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Fcfe 3 ST
Fcfe 3 ST
THREESTAGE FCFE DISCOUNT MODEL
This model is designed to value the equity in a firm with three stages of growth an initial
period of high growth, a transition period of declining growth and a final period of stable
growth.
Assumptions
1. The firm is assumed to be in an extraordinary growth phase currently.
2. This extraordinary growth is expected to last for an initial period that has to be specified.
3. The growth rate declines linearly over the transition period to a stable growth rate.
4. The relationship between capital spending and depreciation changes consistently with the growth rate.
The user should enter the following inputs:
1. Length of each growth phase
2. Growth rate in each growth phase
3. Capital Spending, Depreciation and Working Capital in each growth phase.
4. Costs of Equity in each growth phase
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Three-stage FCFE Model
Inputs to the model
General Inputs
Current Revenues/ share = $12.50
Chg. Working Capital/share = $0.50
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 for the initial high growth stage
Beta of the stock = 1.1
Earnings Inputs
Growth Rate during the initial high growth phase
Enter length of extraordinary growth period = 5 (in years)
Do you want to use the historical growth rate? No (Yes or No)
If yes, enter EPS from five years ago = $0.90 (in currency)
Do you want to calculate the growth rate from fundamentals? No (Yes or No)
If yes, enter the following inputs:
Net Income Currently = $10.00 (in currency)
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Three-stage FCFE Model
The following will be the inputs to the fundamental growth formulation:
ROC = 26.27% D/E = 54.58% (in percent)
Do you want to change any of these inputs for the high growth period? No (Yes or No)
If yes, specify the values for these inputs (Please enter all variables)
ROC = 25.00% D/E = 54.58% (in percent)
If yes, specify the values for these inputs
ROC = 20.00% D/E = 54.58% (in percent)
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Three-stage FCFE Model
Specify weights to be assigned to each of these growth rates:
Historical Growth Rate = 0.00% (in percent)
Growth Rate during the transition period
Enter length of the transition period = 10 (in years)
Growth Rate during the stable phase
If yes, enter the beta for stable period = 0.9
Capital Spending, Depreciation & Working Capital
If not, enter the growth rates for each of the following items:
If no, specify working capital as a percent of revenues: (in percent)
Do you want to use the current debt ratio as your desired mix? No (Yes or No)
If no, enter the following inputs for financing mix,
Desired debt financing proportion Capital Spending 15.00% (in percent) Aswath Damodaran:
Yes or No. If yes, enter
Desired debt financing proportion Working Capital 15.00% (in percent) 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
Stable Growth Inputs for Capital Expenditures and Depreciation percent
Aswathof Damodaran:
depreciatiion.
If you are going to
Is capital spending to be offset by depreciation in stable period? No (Yes or No)
assume perpetual
Do you want to compute your reinvestment rate from fundamentals? Yes growth, you should
answer no here and
Return on equity in stable growth period 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
If no, enter capital expenditures as % of depreciation in steady state: 125% (in percent: > 100%)
depreciation in
yourterminal year.
Output from the program
Initial High Growth Phase
Cost of Equity = 13.05%
Current Earnings per share= $0.85
Proportion of Debt: Capital Spending (DR)= 15.00%
Proportion of Debt: Working Capital (DR)= 15.00%
Current Earnings per share= $0.85
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Three-stage FCFE Model
(Capital Spending Depreciation)*(1DR) $0.17
Change in Working Capital * (1DR) $0.43
Current FCFE $0.26
Growth Rate in Earnings per share Initial High Growth phase
Growth Rate Weight
Historical Growth = 0.00% 0.00%
Weighted Average 20.00%
Growth Rate in capital spending, depreciation and working capital
The dividends for the high growth phase are shown below (upto 10 years)
Year 1 2 3 4
Earnings $1.02 $1.22 $1.47 $1.76
(CapExDepreciation)*(1DR) $0.20 $0.24 $0.29 $0.35
Transition period (upto ten years)
Year 6 7 8 9
Growth Rate 18.50% 17.00% 15.50% 14.00%
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Three-stage FCFE Model
EndofLife Index 0 0 0 0
Stable Growth Phase
Growth Rate in Stable Phase = 5.00%
FCFE in terminal year = $3.76
Cost of Equity in Stable Phase = 11.95%
Price at the end of growth phase = $54.13
Present Value of FCFE in high growth phase = ($0.17)
Present Value of FCFE in transition phase = $3.36
Present Value of Terminal Price = $9.07
Value of the stock = $12.26
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Three-stage FCFE Model
MODEL
wth an initial
riod of stable
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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
cent of Page
preciatiion.
wath Damodaran: Three-stage FCFE Model
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:
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ou are going to
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wth, you should
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wath Damodaran:
ou are going to
ume perpetual
wth, you should Three-stage FCFE Model
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igher than
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preciation in
urterminal year.
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Three-stage FCFE Model
5
$2.12
$0.42
$1.76
($0.07)
($0.04)
10 11 12 13 14 15 Terminal Year
12.50% 11.00% 9.50% 8.00% 6.50% 5.00%
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Three-stage FCFE Model
0 0 0 0 0 1
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