Three-stage FCFE Model

THREESTAGEFCFEDISCOUNTMODEL

Thismodelisdesignedtovaluetheequityinafirmwiththreestagesofgrowthaninitial
periodofhighgrowth,atransitionperiodofdeclininggrowthandafinalperiodofstable
growth.

Assumptions

1.Thefirmisassumedtobeinanextraordinarygrowthphasecurrently.
2.Thisextraordinarygrowthisexpectedtolastforaninitialperiodthathastobespecified.

3.Thegrowthratedeclineslinearlyoverthetransitionperiodtoastablegrowthrate.

4.Therelationshipbetweencapitalspendinganddepreciationchangesconsistentlywiththegrowthrate.

Theusershouldenterthefollowinginputs:

1.Lengthofeachgrowthphase

2.Growthrateineachgrowthphase
3.CapitalSpending,DepreciationandWorkingCapitalineachgrowthphase.

4.CostsofEquityineachgrowthphase

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Inputstothemodel

GeneralInputs

CurrentEarningspershare= $0.85 (incurrency)

CurrentDividendspershare= $0.00 (incurrency)

CurrentCapitalSpending/sh= $1.00 (incurrency)

CurrentDepreciation/share= $0.80 (incurrency)

CurrentRevenues/share= $12.50

WorkingCapital/share= $5.00 (incurrency)

Chg.WorkingCapital/share= $0.50

Doyouwanttoentercostofequitydirectly? No (YesorNo)

Ifyes,enterthecostofequity= (inpercent)

Ifno,entertheinputstothecostofequityfortheinitialhighgrowthstage
Betaofthestock= 1.1

Riskfreerate= 7.00% (inpercent)

RiskPremium= 5.50% (inpercent)

EarningsInputs

GrowthRateduringtheinitialhighgrowthphase

Enterlengthofextraordinarygrowthperiod= 5 (inyears)

Doyouwanttousethehistoricalgrowthrate? No (YesorNo)
Ifyes,enterEPSfromfiveyearsago= $0.90 (incurrency)

Doyouhaveanoutsideestimateofgrowth? Yes (YesorNo)

Ifyes,entertheestimatedgrowth: 20.00% (inpercent)

Doyouwanttocalculatethegrowthratefromfundamentals? No (YesorNo)

Ifyes,enterthefollowinginputs:
NetIncomeCurrently= $10.00 (incurrency)

InterestExpenseCurrently= $2.50 Lastyear (incurrency)

BookValueofDebt= $16.10 $15.20 (incurrency)

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 Three-stage FCFE Model

BookValueofEquity= $29.50 $28.10 (incurrency)

TaxRateonIncome= 45.00% (inpercent)

Thefollowingwillbetheinputstothefundamentalgrowthformulation:
ROC= 26.27% D/E= 54.58% (inpercent)

Retention= 100.00% InterestRate= 15.53% (inpercent)

Doyouwanttochangeanyoftheseinputsforthehighgrowthperiod? No (YesorNo)

Ifyes,specifythevaluesfortheseinputs(Pleaseenterallvariables)
ROC= 25.00% D/E= 54.58% (inpercent)

Retention= 100.00% InterestRate= 15.53% (inpercent)

Doyouwanttochangeanyoftheseinputsforthestablegrowthperiod? Yes (YesorNo)

Ifyes,specifythevaluesfortheseinputs
ROC= 20.00% D/E= 54.58% (inpercent)

InterestRate= 14.00% (inpercent)

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Specifyweightstobeassignedtoeachofthesegrowthrates:
HistoricalGrowthRate= 0.00% (inpercent)

OutsidePredictionofGrowth= 100.00% (inpercent)

FundamentalEstimateofGrowth= 0.00% (inpercent)

GrowthRateduringthetransitionperiod

Enterlengthofthetransitionperiod= 10 (inyears)

Doyouwantthebetatoadjustgraduallytostablebeta? Yes (YesorNo)

Ifno,enterthebetaforthetransitionperiod=

GrowthRateduringthestablephase

Entergrowthrateinstablegrowthperiod? 5.00% (inpercent)

Willthebetachangeinthestableperiod? Yes (YesorNo)

Ifyes,enterthebetaforstableperiod= 0.9

CapitalSpending,Depreciation&WorkingCapital

Doyouwantalltheseitemstogrowatthesamerateasearnings? Yes (YesorNo)

Ifnot,enterthegrowthratesforeachofthefollowingitems:

CapitalSpending Depreciation Revenues

HighGrowth 20.00% 20.00% 18.00% (inpercent)

Transitionperiod 12.00% 12.00% 12.00% (inpercent)

StableGrowth Donotenter Donotenter 6.00% (inpercent)

Doyouwanttokeepthecurrentfractionofworkingcapitaltorevenues? Yes (YesorNo)

Ifno,specifyworkingcapitalasapercentofrevenues: (inpercent)

Doyouwanttousethecurrentdebtratioasyourdesiredmix? No (YesorNo)

Ifno,enterthefollowinginputsforfinancingmix,
DesireddebtfinancingproportionCapitalSpending 15.00% (inpercent) Aswath Damodaran:
Yes or No. If yes, enter
DesireddebtfinancingproportionWorkingCapital 15.00% (inpercent) the return on equity
that your firm will have
in perpetuity below. If
no, enter cap ex as a
Page percent of
depreciatiion.
 Three-stage FCFE Model Aswath Damodaran:
Yes or No. If yes, enter
the return on equity
that your firm will have
in perpetuity below. If
no, enter cap ex as a
StableGrowthInputsforCapitalExpendituresandDepreciation percent
Aswathof Damodaran:
depreciatiion.
If you are going to
Iscapitalspendingtobeoffsetbydepreciationinstableperiod? No (YesorNo)
assume perpetual
Doyouwanttocomputeyourreinvestmentratefromfundamentals? Yes growth, you should
answer no here and
Returnonequityinstablegrowthperiod 12% make sure that cap ex
is higher than
depreciation in
yourterminal year.

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 Aswath Damodaran:
If you are going to
assume perpetual
Three-stage FCFE Model growth, you should
answer no here and
make sure that cap ex
is higher than
Ifno,entercapitalexpendituresas%ofdepreciationinsteadystate: 125% depreciation in
(inpercent:>100%)
yourterminal year.

Outputfromtheprogram
InitialHighGrowthPhase

CostofEquity= 13.05%

CurrentEarningspershare= $0.85

ProportionofDebt:CapitalSpending(DR)= 15.00%

ProportionofDebt:WorkingCapital(DR)= 15.00%

CurrentEarningspershare= $0.85

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 Three-stage FCFE Model

(CapitalSpendingDepreciation)*(1DR) $0.17

ChangeinWorkingCapital*(1DR) $0.43

CurrentFCFE $0.26

GrowthRateinEarningspershareInitialHighGrowthphase

GrowthRate Weight
HistoricalGrowth= 0.00% 0.00%

OutsideEstimates= 20.00% 100.00%

FundamentalGrowth= 0.00% 0.00%

WeightedAverage 20.00%

GrowthRateincapitalspending,depreciationandworkingcapital

HighGrowth Transitionperiod StableGrowth

Growthrateincapitalspending= 20.00% Earningsg 5.00%

Growthrateindepreciation= 20.00% Earningsg 5.00%

Growthrateinrevenues= 20.00% Earningsg 5.00%

WorkingCapitalaspercentofrevenues= 40.00% (inpercent)

Thedividendsforthehighgrowthphaseareshownbelow(upto10years)

Year 1 2 3 4
Earnings $1.02 $1.22 $1.47 $1.76
(CapExDepreciation)*(1DR) $0.20 $0.24 $0.29 $0.35

Chg.WorkingCapital*(1DR) $0.85 $1.02 $1.22 $1.47

FCFE ($0.03) ($0.04) ($0.05) ($0.06)

PresentValue ($0.03) ($0.03) ($0.03) ($0.04)

Transitionperiod(uptotenyears)

Year 6 7 8 9
GrowthRate 18.50% 17.00% 15.50% 14.00%

CumulatedGrowth 18.50% 38.65% 60.13% 82.55%

Earnings $2.51 $2.93 $3.39 $3.86

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(CapExDepreciation)*(1DR) $0.50 $0.59 $0.68 $0.77

Chg.WorkingCapital*(1DR) $1.96 $2.13 $2.27 $2.37

FCFE $0.05 $0.22 $0.44 $0.72

Beta 1.08 1.06 1.04 1.02

CostofEquity 12.94% 12.83% 12.72% 12.61%

PresentValue $0.02 $0.09 $0.16 $0.24

EndofLifeIndex 0 0 0 0
StableGrowthPhase

GrowthRateinStablePhase= 5.00%
FCFEinterminalyear= $3.76

CostofEquityinStablePhase= 11.95%

Priceattheendofgrowthphase= $54.13

PresentValueofFCFEinhighgrowthphase= ($0.17)

PresentValueofFCFEintransitionphase= $3.36

PresentValueofTerminalPrice= $9.07
Valueofthestock= $12.26

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 Three-stage FCFE Model

MODEL

wthaninitial
riodofstable

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Three-stage FCFE Model

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 Three-stage FCFE Model

wath Damodaran:
or No. If yes, enter
return on equity
t your firm will have
perpetuity below. If
enter cap ex as a
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wath Damodaran: Three-stage FCFE Model
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return on equity
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enter cap ex as a
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wath Damodaran:
ou are going to
ume perpetual
wth, you should Three-stage FCFE Model
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urterminal year.

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 Three-stage FCFE Model

$2.12
$0.42

$1.76

($0.07)

($0.04)

10 11 12 13 14 15 TerminalYear
12.50% 11.00% 9.50% 8.00% 6.50% 5.00%

105.37% 127.96% 149.62% 169.59% 187.11% 201.47%

$4.34 $4.82 $5.28 $5.70 $6.07 $6.38 $6.70

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$0.87 $0.96 $1.06 $1.14 $1.21 $1.28 $1.34

$2.41 $2.39 $2.29 $2.11 $1.85 $1.52 $1.59

$1.06 $1.47 $1.93 $2.45 $3.00 $3.58 $3.76

1 0.98 0.96 0.94 0.92 0.9 0.9

12.50% 12.39% 12.28% 12.17% 12.06% 11.95% 11.95%

$0.32 $0.39 $0.46 $0.52 $0.56 $0.60

0 0 0 0 0 1

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