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
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- 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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