Description
A spreadsheet explaining the workings of Free Cash Flow to Equity (FCFE) Valuation Model for organizations with stable growth rates.
FCFE Stable Model
FCFE STABLE GROWTH MODEL
This model is designed to value the equity in a stable firm on the basis of free cashflows to equity, especially when they are different from dividends paid.
Assumptions in the model: 1. The firm is in steady state and will grow at a stable rate forever. 2. The firm does not pay out what it can afford to in dividends, i.e., Dividends ? FCFE.
User defined inputs The user has to define the following inputs to the model: 1. Current Earnings per share 2. Capital Spending and Depreciation per share 3. Change in working capital per share 4. Desired debt level for financing working capital and capital spending needs. 5. Cost of Equity or Inputs to the CAPM (Beta, Riskfree rate, Risk Premium) 6. Expected Growth Rate in free cashflows to equity forever.
Page 1
FCFE Stable Model
Please enter inputs to the model: Current Earnings per share = Capital Spending/share = Depreciation / share = Chg. Working Capital/share = Desired debt financing ratio = $5.45 $2.00 $1.75 $0.60 29.97% (in currency) {You can input all the numbers for the aggregate company, if you so desire} (in currency) (in currency) (in currency) ( in percent) No 10.96% Yes 12% (Yes or No)
Do you want to offset capital expenditures by depreciation in the future? The reinvestment rate based upon your inputs is computed to be Do you want to recompute this reinvestment rate based upon fundamentals? If yes, enter the return on equity that you expect this firm to have in perpetuity Desired debt financing ratio = 29.97% ( in percent) No (in percent) 1.1 7% 5.50% 6% (in percent) (in percent) (in percent)
Are you directly entering the cost of equity? (Yes or No) If yes, enter cost of equity = If no, enter the inputs for the CAPM Beta of the stock = Riskfree rate = Risk Premium= Expected Growth Rate =
The expected growth rate for a stable firm
Page 2
FCFE Stable Model
cannot be significantly higher than the nominal growth rate in the economy in which the firm operates. It can be lower. Warnings:
Page 3
FCFE Stable Model
This is the output from the Gordon Growth Model Firm Details: from inputs on prior page Current Earnings per share = -(1- Desired debt fraction) * (Capital Spending - Depreciation) -(1- Desired debt fraction) * ? Working Capital Free Cashflow to Equity = 70.03% $3.29 70.03% $0.60 $0.42 $2.73 $2.30 $5.45
Cost of Equity = Expected Growth rate =
13.05% 6.00%
Gordon Growth Model Value =
$40.97
Growth rate 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00%
Value $98.28 $73.34 $58.28 $48.19 $40.97 $35.54 $31.31
Value vs. Expected Growth $120.00
$100.00
Value of Stock $80.00 $60.00 Page 4
Value of Stock
FCFE Stable Model $60.00
3.00% 2.00%
$27.93 $25.15
$40.00
$20.00 $0.00
Expected Growth Rate
Page 5
doc_217893705.xls
A spreadsheet explaining the workings of Free Cash Flow to Equity (FCFE) Valuation Model for organizations with stable growth rates.
FCFE Stable Model
FCFE STABLE GROWTH MODEL
This model is designed to value the equity in a stable firm on the basis of free cashflows to equity, especially when they are different from dividends paid.
Assumptions in the model: 1. The firm is in steady state and will grow at a stable rate forever. 2. The firm does not pay out what it can afford to in dividends, i.e., Dividends ? FCFE.
User defined inputs The user has to define the following inputs to the model: 1. Current Earnings per share 2. Capital Spending and Depreciation per share 3. Change in working capital per share 4. Desired debt level for financing working capital and capital spending needs. 5. Cost of Equity or Inputs to the CAPM (Beta, Riskfree rate, Risk Premium) 6. Expected Growth Rate in free cashflows to equity forever.
Page 1
FCFE Stable Model
Please enter inputs to the model: Current Earnings per share = Capital Spending/share = Depreciation / share = Chg. Working Capital/share = Desired debt financing ratio = $5.45 $2.00 $1.75 $0.60 29.97% (in currency) {You can input all the numbers for the aggregate company, if you so desire} (in currency) (in currency) (in currency) ( in percent) No 10.96% Yes 12% (Yes or No)
Do you want to offset capital expenditures by depreciation in the future? The reinvestment rate based upon your inputs is computed to be Do you want to recompute this reinvestment rate based upon fundamentals? If yes, enter the return on equity that you expect this firm to have in perpetuity Desired debt financing ratio = 29.97% ( in percent) No (in percent) 1.1 7% 5.50% 6% (in percent) (in percent) (in percent)
Are you directly entering the cost of equity? (Yes or No) If yes, enter cost of equity = If no, enter the inputs for the CAPM Beta of the stock = Riskfree rate = Risk Premium= Expected Growth Rate =
The expected growth rate for a stable firm
Page 2
FCFE Stable Model
cannot be significantly higher than the nominal growth rate in the economy in which the firm operates. It can be lower. Warnings:
Page 3
FCFE Stable Model
This is the output from the Gordon Growth Model Firm Details: from inputs on prior page Current Earnings per share = -(1- Desired debt fraction) * (Capital Spending - Depreciation) -(1- Desired debt fraction) * ? Working Capital Free Cashflow to Equity = 70.03% $3.29 70.03% $0.60 $0.42 $2.73 $2.30 $5.45
Cost of Equity = Expected Growth rate =
13.05% 6.00%
Gordon Growth Model Value =
$40.97
Growth rate 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00%
Value $98.28 $73.34 $58.28 $48.19 $40.97 $35.54 $31.31
Value vs. Expected Growth $120.00
$100.00
Value of Stock $80.00 $60.00 Page 4
Value of Stock
FCFE Stable Model $60.00
3.00% 2.00%
$27.93 $25.15
$40.00
$20.00 $0.00
Expected Growth Rate
Page 5
doc_217893705.xls