Two-Stage FCFE Discount Model

Comparing DDM and FCFE Models: Two Stage Valuation

Inputs for FCFE Calculation Current Net Income = Current Dividends = Current Capital Expenditures = Current Depreciation Current Revenue = Current Working Capital = Net Debt Cashflow = $100.00 $30.00 $75.00 $50.00 $1,000.00 $50.00 $10.00 (in currency) (in currency) (in currency) (in currency) (in currency)

Enter length of extraordinary growth period = Enter growth rate for high growth period =

5 10.00%

(in years)

Inputs for cost of equity Beta of the stock = Riskfree rate= Risk Premium= 1 5.00% 4.00% (in percent) (in percent)

Enter growth rate in stable growth period?

4.00%

(in percent)

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Two-Stage FCFE Discount Model

Return on equity in stable growth = Will the beta to change in the stable period? If yes, enter the beta for stable period =

12.00% No 1 (Yes or No)

To reconcile the dividend discount model and the FCFE model, you have to input the following: Do you want to assume that the cash buildup that will occur if dividends < FCFE get reinvested at the cost of equity = If not, enter the rate of return you expect to earn on this cash (assuming that it is invested at current risk level) =

Output from the program

Cost of Equity = 9.00%

Net Income = Expected growth rate in net income =

$100.00 10.00%

Growth Rate in capital spending, depreciation and working capital High Growth Growth rate in capital spending = Growth rate in depreciation = Growth rate in revenues = 10.00% 10.00% 10.00% Stable Growth 4.00% 4.00% 4.00%

Working Capital as percent of revenues = Cash builds up gets invested at

5.00% 7.00%

(in percent)

The FCFE for the high growth phase are shown below (upto 6 years) 1 Net Income - (CapEx-Depreciation) - Change in Working Capital + Net Debt Cash flow Free Cashflow to Equity Dividends PV of FCFE PV of Dividends $110.00 $27.50 $5.00 $11.00 $88.50 $33.00 $81.19 $30.28 2 $121.00 $30.25 $5.50 $12.10 $97.35 $36.30 $81.94 $30.55 3 $133.10 $33.28 $6.05 $13.31 $107.09 $39.93 $82.69 $30.83 4 $146.41 $36.60 $6.66 $14.64 $117.79 $43.92 $83.45 $31.12

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Two-Stage FCFE Discount Model

Cash Build up (invested at specified rate)

$55.50

$120.44

$196.02

$283.61

FCFE Growth Rate in Stable Phase = FCFE (Dividends) in Stable Phase = Cost of Equity in Stable Phase = Price at the end of growth phase = Additional cash build up over high growth period = 4.00% $111.66 9.00% $2,233.24

DDM 4.00% $111.66 9.00% $2,233.24 $384.72

FCFE Present Value of FCFE in high growth phase = Present Value of Terminal Price = Present Value of Cash build up in terminal year = Value of the stock = $1,864.93 $413.48 $1,451.45

DDM $154.18 $1,451.45 $250.04 $1,855.68

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Two-Stage FCFE Discount Model

tage Valuation

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Two-Stage FCFE Discount Model

No 7%

5 $161.05 $40.26 $7.32 $16.11 $129.57 $48.32 $84.21 $31.40

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Two-Stage FCFE Discount Model

$384.72

$9.26

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Two-Stage FCFE Discount Model

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Two-Stage FCFE Discount Model

Terminal Year $167.49 $69.36 $3.22 $16.75 $111.66

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Two-Stage FCFE Discount Model

$384.72

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