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Free Cash Flow to Equity (FCFE) Stable Growth Model
  • Free Cash Flow to Equity (FCFE) Stable Growth Model
Originally published: 22/06/2016 09:26
Publication number: ELQ-62798-1
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Free Cash Flow to Equity (FCFE) Stable Growth Model

Value the equity in a stable firm on the basis of free cashflows to equity

Prof. Aswath Damodaranby Prof. Aswath Damodaran
Professor at NYU Stern School of BusinessFollow 1,096
NYU Stern School of Businesswith NYU Stern School of Business
An Education in PossibleFollow 64
15 reviews1,124 views|Start the discussion!|Bookmark download for free
financevaluationfcfefree cash flow to equityequityearnings per sharestable growth
Description
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.

Note: this model is being shared with the authorization of Professor Aswath Damodaran from NYU Stern Business School

This Best Practice includes
1 Excel Model File

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Further information

Outputs:
Current Earnings per share
-(1- Desired debt fraction) *
(Capital Spending - Depreciation)
-(1- Desired debt fraction) *
∂ Working Capital
Free Cashflow to Equity

Cost of Equity
Expected Growth rate

Gordon Growth Model Value

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.

- Especially use when free cashflows to equity are different from dividends paid.
- Best suited for firms in stable leverage and growing at the same rate as the economy.


4.8 / 5 (15 votes)

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