Two-Stage FCFF Discount Model

Two­Stage FCFF Discount Model
This model is designed to value a firm, with two stages of growth, an initial period of higher growth and a subsequent period of stable growth.
For a richer version of this model, try the fcffginzu.xls spreadsheet.
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. 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 capital. (Cost of equity, Cost of debt, Weights on debt and equity)

Inputs to the model

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Two-Stage FCFF Discount Model

Current EBIT = Current Interest Expense = Current Capital Spending Current Depreciation & Amort'n = Tax Rate on Income = Current Revenues = Current Non­cash Working Capital = Chg. Working Capital = Cash and Marketable Securities Value of equity options issued by firm = Book Value of Debt = Book Value of Equity =

$5,186.00  $118.00  $2,152.00  $1,228.00  28.49% $16,701.00  $3,755.00  $499.00  $500.00  $1,500.00  $1,479.00  $12,941.00  $1,315.00  $12,156.00  Last year

Weights on Debt and Equity Is the firm publicly traded ? Yes ( Yes or No)

If yes, enter the market price per share =       & Number of shares outstanding  =       & Market Value of Debt =

$125.50  993.57 $1,822.00 

(in currency) (in #) ( in currency)

If no, do you want to use the book value debt ratio ? If no, enter the debt to capital ratio to be used =

No

(Yes or No) (in percent)

Enter length of extraordinary growth period =

5

(in years)

Do you want to change the debt ratio in the stable growth period? If yes, enter the debt ratio for the stable growth period =

No

Costs of Components Do you want to enter cost of equity directly? If yes, enter the cost of equity = If no, enter the inputs to the cost of equity No (Yes or No) (in percent)

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Two-Stage FCFF Discount Model

Beta of the stock = Riskfree rate= Risk Premium=

0.8 5.30% 5.50% (in percent) (in percent)

Enter the cost of debt for cost of capital calculation

5.50%

( in percent)

Earnings Inputs Do you want to use the historical growth rate? If yes, enter EBIT  from five years ago = No $800.00  (Yes or No) (in currency)

Do you have an outside estimate of growth ? If yes, enter the estimated growth:

Yes 12.50%

(Yes or No) (in percent)

Do you want to calculate the growth rate from fundamentals? The following will be the inputs to the fundamental growth formulation: ROC = Reinv. Rate = 27.53% 38.37%

Yes

(Yes or No)

Do you want to change any of these inputs for the high growth period? If yes, specify the values for these inputs (Please enter all variables) ROC = Reinv. Rate = 10.00% 100.00%

No

(Yes or No)

Specify weights to be assigned to each of these growth rates: Historical Growth Rate  = Outside Prediction of Growth = Fundamental Estimate of Growth = 0.00% 0.00% 100.00% (in percent) (in percent) (in percent)

Enter growth rate in stable growth period? Beta Will the beta to change in the stable period? If yes, enter the beta for stable period =

6.00%

(in percent)

No 1.00

(Yes or No)

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Two-Stage FCFF Discount Model

Will the cost of debt change in the stable period? If yes, enter the new cost of debt  = Capital Spending, Depreciation & Working Capital Do you want all these items to grow at the same rate as earnings ? If not, enter the growth rates for each of the following items: Capital Spending High Growth Stable Growth 6% Do not enter Depreciation 6% Do not enter

No

(Yes or No) ( in percent)

Yes

(Yes or No)

Revenues 6% 6% (in percent) (in percent)

Do you want to keep the current fraction of working capital to revenues? Specify working capital as a percent of revenues:

Yes (in percent)

(Yes or No)

Capital Spending and Depreciation in Stable Growth Is capital spending to be offset by depreciation in stable period? Do you want your reinvestment to be computed from fundamentals? Return on captial in perpetuity If no, do you want to enter capital expenditure as % of depreciation No Yes 12% 120% (Yes or No) Aswath Damodaran: Yes or no. If yes, enter the return on capital that your firm will have in stable growth. If no, enter cap ex as a (in percent) percent of depreciation in the cell below.

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Two-Stage FCFF Discount Model

that your firm will have in stable growth. If no, enter cap ex as a percent of depreciation in the cell below.

Output from the program
Cost of Equity = Equity/(Debt+Equity ) = After­tax Cost of debt = Debt/(Debt +Equity) = 9.70% 98.56% 3.93% 1.44%

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Two-Stage FCFF Discount Model

Cost of Capital =

9.62%

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Two-Stage FCFF Discount Model

Current EBIT * (1 ­ tax rate) =  ­ (Capital Spending ­ Depreciation)  ­ Change in Working Capital Current FCFF

$3,708.51  $924.00  $499.00  $2,285.51 

Growth Rate in Earnings per share Growth Rate Historical Growth = Outside Estimates = Fundamental Growth = Weighted Average 45.33% 12.50% 10.56% 10.56% Weight 0.00% 0.00% 100.00%

Growth Rate in capital spending, depreciation and working capital High Growth Growth rate in capital spending = Growth rate in depreciation = Growth rate in revenues = 10.56% 10.56% 10.56% Stable Growth Do not enter Do not enter 6.00%

Working Capital as percent of revenues =

22.48%

 (in percent)

The FCFE for the high growth phase are shown below (upto 10 years) 1 EBIT * (1 ­ tax rate)  ­ (CapEx­Depreciation)  ­Chg. Working Capital Free Cashflow to Firm Present Value $4,100.25  $1,021.61  $396.66  $2,681.99  $2,446.69  2 $4,533.38  $1,129.52  $438.56  $2,965.30  $2,467.82  3 $5,012.26  $1,248.84  $484.88  $3,278.54  $2,489.13  4 $5,541.73  $1,380.76  $536.10  $3,624.87  $2,510.62 

Growth Rate in Stable Phase = FCFF in Stable Phase = Cost of Equity in Stable Phase = Equity/ (Equity + Debt) = AT Cost of Debt in Stable Phase =

6.00% $3,247.38  9.70% 98.56% 3.93%

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Two-Stage FCFF Discount Model

Debt/ (Equity + Debt)  = Cost of Capital in Stable Phase = Value at the end of growth phase = Present Value of FCFF in high growth phase = Present Value of Terminal Value of Firm = Value of the firm = Cash and Marketable Securities = Market Value of outstanding debt = Market Value of Equity = Value of Equity options issued by the company = Market Value of Equity/share =

1.44% 9.62% $89,782.26  $12,446.56  $56,728.59  $69,175.15  $500.00  $1,822.00  $67,853.15  $1,500.00  $66.78 

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Two-Stage FCFF Discount Model

el

f growth, an initial table growth.

adsheet.

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Two-Stage FCFF Discount Model

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Two-Stage FCFF Discount Model

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Two-Stage FCFF Discount Model

swath Damodaran: s or no. If yes, enter e return on capital at your firm will have stable growth. If no, ter cap ex as a rcent of depreciation the cell below.

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at your firm will have stable growth. If no, ter cap ex as a rcent of depreciation the cell below.

Two-Stage FCFF Discount Model

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5 $6,127.13  $1,526.62  $592.74  $4,007.78  $2,532.30 

           

           

           

           

           

Terminal Year $6,494.75  $2,875.14  $372.24  $3,247.38 

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Two-Stage FCFF Discount Model

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