Two-Stage FCFF Discount Model

TwoStageFCFFDiscountModel

Thismodelisdesignedtovalueafirm,withtwostagesofgrowth,aninitial
periodofhighergrowthandasubsequentperiodofstablegrowth.
For a richer version of this model, try the fcffginzu.xls spreadsheet.
Assumptions

1.Thefirmisexpectedtogrowatahighergrowthrateinthefirstperiod.

2.Thegrowthratewilldropattheendofthefirstperiodtothestablegrowthrate.

Theuserhastodefinethefollowinginputs:

1.Lengthofhighgrowthperiod

2.Expectedgrowthrateinearningsduringthehighgrowthperiod.

3.CapitalSpending,DepreciationandWorkingCapitalneedsduringthehighgrowthperiod.

4.Expectedgrowthrateinearningsduringthestablegrowthperiod.

5.Inputsforthecostofcapital.(Costofequity,Costofdebt,Weightsondebtandequity)

Inputstothemodel

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CurrentEBIT= $5,186.00

CurrentInterestExpense= $118.00

CurrentCapitalSpending $2,152.00
CurrentDepreciation&Amort'n= $1,228.00

TaxRateonIncome= 28.49%

CurrentRevenues= $16,701.00

CurrentNoncashWorkingCapital= $3,755.00

Chg.WorkingCapital= $499.00 Last year

CashandMarketableSecurities $500.00
Valueofequityoptionsissuedbyfirm $1,500.00

BookValueofDebt= $1,479.00 $1,315.00

BookValueofEquity= $12,941.00 $12,156.00

WeightsonDebtandEquity

Isthefirmpubliclytraded? Yes (YesorNo)

Ifyes,enterthemarketpricepershare= $125.50 (incurrency)

&Numberofsharesoutstanding= 993.57 (in#)

&MarketValueofDebt= $1,822.00 (incurrency)

Ifno,doyouwanttousethebookvaluedebtratio? No (YesorNo)

Ifno,enterthedebttocapitalratiotobeused= (inpercent)

Enterlengthofextraordinarygrowthperiod= 5 (inyears)

Doyouwanttochangethedebtratiointhestablegrowthperiod? No

Ifyes,enterthedebtratioforthestablegrowthperiod=

CostsofComponents

Doyouwanttoentercostofequitydirectly? No (YesorNo)

Ifyes,enterthecostofequity= (inpercent)

Ifno,entertheinputstothecostofequity

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Betaofthestock= 0.8

Riskfreerate= 5.30% (inpercent)

RiskPremium= 5.50% (inpercent)

Enterthecostofdebtforcostofcapitalcalculation 5.50% (inpercent)

EarningsInputs

Doyouwanttousethehistoricalgrowthrate? No (YesorNo)

Ifyes,enterEBITfromfiveyearsago= $800.00 (incurrency)

Doyouhaveanoutsideestimateofgrowth? Yes (YesorNo)

Ifyes,entertheestimatedgrowth: 12.50% (inpercent)

Doyouwanttocalculatethegrowthratefromfundamentals? Yes (YesorNo)

Thefollowingwillbetheinputstothefundamentalgrowthformulation:
ROC= 27.53%
Reinv.Rate= 38.37%

Doyouwanttochangeanyoftheseinputsforthehighgrowthperiod? No (YesorNo)

Ifyes,specifythevaluesfortheseinputs(Pleaseenterallvariables)
ROC= 10.00%

Reinv.Rate= 100.00%

Specifyweightstobeassignedtoeachofthesegrowthrates:
HistoricalGrowthRate= 0.00% (inpercent)

OutsidePredictionofGrowth= 0.00% (inpercent)

FundamentalEstimateofGrowth= 100.00% (inpercent)

Entergrowthrateinstablegrowthperiod? 6.00% (inpercent)

Beta

Willthebetatochangeinthestableperiod? No (YesorNo)

Ifyes,enterthebetaforstableperiod= 1.00

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 Two-Stage FCFF Discount Model

Willthecostofdebtchangeinthestableperiod? No (YesorNo)

Ifyes,enterthenewcostofdebt= (inpercent)

CapitalSpending,Depreciation&WorkingCapital

Doyouwantalltheseitemstogrowatthesamerateasearnings? Yes (YesorNo)

Ifnot,enterthegrowthratesforeachofthefollowingitems:

CapitalSpending Depreciation Revenues

HighGrowth 6% 6% 6% (inpercent)
StableGrowth Donotenter Donotenter 6% (inpercent)

Doyouwanttokeepthecurrentfractionofworkingcapitaltorevenues? Yes (YesorNo)

Specifyworkingcapitalasapercentofrevenues: (inpercent)

CapitalSpendingandDepreciationinStableGrowth
Iscapitalspendingtobeoffsetbydepreciationinstableperiod? No (YesorNo)
Aswath Damodaran:
Doyouwantyourreinvestmenttobecomputedfromfundamentals? Yes Yes or no. If yes, enter
the return on capital
Returnoncaptialinperpetuity 12% that your firm will have
in stable growth. If no,
Ifno,doyouwanttoentercapitalexpenditureas%ofdepreciation 120% enter cap ex as a
(inpercent)
percent of depreciation
in the cell below.

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Outputfromtheprogram
CostofEquity= 9.70%

Equity/(Debt+Equity)= 98.56%
AftertaxCostofdebt= 3.93%

Debt/(Debt+Equity)= 1.44%

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CostofCapital= 9.62%

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CurrentEBIT*(1taxrate)= $3,708.51

(CapitalSpendingDepreciation) $924.00

ChangeinWorkingCapital $499.00
CurrentFCFF $2,285.51

GrowthRateinEarningspershare

GrowthRate Weight
HistoricalGrowth= 45.33% 0.00%

OutsideEstimates= 12.50% 0.00%

FundamentalGrowth= 10.56% 100.00%

WeightedAverage 10.56%

GrowthRateincapitalspending,depreciationandworkingcapital

HighGrowth StableGrowth
Growthrateincapitalspending= 10.56% Donotenter

Growthrateindepreciation= 10.56% Donotenter

Growthrateinrevenues= 10.56% 6.00%

WorkingCapitalaspercentofrevenues= 22.48% (inpercent)

TheFCFEforthehighgrowthphaseareshownbelow(upto10years)
1 2 3 4

EBIT*(1taxrate) $4,100.25 $4,533.38 $5,012.26 $5,541.73

(CapExDepreciation) $1,021.61 $1,129.52 $1,248.84 $1,380.76

Chg.WorkingCapital $396.66 $438.56 $484.88 $536.10

FreeCashflowtoFirm $2,681.99 $2,965.30 $3,278.54 $3,624.87

PresentValue $2,446.69 $2,467.82 $2,489.13 $2,510.62

GrowthRateinStablePhase= 6.00%
FCFFinStablePhase= $3,247.38

CostofEquityinStablePhase= 9.70%

Equity/(Equity+Debt)= 98.56%

ATCostofDebtinStablePhase= 3.93%

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Debt/(Equity+Debt)= 1.44%

CostofCapitalinStablePhase= 9.62%
Valueattheendofgrowthphase= $89,782.26

PresentValueofFCFFinhighgrowthphase= $12,446.56

PresentValueofTerminalValueofFirm= $56,728.59

Valueofthefirm= $69,175.15

CashandMarketableSecurities= $500.00

MarketValueofoutstandingdebt= $1,822.00

MarketValueofEquity= $67,853.15
ValueofEquityoptionsissuedbythecompany= $1,500.00

MarketValueofEquity/share= $66.78

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 Two-Stage FCFF Discount Model

el

growth,aninitial
tablegrowth.
adsheet.

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 Two-Stage FCFF Discount Model

swath Damodaran:
s or no. If yes, enter
e return on capital
at your firm will have
stable growth. If no,
nter cap ex as a
ercent of depreciation
the cell below.

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Two-Stage FCFF Discount Model

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 Two-Stage FCFF Discount Model

5 TerminalYear

$6,127.13 $6,494.75
$1,526.62 $2,875.14

$592.74 $372.24

$4,007.78 $3,247.38
$2,532.30

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