Two-Stage Free Cash Flow to Equity (FCFE) Discount Model
Originally published: 28/06/2016 09:47
Publication number: ELQ-67808-1
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Two-Stage Free Cash Flow to Equity (FCFE) Discount Model

Value the equity in a firm with two stages of growth

This model is designed to value the equity in 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 to the model:
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 equity.

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

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Further information

- Cost of Equity

- Proportion of Debt: Capital Spending
- Proportion of Debt: Working Capital

- Current Earnings per share
- Change in Working Capital
- Current FCFE

Growth Rate in Earnings per share

Historical Growth
Outside Estimates
Fundamental Growth
Weighted Average

- Growth Rate in capital spending, depreciation and working capital

- Working Capital as percent of revenues

- Earnings
- Free Cashflow to Equity
- Present Value

- Growth Rate in Stable Phase
- FCFE in Stable Phase
- Cost of Equity in Stable Phase
- Price at the end of growth phase

- Present Value of FCFE in high growth phase
- Present Value of Terminal Price
- Value of the stock

- Value of assets in place
- Value of stable growth
- Value of extraordinary growth
- Value of the stock

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.
3. The free cashflow to equity is the correct measure of expected cashflows to stockholders.

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