Two-Stage FCFE Discount Model

Comparing DDM and FCFE Models: Two Stage Valuation

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

Enter length of extraordinary growth period = 5 (in years)

Enter growth rate for high growth period = 10.00%

Inputs for cost of equity

Beta of the stock = 1
Riskfree rate= 5.00% (in percent)
Risk Premium= 4.00% (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 = 12.00%

Will the beta to change in the stable period? No (Yes or No)
If yes, enter the beta for stable period = 1
To reconcile the dividend discount model and the FCFE model, you have to inp
Do you want to assume that the cash buildup that will occur if dividends < FCFE get reinvested No
If not, enter the rate of return you expect to earn on this cash (assuming that it is invested at cur 7%

Output from the program

Cost of Equity = 9.00%

Net Income = $100.00

Expected growth rate in net in 10.00%

Growth Rate in capital spending, depreciation and working capital

High Growth Stable Growth
Growth rate in capital spending 10.00% 4.00%
Growth rate in depreciation = 10.00% 4.00%
Growth rate in revenues = 10.00% 4.00%

Working Capital as percent of revenues = 5.00% (in percent)

Cash builds up gets invested at 7.00%
The FCFE for the high growth phase are shown below (upto 6 years)
1 2 3 4 5
Net Income $110.00 $121.00 $133.10 $146.41 $161.05
- (CapEx-Depreciation) $27.50 $30.25 $33.28 $36.60 $40.26
- Change in Working Capital $5.00 $5.50 $6.05 $6.65 $7.32
+ Net Debt Cash flow $11.00 $12.10 $13.31 $14.64 $16.11
Free Cashflow to Equity $88.50 $97.35 $107.09 $117.79 $129.57
Dividends $33.00 $36.30 $39.93 $43.92 $48.32
PV of FCFE $81.19 $81.94 $82.69 $83.45 $84.21
PV of Dividends $30.28 $30.55 $30.83 $31.12 $31.40

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Cash Build up (invested at speci $55.50 $120.44 $196.02 $283.61 $384.72

FCFE DDM
Growth Rate in Stable Phase = 4.00% 4.00%
FCFE (Dividends) in Stable Phase = $111.66 $111.66
Cost of Equity in Stable Phase = 9.00% 9.00%
Price at the end of growth phase = $2,233.24 $2,233.24
Additional cash build up over high growth period = $384.72

FCFE DDM
Present Value of FCFE in high growth phase = $413.48 $154.18
Present Value of Terminal Price = $1,451.45 $1,451.45
Present Value of Cash build up in terminal year = $250.04
Value of the stock = $1,864.93 $1,855.68 $9.26

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Valuation

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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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