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Comparing DDM and FCFE Models: Two Stage Valuation: Inputs For FCFE Calculation

This document presents a two-stage discounted cash flow model to value a company. It provides inputs like the company's current net income, capital expenditures, depreciation, cost of equity, and growth rates. It then calculates the free cash flows to equity for the high growth period of 5 years as well as the terminal value. Finally, it calculates the net present value of the free cash flows and terminal value to arrive at a valuation of the company using both the FCFE and DDM methods.

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139 views6 pages

Comparing DDM and FCFE Models: Two Stage Valuation: Inputs For FCFE Calculation

This document presents a two-stage discounted cash flow model to value a company. It provides inputs like the company's current net income, capital expenditures, depreciation, cost of equity, and growth rates. It then calculates the free cash flows to equity for the high growth period of 5 years as well as the terminal value. Finally, it calculates the net present value of the free cash flows and terminal value to arrive at a valuation of the company using both the FCFE and DDM methods.

Uploaded by

api-3763138
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLS, PDF, TXT or read online on Scribd
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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 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 = $100.00


Expected growth rate in net income = 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
Net Income $110.00 $121.00 $133.10 $146.41
- (CapEx-Depreciation) $27.50 $30.25 $33.28 $36.60
- Change in Working Capital $5.00 $5.50 $6.05 $6.66
+ Net Debt Cash flow $11.00 $12.10 $13.31 $14.64
Free Cashflow to Equity $88.50 $97.35 $107.09 $117.79
Dividends $33.00 $36.30 $39.93 $43.92
PV of FCFE $81.19 $81.94 $82.69 $83.45
PV of Dividends $30.28 $30.55 $30.83 $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 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

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Two-Stage FCFE Discount Model

age Valuation

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Two-Stage FCFE Discount Model

No
7%

5 Terminal Year
$161.05 $167.49
$40.26 $69.36
$7.32 $3.22
$16.11 $16.75
$129.57 $111.66
$48.32
$84.21
$31.40

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Two-Stage FCFE Discount Model

$384.72 $384.72

$9.26

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