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# Sheet1

There are three ways in which you can estimate the capital expenditures, especially in stable grow
Approach 1: Assume Net Capital Expenditures are zero. (Cap Ex is 100% of Depreciation)
This approach, which is the most widely used in DCF valuation, especially when it comes to stable growth
periods, is also the most dangerous when combined with assumptions about growth in cash flows. It raises
the legitimate question of how growth is feasible with no net investment. It is defensible when the growth in
earnings is expected to be zero.
Approach 2: Assume that Capital/Expenditures/Depreciation approaches the industry average (see dataset)
Assume that the capital expenditure/depreciation ratio for this firm will approach that of the
industry or sector in which the firm operates. To see what the averages are for different sectors of the U.S.
economy scroll down to Table 1. The net cap exp is also estimated as a percent of revenues
and after-tax operating income. Use the ratio that best fits your firm.
Approach 3: Estimate the net capital expenditures needed based upon return on capital

Approach 3: Estimate the net capital ex and working capital investment needed based upon the growth rate an
return on capital of the firm. Typical returns on capital in different sectors are in table 1. To calculate
the net capital expenditures for your firm as a percentage of after-tax EBIT enter the following:
Expected Growth Rate in Operating Income =
5.00%
Expected Return on Capital =
15.00%
Expected Net Capital Ex and Chg in WC as % of after-tax EBIT =
33.33%
As an example,
Thus, if your after-tax EBIT in year 5 is \$ 100 million, and you want to estimate net capital expendiutures
and working capital requirements in year 6, given a stable growth rate of 5% forever after that:
Net Cap Ex + Change in Working Capital in year 6 = (.3333) ( \$ 100 million) = \$ 33.33 million

Table 1: Cap Expenditure/Depreciation Ratios by Sector
Industry
Depreciation Cap Ex
Cap Ex/Deprec'nNet CapEx/SalesNet CapEx/EBIT(1-t)
\$39.51
\$31.13
78.81%
-0.92%
-9.82%
Aerospace/Defense
\$101.56
\$90.23
88.85%
-0.36%
-3.90%
Air Transport
\$179.56
\$264.82
147.48%
2.40%
24.83%
Aluminum
\$196.02
\$254.49
129.83%
1.55%
14.90%
Apparel
\$13.74
\$13.78
100.33%
0.01%
0.11%
Auto & Truck
\$2,134.54
\$2,387.37
111.84%
0.79%
7.34%
Auto Parts (OEM)
\$80.54
\$99.37
123.39%
0.83%
11.36%
Auto Parts (Replacement)
\$26.90
\$38.70
143.85%
1.23%
16.86%
Beverage (Alcoholic)
\$69.67
\$116.23
166.83%
2.42%
23.75%
Beverage (Soft Drink)
\$305.78
\$405.59
132.64%
1.59%
13.14%
Building Materials
\$25.47
\$47.23
185.43%
2.01%
29.03%
Cable TV
\$184.31
\$240.12
130.28%
5.64%
21.16%
\$277.27
\$441.82
159.35%
6.46%
40.71%
Cement & Aggregates
\$27.00
\$38.78
143.66%
2.48%
17.24%
Chemical (Basic)
\$324.22
\$435.46
134.31%
1.95%
10.31%
Chemical (Diversified)
\$215.83
\$338.22
156.71%
3.46%
28.86%
Chemical (Specialty)
\$37.88
\$56.50
149.16%
2.26%
19.42%
Coal/Alternate Energy
\$42.10
\$154.08
366.02%
20.27%
49.68%

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35% 22.13% 126.36% 3.42% 0.70% .86% 6.99% 1.12 Hotel/Gaming \$33.37% 0.53% 0.88% 1.86 \$67.36 \$27.53% 69.18% 1.87% 14.35% 311.47% 139.85% 26.09% 6.88 Paper & Forest Products \$126.63% -0.19 Natural Gas (Diversified) \$115.89 \$71. (Central) \$206.41 \$206.74% -0.06 Foreign Diversified \$786.55% 11.06 \$5.04% 0.79% 145.18% -0.51% 107.225.51% 36.75% 127.054.40% 0.) \$82.61 Manuf.) \$97.51% 0. (Foreign) \$2.32% 20.42 \$95.19 Household Products \$116.49% -3.18% -1.79 Oilfield Services/Equip.66% 10.30 \$255.82% 27.073.43% 202. \$56.60% 6.41 Investment Co.62% 146.06% 205.20% 12.25% 113.24 \$28.59% 87.90% 0.14 \$27.64 \$1.05 \$307.76% 130.93 \$88.89% 35.56% 146.66% 2.80 \$130.36 \$1.35% 48.65 Financial Services \$23.40% 6.37 Electric Utility (West) \$256./Home Furnishings \$19.66 Page 2 129.596.31% 131.55 Metals & Mining (Div.29 Natural Gas (Distrib.70 \$3.75% 1.14% 1.25% 2.05% 6.24 \$36.51% 2.75 \$15.34 Food Processing \$99.83% 189.78% -0.80 \$46.Sheet1 Computer & Peripherals \$73.62% 5.52 \$194.01% 0.58 Grocery \$91.42 \$160.76% 0.80 Newspaper \$134.21 Office Equip & Supplies \$59.03% 2.84 Foreign Electron/Entertn \$1.38% 102.13% 11.44% 14.06 Electronics \$16.19 Machinery \$28.29% 6.83 \$264.51% 0.66 \$130.54 \$91.13% 119.71 \$35.09 Electric Util. (Domestic) \$0.62% 137.31 \$70.87% -4.94% 177.46% 9.13 \$14.89% 1.63% 3.72% 116.20% 90.79 \$11.37 \$977.39 Metal Fabricating \$17.99 Petroleum (Integrated) \$1.53 \$103.57 \$16.75 Computer Software & Svcs \$30.13% 0.88% 89.49 Copper \$173.79 Insurance (Life) \$1.70% 0.68 Food Wholesalers \$78.62% 157.43 Medical Services \$28.69% 2.86% 12.22% 166.88 Publishing \$52.34 \$69.73% 24.15% 36.39% 3.90% 98.57% -0.59% 0.11 Precision Instrument \$19.23 Investment Co.31 \$698.77 Entertainment \$89.99% 38.68% 132.46% 22.59% 147.74 Drug \$45. Housing/Rec Veh \$7.29% 163.06% 0.40 \$91.73% 36.80 Diversified Co.40 \$25.76 \$54.93 Homebuilding \$9.07% 4.72 Furn.71% 107.89% 4.39 Home Appliance \$54.64% 0.01 Electric Utility (East) \$283.97% 128.58 \$94.94% -10.57 Industrial Services \$13.78 Petroleum (Producing) \$48.25% 0.78 \$20.95% -5.80 \$117.62% 11.16% 9.33 Healthcare Info Systems \$21.10% 415.21% 27.68% 7.95 Drugstore \$43.28% 92.11% 1.28% 103.93% 0.84% 1.13 Insurance (Diversified) \$5.08% 76.15 \$120.48 Medical Supplies \$21.69% 50.57% 7.46% 1.88% -0.93% 10.87% 1.49% 178.92% 2.18% 1.30 Foreign Telecom.78% 114.28% 170.77% 149.70% 0.44% 139.80% 2.60 \$33.07% 0.26% 5.31 \$202.80 \$49.41% 199.46% 1.63% 57.84% 25.06% 116. \$1.30% 1.40 Packaging & Container \$48.94% 131.34% 154.74 \$189.47% -1.69 \$24.76% 114.29 Environmental \$47.662.91% 218.10 \$0.94% 88.91 \$63.01% 1.08 \$162.09 \$67. \$56.68% 177.59% -3.99 \$110.00 Gold/Silver Mining \$33.55 \$32.18% 8.55 Maritime \$34.24% 10.68% 205.63% 57.51 Electrical Equipment \$84.27% -6.67% 416.

87 Utility (Foreign) \$1.19 Telecom.28 Retail (Special Lines) \$19.68 \$41.88 Telecom.64 Retail Building Supply \$40.16% .39 \$35.18% 16.48% 239.87 \$89.40% 207.01% 131.36% 58.25 \$393.64% 1.43 \$6.13% 34.55 \$69.21% 151.12% 2.55 Restaurant \$26.61% 157.21 Retail Store \$121.00 \$53.44 Tobacco \$348.37% 213.39 Page 3 358.73% 58.99% 39.87% 23.70% 16.16% 186.57% 11.I.41 Trucking/Transp.154.58 \$99.62 Steel (General) \$29.90 \$159.62% 4.71 \$39.95 Textile \$26. Services \$273. Leasing \$55.93% 47.35 \$51.08% 249.92% 1.51% 94.24 Recreation \$21.56 \$513.31% 38.83% 4.88% 2.38% 63.58 \$31.T.78% 0.33% 1.83 Semiconductor Cap Equip \$35.14 \$32.36 \$330.19 \$71.88% 81.26% 3.83 Railroad \$247.83% 8.29% 19.12% 143.78% 66.56% 20.52% 240.07% 19.00% 71.75% 202.17% 26.99% 1.99 Water Utility \$21.49% 63.07% 18.31% 5.49% 8.37% 108.74 Shoe \$12.02% 5.76% 23.945.42% 4.06 \$191.00% -0.25 Toiletries/Cosmetics \$31.67 \$240.63 \$158.59 \$237.82 Securities Brokerage \$36.33% 162. Equipment \$26.20% 0.94% -1.51% 121.E.32% 5.77% 191.07% 0.26 \$25.66 \$4.51% 162.42% 395.Sheet1 R.14% 272.61% 1.00 Steel (Integrated) \$159.12% 7.96% 0.86 Tire & Rubber \$97.76% 170. \$1.60 Semiconductor \$127.55% 178.

Sheet1 ecially in stable growth.S. upon the growth rate and the . To calculate (Cap Ex = 133.33 Deprec'n . It raises e when the growth in erage (see dataset) sectors of the U.Change in WC) tal expendiutures t CapEx/EBIT(1-t) Page 4 . s to stable growth ash flows.

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