Originally published: 12/07/2016 10:54
Publication number: ELQ-27439-1

Generalized Free Cash Flow to the Firm (FCFF) Model for Negative Earnings Firms

This model is designed to value a firm, with changing margins, revenue growth, and other parameters.

by Prof. Aswath Damodaran
Professor at NYU Stern School of Business

with NYU Stern School of Business
An Education in Possible

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finance fcff negative earnings troubled firm

Description
The user has to define the following inputs:
- Length of high growth period
- Expected growth rate in earnings during the high growth period.
- Capital Spending, Depreciation and Working Capital needs during the high growth period.
- Expected growth rate in earnings during the stable growth period.
- 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)

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Further information

Objectives

Outputs:
- Present Value of FCFF in high growth phase
- Present Value of Terminal Value of Firm
- Value of the firm
- Market Value of Debt
- Market Value of Equity
- Value of Options Outstanding
- Value of Equity in Common Stock
- Value of Equity per Share

Use it if

Assumptions
- The firm is expected to grow at a higher growth rate in the first period.
- The growth rate will drop at the end of the first period to the stable growth rate.
- The free cashflow to equity is the correct measure of expected cashflows to stockholders.