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FCFEStableModel

FCFESTABLEGROWTHMODEL

Thismodelisdesignedtovaluetheequityinastablefirmonthebasisof
freecashflowstoequity,especiallywhentheyare
differentfromdividendspaid.

Assumptionsinthemodel:
1.Thefirmisinsteadystateandwillgrowatastablerateforever.
2.Thefirmdoesnotpayoutwhatitcanaffordtoindividends,i.e.,DividendsFCFE.

Userdefinedinputs
Theuserhastodefinethefollowinginputstothemodel:
1.CurrentEarningspershare
2.CapitalSpendingandDepreciationpershare
3.Changeinworkingcapitalpershare
4.Desireddebtlevelforfinancingworkingcapitalandcapitalspendingneeds.
5.CostofEquityorInputstotheCAPM(Beta,Riskfreerate,RiskPremium)
6.ExpectedGrowthRateinfreecashflowstoequityforever.

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FCFEStableModel

Pleaseenterinputstothemodel:
CurrentEarningspershare= $5.45 (incurrency) {Youcaninputallthenumbersfortheaggregatecompany,ifyousodesire}

CapitalSpending/share= $2.00 (incurrency)


Depreciation/share= $1.75 (incurrency) AswathDamodaran:
Chg.WorkingCapital/share= $0.60 (incurrency) Ifyousetyourperpetual
growthrateatanynumber
Desireddebtfinancingratio= 29.97% (inpercent) greaterthanzero,this
shouldbeno.
Doyouwanttooffsetcapitalexpendituresbydepreciationinthefuture? No (YesorNo)
Thereinvestmentratebaseduponyourinputsiscomputedtobe 10.96%
AswathDamodaran:
Doyouwanttorecomputethisreinvestmentratebaseduponfundamentals? Yes Yourreinvestmentrate
shouldbeconsistentwith
Ifyes,enterthereturnonequitythatyouexpectthisfirmtohaveinperpetuity 12% yourgrowthrate
Desireddebtfinancingratio= 29.97% (inpercent) assumptions.Ifyouanswer
yestothisquestion,you
shouldenterthereturnon
equitybelow.
Areyoudirectlyenteringthecostofequity?(YesorNo) No
Ifyes,entercostofequity= (inpercent)
Ifno,entertheinputsfortheCAPM
Betaofthestock= 1.1
Riskfreerate= 7% (inpercent)
RiskPremium= 5.50% (inpercent)

ExpectedGrowthRate= 6% (inpercent) Theexpectedgrowthrateforastablefirm

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FCFEStableModel

cannotbesignificantlyhigherthanthenominal
growthrateintheeconomyinwhichthefirm
operates.Itcanbelower.

Warnings:

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FCFEStableModel

ThisistheoutputfromtheGordonGrowthModel

FirmDetails:frominputsonpriorpage
CurrentEarningspershare= $5.45

(1Desireddebtfraction)* 70.03%

(CapitalSpendingDepreciation) $3.29 $2.30


(1Desireddebtfraction)* 70.03%

WorkingCapital $0.60 $0.42

FreeCashflowtoEquity= $2.73

CostofEquity= 13.05%

ExpectedGrowthrate= 6.00%

GordonGrowthModelValue= $40.97

Growth rate Value Valuevs.ExpectedGrowth


10.00% $98.28
9.00% $73.34 $120.00
8.00% $58.28
7.00% $48.19 $100.00
6.00% $40.97 $80.00
5.00% $35.54
ValueofStock

4.00% $31.31 $60.00


3.00% $27.93
$40.00
$20.00
$0.00 Page
10.0 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00
0% % % % % % % % %
$100.00
$80.00
FCFEStableModel

ValueofStock
$60.00
$40.00
2.00% $25.15
$20.00
$0.00
10.0 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00
0% % % % % % % % %

ExpectedGrowthRate

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