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Two-Stage Free Cash Flow for the Firm (FCFF) Discount Model
  • Two-Stage Free Cash Flow for the Firm (FCFF) Discount Model
  • Two-Stage Free Cash Flow for the Firm (FCFF) Discount Model
Originally published: 28/06/2016 09:55
Publication number: ELQ-31555-1
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Two-Stage Free Cash Flow for the Firm (FCFF) Discount Model

Value a firm with two stages of growth on the basis of free cashflows to firm

Prof. Aswath Damodaranby Prof. Aswath Damodaran
Professor at NYU Stern School of BusinessFollow 1,062
NYU Stern School of Businesswith NYU Stern School of Business
An Education in PossibleFollow 56
20 reviews2,608 views|Start the discussion!|Bookmark download for free
financevaluationfree cash flow for the firmfcfftwo-stage growth
Description
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.

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)

Note: this model is being shared with the authorization of Professor Aswath Damodaran from NYU Stern Business School (www.damodaran.com)

This Best Practice includes
1 Excel Model File

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Further information

Outputs:
- Cost of Equity
- After-tax Cost of debt
- Cost of Capital

- Current EBIT
- Current FCFF
- Growth Rate in Earnings per share
- Growth Rate in capital spending, depreciation and working capital

- Working Capital as percent of revenues
- The FCFE for the high growth phase (up to 10 years)
- Growth Rate in Stable Phase
- FCFF in Stable Phase
- Cost of Equity in Stable Phase
- AT Cost of Debt in Stable Phase
- 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

Best suited for firms with two stages of growth, an initial period of higher growth and a subsequent period of stable growth.

Assumptions in the model:
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.


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