27% 0.96
Entertainment 91 86.49% 6.63% -0.24% 0.79
Environmental 55 98.51% 11.36% 4.64% 0.40
Financial Svcs. (Div.) 185 150.85% 13.08% 23.89% 0.81
Food Processing 94 114.20% 14.32% 2.79% 0.67
Food Wholesalers 23 206.42% 10.80% 23.04% 0.58
Foreign Electron/Entertn 13 106.68% 8.71% 6.82% 0.90
Foreign Telecom. 16 82.15% 20.05% -3.49% 1.06
Furn./Home Furnishings 35 151.76% 18.14% 23.83% 0.73
Gold/Silver Mining 31 122.41% 7.21% 5.55% 0.63
Grocery 27 175.61% 14.25% 18.22% 0.58
Healthcare Info Systems 32 100.73% 10.66% 5.64% 0.84
Home Appliance 12 105.27% 23.95% 8.47% 0.80
Homebuilding 58 253.24% 9.43% 57.47% 0.50
Hotel/Gaming 54 215.77% 8.22% 20.72% 0.55
Household Products 30 109.80% 22.58% 6.65% 0.71
Industrial Services 187 104.30% 11.80% 16.17% 0.82
Insurance (Life) 34 NA 29.60% 3.93% 0.87
Insurance (Prop/Casualty 59 49405.56% 0.01% 7000.72% 0.82
Internet 304 160.76% 1.88% -93.39% 2.12
Investment Co. 26 323.32% 9.70% 61.80% 0.57
Investment Co. (Foreign) 20 41.40% 6.21% -18.67% 1.15
Machinery 126 119.36% 11.49% 8.93% 0.62
Manuf. Housing/Rec Veh 21 148.69% 12.72% 20.68% 0.69
Maritime 16 167.49% 8.16% 23.26% 0.42
Medical Services 163 108.58% 13.12% 9.24% 0.79
Medical Supplies 194 114.58% 18.71% 17.19% 0.80
Metal Fabricating 42 125.29% 15.04% 12.00% 0.74
Metals & Mining (Div.) 35 133.53% 10.89% 13.54% 0.71
Natural Gas (Distrib.) 43 184.13% 11.25% 21.40% 0.40
Natural Gas (Diversified 37 226.13% 10.32% 38.36% 0.57
Newspaper 20 85.71% 12.53% -2.72% 0.75
Office Equip & Supplies 31 99.98% 12.62% 4.98% 0.69
Oilfield Services/Equip. 72 166.98% 6.67% 9.57% 0.98
Packaging & Container 36 92.31% 11.41% 2.64% 0.47
Paper & Forest Products 55 88.65% 11.05% 2.31% 0.58
Petroleum (Integrated) 43 133.14% 16.75% 8.38% 0.72
Petroleum (Producing) 96 161.00% 11.56% 22.67% 0.60
Precision Instrument 89 109.99% 14.55% 3.63% 0.86
Publishing 49 118.89% 19.36% 3.97% 0.75
R.E.I.T. 155 395.17% 6.60% 35.16% 0.66
Railroad 16 195.34% 11.00% 17.34% 0.58
Recreation 87 171.11% 10.41% 17.95% 0.74
Restaurant 93 184.60% 17.39% 14.21% 0.68
Retail (Special Lines) 205 161.03% 16.94% 17.87% 1.11
Retail Building Supply 12 463.71% 17.82% 38.03% 0.84
Retail Store 31 189.30% 13.25% 25.24% 0.96
Securities Brokerage 32 125.02% 14.88% 51.37% 0.82
Semiconductor 99 109.19% 18.09% 3.53% 1.32
Semiconductor Cap Equip 7 97.49% 16.92% 1.57% 1.91
Shoe 26 155.94% 14.49% 27.42% 0.89
Steel (General) 30 170.73% 10.34% 17.03% 0.60
Steel (Integrated) 19 148.33% 10.49% 19.36% 0.67
Telecom. Equipment 116 157.32% 13.82% 25.25% 1.09
Telecom. Services 175 172.78% 12.13% 17.62% 1.08
Textile 27 136.70% 9.86% 16.84% 0.33
Thrift 133 NA 9.26% 0.00% 0.26
Tire & Rubber 10 152.36% 11.07% 15.62% 0.63
Tobacco 12 77.55% 26.07% -1.92% 0.56
Toiletries/Cosmetics 20 166.22% 21.66% 10.40% 0.86
Trucking/Transp. Leasing 51 190.04% 16.18% 35.56% 0.51
Utility (Foreign) 2 215.58% 12.53% 50.11% 1.03
Water Utility 15 254.10% 6.74% 20.89% 0.42
MV Debt to Capital Ratio Non-Cash Working Capital/Sales Pre-tax Operating Margin Std Deviation in Equity
8.46% -17.49% 15.84% 48.17%
30.76% 10.38% 10.45% 44.93%
44.48% -11.96% 12.30% 50.15%
32.20% 22.40% 13.24% 54.50%
54.37% 28.34% 15.05% 39.79%
39.06% 6.65% 11.32% 46.30%
54.60% 17.12% 11.79% 49.63%
33.13% NA NA 28.81%
23.39% NA NA 27.03%
16.64% NA NA 33.25%
34.32% NA NA 27.16%
20.90% 4.84% 16.44% 37.06%
11.69% 0.34% 20.00% 38.11%
32.61% 8.05% 12.02% 40.09%
31.64% -30.63% 24.56% 71.94%
34.10% 2.59% 25.48% 33.10%
20.10% 12.75% 24.14% 36.50%
25.66% 16.07% 19.17% 42.82%
21.46% 15.42% 18.37% 34.93%
29.47% 15.42% 16.20% 45.28%
2.91% 6.59% 12.24% 77.96%
2.07% -2.77% 24.78% 78.16%
52.99% 24.99% 15.17% 35.64%
22.98% 8.40% 14.09% 42.51%
3.16% 8.02% 28.69% 80.89%
13.03% 9.41% 7.08% 40.62%
4.88% 3.62% 16.51% 56.15%
53.44% 5.79% 23.32% 23.55%
46.63% 3.29% 28.61% 22.83%
50.66% -2.58% 22.32% 25.54%
3.11% 3.94% 17.07% 64.61%
5.82% 17.99% 9.31% 64.92%
17.93% 7.08% 22.17% 48.22%
55.94% 13.14% 25.60% 64.88%
31.38% 132.06% 94.34% 41.60%
23.75% 1.63% 12.76% 37.72%
26.51% 1.56% 4.40% 36.52%
16.18% 14.39% 9.88% 35.48%
5.97% 7.42% 32.84% 39.47%
20.90% 15.24% 13.37% 38.56%
12.77% 6.94% 33.33% 59.31%
28.48% 1.04% 6.69% 39.12%
13.36% 6.08% 16.06% 111.07%
26.55% 10.11% 13.25% 40.76%
52.98% 36.04% 12.42% 41.68%
50.12% -2.44% 24.75% 49.95%
13.68% 6.68% 20.38% 40.69%
17.34% 9.03% 10.03% 50.02%
18.30% NA NA 37.61%
7.65% -203.53% 38.43% 34.06%
1.23% -21.00% 8.36% 126.31%
2.71% 18.23% 34.01% 17.31%
3.13% -5.35% 55.09% 33.16%
30.57% 21.32% 12.47% 42.63%
33.27% 15.22% 8.10% 41.73%
57.65% 6.98% 18.03% 39.71%
25.67% 5.06% 11.61% 64.74%
7.56% 13.35% 14.18% 63.58%
18.71% 17.40% 14.21% 44.08%
28.19% 15.96% 16.07% 48.65%
45.01% 4.47% 22.03% 24.23%
28.40% 1.23% 13.98% 38.80%
16.54% -2.81% 23.89% 33.24%
33.52% 19.64% 12.46% 44.71%
14.58% 18.24% 16.63% 55.66%
52.40% 10.91% 16.41% 37.83%
39.61% 11.46% 15.64% 35.52%
11.05% 0.64% 15.80% 33.30%
27.91% -0.28% 37.27% 58.29%
6.79% 15.78% 17.02% 62.18%
19.97% -0.89% 19.80% 51.12%
8.89% -23.88% 59.04% 24.25%
39.87% -7.04% 25.60% 38.14%
20.21% 5.50% 16.51% 62.11%
18.36% -4.72% 16.47% 45.04%
12.66% 8.71% 9.32% 62.70%
2.63% 8.14% 10.00% 39.98%
16.68% 11.03% 7.91% 41.19%
53.50% 164.89% 57.47% 54.78%
1.77% 7.04% 26.07% 76.17%
0.56% 15.85% 23.99% 68.02%
14.18% 22.09% 10.34% 52.33%
39.05% 17.00% 10.76% 44.13%
47.76% 13.97% 12.58% 40.76%
3.64% 25.18% 17.32% 86.15%
17.34% -4.86% 34.29% 67.36%
68.59% 22.55% 11.64% 48.08%
76.73% NA NA 31.01%
41.46% 16.61% 10.10% 43.61%
23.40% 1.58% 15.82% 41.65%
13.61% 14.95% 18.43% 48.91%
58.92% 23.74% 19.40% 42.95%
31.65% -7.91% 44.90% 37.97%
45.55% 1.76% 39.50% 28.82%