Two-Stage FCFE Discount Model

ComparingDDMandFCFEModels:TwoStageValuation
InputsforFCFECalculation
CurrentNetIncome= $100.00 (incurrency)
CurrentDividends= $30.00 (incurrency)

CurrentCapitalExpenditures= $75.00 (incurrency)

CurrentDepreciation $50.00 (incurrency)

CurrentRevenue= $1,000.00

CurrentWorkingCapital= $50.00 (incurrency)

NetDebtCashflow= $10.00

Enterlengthofextraordinarygrowthperiod= 5 (inyears)

Entergrowthrateforhighgrowthperiod= 10.00%

Inputsforcostofequity
Betaofthestock= 1

Riskfreerate= 5.00% (inpercent)

RiskPremium= 4.00% (inpercent)

Entergrowthrateinstablegrowthperiod? 4.00% (inpercent)

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Returnonequityinstablegrowth= 12.00%

Willthebetatochangeinthestableperiod? No (YesorNo)

Ifyes,enterthebetaforstableperiod= 1

ToreconcilethedividenddiscountmodelandtheFCFEmodel,youhavetoinputthefollowing:
Doyouwanttoassumethatthecashbuildupthatwilloccurifdividends<FCFEgetreinvestedatthecostofequity=

Ifnot,entertherateofreturnyouexpecttoearnonthiscash(assumingthatitisinvestedatcurrentrisklevel)=

Outputfromtheprogram
CostofEquity= 9.00%

NetIncome= $100.00

Expectedgrowthrateinnetincome= 10.00%

GrowthRateincapitalspending,depreciationandworkingcapital

HighGrowth StableGrowth
Growthrateincapitalspending= 10.00% 4.00%

Growthrateindepreciation= 10.00% 4.00%

Growthrateinrevenues= 10.00% 4.00%

WorkingCapitalaspercentofrevenues= 5.00% (inpercent)

Cashbuildsupgetsinvestedat 7.00%

TheFCFEforthehighgrowthphaseareshownbelow(upto6years)
1 2 3 4

NetIncome $110.00 $121.00 $133.10 $146.41

(CapExDepreciation) $27.50 $30.25 $33.28 $36.60

ChangeinWorkingCapital $5.00 $5.50 $6.05 $6.66

+NetDebtCashflow $11.00 $12.10 $13.31 $14.64

FreeCashflowtoEquity $88.50 $97.35 $107.09 $117.79

Dividends $33.00 $36.30 $39.93 $43.92

PVofFCFE $81.19 $81.94 $82.69 $83.45

PVofDividends $30.28 $30.55 $30.83 $31.12

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CashBuildup(investedatspecifiedrat $55.50 $120.44 $196.02 $283.61

FCFE DDM
GrowthRateinStablePhase= 4.00% 4.00%

FCFE(Dividends)inStablePhase= $111.66 $111.66

CostofEquityinStablePhase= 9.00% 9.00%

Priceattheendofgrowthphase= $2,233.24 $2,233.24

Additionalcashbuildupoverhighgrowthperiod= $384.72

FCFE DDM
PresentValueofFCFEinhighgrowthphase= $413.48 $154.18
PresentValueofTerminalPrice= $1,451.45 $1,451.45
PresentValueofCashbuildupinterminalyear= $250.04
Valueofthestock= $1,864.93 $1,855.68

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tageValuation

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 Two-Stage FCFE Discount Model

No

7%

5 TerminalYear

$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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$384.72 $384.72

$9.26

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