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Fcfe 2 ST
Fcfe 2 ST
TwoStage FCFE Discount Model
This model is designed to value the equity in a firm, with two stages of growth, an in
period of higher growth and a subsequent period of stable growth.
Assumptions
1. The firm is expected to grow at a higher growth rate in the first period.
2. The growth rate will drop at the end of the first period to the stable growth rate.
3. The free cashflow to equity is the correct measure of expected cashflows to stockholders.
The user has to define the following inputs:
1. Length of high growth period
2. Expected growth rate in earnings during the high growth period.
3. Capital Spending, Depreciation and Working Capital needs during the high growth period.
4. Expected growth rate in earnings during the stable growth period.
5. Inputs for the cost of equity.
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Two-Stage FCFE Discount Model
Inputs to the model
Current Revenues/ share = $20.00
Chg. Working Capital/share = $1.00
Enter length of extraordinary growth period = 5 (in years)
Do you want to enter cost of equity directly? No (Yes or No)
If yes, enter the cost of equity = (in percent)
If no, enter the inputs to the cost of equity
Beta of the stock = 1.3
Earnings Inputs
If yes, enter the following inputs:
Net Income Currently = $1,077.00 (in currency)
Interest Expense Currently = $53.85 Last year (in currency)
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Two-Stage FCFE Discount Model
The following will be the inputs to the fundamental growth formulation:
ROC = 19.57% D/E = 11.02% (in percent)
If yes, specify the values for these inputs (Please enter all variables)
ROC = 19.57% D/E = 11.02% (in percent)
Specify weights to be assigned to each of these growth rates:
Historical Growth Rate = 10.00% (in percent)
Beta
If yes, enter the beta for stable period = 1.1
Capital Spending, Depreciation & Working Capital
Do you want all these items to grow at the same rate as earnings ? No (Yes or No)
If not, enter the growth rates for each of the following items:
Capital Spending Depreciation Revenues
If no, enter the following inputs for financing mix,
Desired debt financing proportion Capital Spending (in percent)
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Two-Stage FCFE Discount Model
Desired debt financing proportion Working Capital (in percent)
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If you are going to
Aswath Damodaran:
assume perpetual
Yes or No.
growth, youIf yes, enter
should
the return
answer no on equity
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Two-Stage FCFE Discount Model that
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Output from the program
Cost of Equity = 14.15%
Proportion of Debt: Capital Spending (DR)= 9.93%
Proportion of Debt: Working Capital (DR)= 9.93%
Current Earnings per share= $4.00
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Two-Stage FCFE Discount Model
(Capital Spending Depreciation)*(1DR) $1.80
Change in Working Capital * (1DR) $0.90
Current FCFE $1.30
Growth Rate in Earnings per share
Growth Rate Weight
Historical Growth = 52.19% 10.00%
Weighted Average 22.71%
Growth Rate in capital spending, depreciation and working capital
High Growth Stable Growth
Growth rate in capital spending = 20.00% Do not enter
The FCFE for the high growth phase are shown below (upto 6 years)
1 2 3 4
Growth Rate in Stable Phase = 6.00%
FCFE in Stable Phase = $5.90
Cost of Equity in Stable Phase = 13.05%
Price at the end of growth phase = $83.65
Present Value of FCFE in high growth phase = $8.40
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Two-Stage FCFE Discount Model
Present Value of Terminal Price = $43.16
Value of the stock = $51.56
Estimating the value of growth
Value of assets in place = $9.94
Value of stable growth = $9.57
Value of extraordinary growth = $32.05
Value of the stock = $51.56
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Two-Stage FCFE Discount Model
el
ages of growth, an initial
table growth.
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Two-Stage FCFE Discount Model
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Two-Stage FCFE Discount Model
swath Damodaran:
you are going to
swath Damodaran:
sume perpetual
s or No.
owth, youIf yes, enter
should
e return
nswer no on equity
here and
at your
ake surefirm
thatwill
caphave
ex
perpetuity
higher thanbelow. If
o, enter capinex as a
epreciation
ercent of
ourterminal year.
epreciatiion.
Page
you are going to
swath Damodaran:
sume perpetual
s or No.
owth, youIf yes, enter
should
e return
nswer no on equity
here and
at your
ake surefirm
thatwill
caphave
ex Two-Stage FCFE Discount Model
perpetuity
higher thanbelow. If
o, enter capinex as a
epreciation
ercent of
ourterminal year.
epreciatiion.
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Two-Stage FCFE Discount Model
5 Terminal Year
$11.13 $11.79
$4.48 $4.91
$2.51 $0.99
$4.13 $5.90
$2.13
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