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FCFE Stable Growth Model Guide

This model values a stable firm using free cash flows to equity (FCFE) rather than dividends, assuming steady growth forever. The user inputs include current earnings, capital spending, depreciation, working capital changes, debt ratio, cost of equity, and expected long-term growth rate. The model calculates FCFE, cost of equity using CAPM, and values the firm using the Gordon Growth model at different growth rates to see the sensitivity of value to changes in growth.

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Dread Nought
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131 views5 pages

FCFE Stable Growth Model Guide

This model values a stable firm using free cash flows to equity (FCFE) rather than dividends, assuming steady growth forever. The user inputs include current earnings, capital spending, depreciation, working capital changes, debt ratio, cost of equity, and expected long-term growth rate. The model calculates FCFE, cost of equity using CAPM, and values the firm using the Gordon Growth model at different growth rates to see the sensitivity of value to changes in growth.

Uploaded by

Dread Nought
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLS, PDF, TXT or read online on Scribd

FCFEStableModel

FCFESTABLEGROWTHMODEL

Thismodelisdesignedtovaluetheequityinastablefirmonthebasisof
freecashflowstoequity,especiallywhentheyare
differentfromdividendspaid.

Assumptionsinthemodel:
1.Thefirmisinsteadystateandwillgrowatastablerateforever.
2.Thefirmdoesnotpayoutwhatitcanaffordtoindividends,i.e.,DividendsFCFE.

Userdefinedinputs
Theuserhastodefinethefollowinginputstothemodel:
1.CurrentEarningspershare
2.CapitalSpendingandDepreciationpershare
3.Changeinworkingcapitalpershare
4.Desireddebtlevelforfinancingworkingcapitalandcapitalspendingneeds.
5.CostofEquityorInputstotheCAPM(Beta,Riskfreerate,RiskPremium)
6.ExpectedGrowthRateinfreecashflowstoequityforever.

Page
FCFEStableModel

Pleaseenterinputstothemodel:
CurrentEarningspershare= $5.45 (incurrency) {Youcaninputallthenumbersfortheaggregatecompany,ifyousodesire}

CapitalSpending/share= $2.00 (incurrency)


Depreciation/share= $1.75 (incurrency) AswathDamodaran:
Chg.WorkingCapital/share= $0.60 (incurrency) Ifyousetyourperpetual
growthrateatanynumber
Desireddebtfinancingratio= 29.97% (inpercent) greaterthanzero,this
shouldbeno.
Doyouwanttooffsetcapitalexpendituresbydepreciationinthefuture? No (YesorNo)
Thereinvestmentratebaseduponyourinputsiscomputedtobe 10.96%
AswathDamodaran:
Doyouwanttorecomputethisreinvestmentratebaseduponfundamentals? Yes Yourreinvestmentrate
shouldbeconsistentwith
Ifyes,enterthereturnonequitythatyouexpectthisfirmtohaveinperpetuity 12% yourgrowthrate
Desireddebtfinancingratio= 29.97% (inpercent) assumptions.Ifyouanswer
yestothisquestion,you
shouldenterthereturnon
equitybelow.
Areyoudirectlyenteringthecostofequity?(YesorNo) No
Ifyes,entercostofequity= (inpercent)
Ifno,entertheinputsfortheCAPM
Betaofthestock= 1.1
Riskfreerate= 7% (inpercent)
RiskPremium= 5.50% (inpercent)

ExpectedGrowthRate= 6% (inpercent) Theexpectedgrowthrateforastablefirm

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FCFEStableModel

cannotbesignificantlyhigherthanthenominal
growthrateintheeconomyinwhichthefirm
operates.Itcanbelower.

Warnings:

Page
FCFEStableModel

ThisistheoutputfromtheGordonGrowthModel

FirmDetails:frominputsonpriorpage
CurrentEarningspershare= $5.45

(1Desireddebtfraction)* 70.03%

(CapitalSpendingDepreciation) $3.29 $2.30


(1Desireddebtfraction)* 70.03%

WorkingCapital $0.60 $0.42

FreeCashflowtoEquity= $2.73

CostofEquity= 13.05%

ExpectedGrowthrate= 6.00%

GordonGrowthModelValue= $40.97

Growth rate Value Valuevs.ExpectedGrowth


10.00% $98.28
9.00% $73.34 $120.00
8.00% $58.28
7.00% $48.19 $100.00
6.00% $40.97 $80.00
5.00% $35.54
ValueofStock

4.00% $31.31 $60.00


3.00% $27.93
$40.00
$20.00
$0.00 Page
10.0 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00
0% % % % % % % % %
$100.00
$80.00
FCFEStableModel

ValueofStock
$60.00
$40.00
2.00% $25.15
$20.00
$0.00
10.0 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00
0% % % % % % % % %

ExpectedGrowthRate

Page

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