Sheet1

There are three ways in which you can estimate the capital expenditures, especially in stable growth.
Approach 1: Assume Net Capital Expenditures are zero. (Cap Ex is 100% of Depreciation)
This approach, which is the most widely used in DCF valuation, especially when it comes to stable growth
periods, is also the most dangerous when combined with assumptions about growth in cash flows. It raises
the legitimate question of how growth is feasible with no net investment. It is defensible when the growth in
earnings is expected to be zero.
Approach 2: Assume that Capital/Expenditures/Depreciation approaches the industry average (see dataset)
Assume that the capital expenditure/depreciation ratio for this firm will approach that of the
industry or sector in which the firm operates. To see what the averages are for different sectors of the U.S.
economy scroll down to Table 1. The net cap exp is also estimated as a percent of revenues
and after-tax operating income. Use the ratio that best fits your firm.
Approach 3: Estimate the net capital expenditures needed based upon return on capital
Approach 3: Estimate the net capital ex and working capital investment needed based upon the growth rate and the
return on capital of the firm. Typical returns on capital in different sectors are in table 1. To calculate
the net capital expenditures for your firm as a percentage of after-tax EBIT enter the following:
Expected Growth Rate in Operating Income =
Expected Return on Capital =

5.00%
15.00%

Expected Net Capital Ex and Chg in WC as % of after-tax EBIT =

33.33% (Cap Ex = 133.33 Deprec'n - C

As an example,
Thus, if your after-tax EBIT in year 5 is $ 100 million, and you want to estimate net capital expendiutures
and working capital requirements in year 6, given a stable growth rate of 5% forever after that:
Net Cap Ex + Change in Working Capital in year 6 = (.3333) ( $ 100 million) = $ 33.33 million

Table 1: Cap Expenditure/Depreciation Ratios by Sector

Industry
Depreciation
Advertising
$
39.51
Aerospace/Defense
$ 101.56
Air Transport
$ 179.56
Aluminum
$ 196.02
Apparel
$
13.74
Auto & Truck
$ 2,134.54
Auto Parts (OEM)
$
80.54
Auto Parts (Replacement)$
26.90
Beverage (Alcoholic)
$
69.67
Beverage (Soft Drink)
$ 305.78
Building Materials
$
25.47
Cable TV
$ 184.31
Canadian Energy
$ 277.27
Cement & Aggregates $
27.00
Chemical (Basic)
$ 324.22
Chemical (Diversified) $ 215.83
Chemical (Specialty)
$
37.88
Coal/Alternate Energy $
42.10
Computer & Peripherals $
73.75
Computer Software & Svcs
$
30.49

Cap Ex
Cap Ex/Deprec'nNet CapEx/SalesNet CapEx/EBIT(1-t)
$
31.13
78.81%
-0.92%
-9.82%
$
90.23
88.85%
-0.36%
-3.90%
$ 264.82
147.48%
2.40%
24.83%
$ 254.49
129.83%
1.55%
14.90%
$
13.78
100.33%
0.01%
0.11%
$ 2,387.37
111.84%
0.79%
7.34%
$
99.37
123.39%
0.83%
11.36%
$
38.70
143.85%
1.23%
16.86%
$ 116.23
166.83%
2.42%
23.75%
$ 405.59
132.64%
1.59%
13.14%
$
47.23
185.43%
2.01%
29.03%
$ 240.12
130.28%
5.64%
21.16%
$ 441.82
159.35%
6.46%
40.71%
$
38.78
143.66%
2.48%
17.24%
$ 435.46
134.31%
1.95%
10.31%
$ 338.22
156.71%
3.46%
28.86%
$
56.50
149.16%
2.26%
19.42%
$ 154.08
366.02%
20.27%
49.68%
$
95.71
129.78%
1.18%
11.09%
$
35.05
114.94%
1.05%
6.15%

Page 1

Sheet1

Copper
$ 173.80
Diversified Co.
$
56.74
Drug
$
45.95
Drugstore
$
43.09
Electric Util. (Central)
$ 206.01
Electric Utility (East)
$ 283.37
Electric Utility (West)
$ 256.51
Electrical Equipment
$
84.06
Electronics
$
16.77
Entertainment
$
89.29
Environmental
$
47.65
Financial Services
$
23.34
Food Processing
$
99.68
Food Wholesalers
$
78.06
Foreign Diversified
$ 786.84
Foreign Electron/Entertn $ 1,225.30
Foreign Telecom.
$ 1,054.72
Furn./Home Furnishings $
19.00
Gold/Silver Mining
$
33.58
Grocery
$
91.33
Healthcare Info Systems $
21.39
Home Appliance
$
54.93
Homebuilding
$
9.12
Hotel/Gaming
$
33.19
Household Products
$ 116.57
Industrial Services
$
13.13
Insurance (Diversified) $
5.79
Insurance (Life)
$
1.23
Investment Co. (Domestic)
$
0.41
Investment Co. (Foreign) $
2.19
Machinery
$
28.61
Manuf. Housing/Rec Veh $
7.55
Maritime
$
34.43
Medical Services
$
28.48
Medical Supplies
$
21.39
Metal Fabricating
$
17.55
Metals & Mining (Div.) $
97.29
Natural Gas (Distrib.)
$
82.19
Natural Gas (Diversified) $ 115.80
Newspaper
$ 134.21
Office Equip & Supplies $
59.79
Oilfield Services/Equip. $
56.40
Packaging & Container $
48.88
Paper & Forest Products $ 126.99
Petroleum (Integrated) $ 1,073.78
Petroleum (Producing) $
48.11
Precision Instrument
$
19.88
Publishing
$
52.42
R.E.I.T.
$
1.83
Railroad
$ 247.24
Recreation
$
21.55
Restaurant
$
26.28

$ 307.86
$
67.80
$
49.58
$
94.31
$ 202.30
$ 255.83
$ 264.99
$ 110.36
$
27.40
$
91.76
$
54.55
$
32.66
$ 130.80
$ 130.31
$ 698.36
$ 1,596.37
$ 977.78
$
20.34
$
69.08
$ 162.13
$
14.91
$
63.79
$
11.53
$ 103.42
$ 160.57
$
16.69
$
24.06
$
5.10
$
0.70
$
3.24
$
36.75
$
15.31
$
70.60
$
33.24
$
28.40
$
25.52
$ 194.15
$ 120.41
$ 206.80
$ 117.09
$
67.93
$
88.89
$
71.74
$ 189.64
$ 1,662.54
$
91.14
$
27.80
$
46.66
$
6.56
$ 513.68
$
41.19
$
71.58

177.13%
119.51%
107.91%
218.90%
98.20%
90.28%
103.31%
131.29%
163.38%
102.76%
114.47%
139.94%
131.22%
166.94%
88.76%
130.28%
92.71%
107.06%
205.68%
177.53%
69.72%
116.13%
126.35%
311.62%
137.75%
127.10%
415.67%
416.28%
170.59%
147.97%
128.43%
202.68%
205.06%
116.68%
132.79%
145.41%
199.56%
146.49%
178.59%
87.25%
113.62%
157.62%
146.77%
149.34%
154.83%
189.44%
139.88%
89.01%
358.40%
207.77%
191.14%
272.33%

Page 2

6.53%
0.64%
0.46%
1.63%
-0.18%
-1.04%
0.37%
0.92%
2.25%
0.18%
1.14%
1.01%
0.90%
0.88%
-0.46%
1.18%
-0.70%
0.20%
12.11%
1.47%
-1.42%
0.59%
0.46%
9.89%
1.51%
0.69%
2.07%
0.06%
0.40%
0.76%
0.84%
1.29%
6.93%
0.51%
0.99%
1.40%
6.63%
3.89%
4.74%
-0.70%
0.39%
3.51%
2.36%
3.03%
2.86%
12.75%
1.78%
-0.62%
0.49%
8.42%
4.83%
8.61%

36.68%
7.87%
1.99%
38.57%
-0.87%
-4.88%
1.57%
7.85%
26.30%
1.86%
6.62%
5.13%
11.51%
36.49%
-3.32%
20.59%
-3.25%
2.63%
57.73%
36.94%
-10.18%
8.60%
6.08%
76.55%
11.93%
10.24%
10.13%
0.80%
2.66%
2.16%
9.35%
22.63%
57.26%
5.66%
10.44%
14.69%
50.73%
24.89%
35.27%
-6.07%
4.82%
27.46%
22.21%
27.84%
25.35%
48.87%
14.95%
-5.70%
1.93%
47.99%
39.38%
63.76%

Sheet1

Retail (Special Lines)

$
19.64
Retail Building Supply
$
40.21
Retail Store
$ 121.82
Securities Brokerage
$
36.60
Semiconductor
$ 127.83
Semiconductor Cap Equip$
35.74
Shoe
$
12.62
Steel (General)
$
29.00
Steel (Integrated)
$ 159.19
Telecom. Equipment
$
26.88
Telecom. Services
$ 273.95
Textile
$
26.86
Tire & Rubber
$
97.44
Tobacco
$ 348.25
Toiletries/Cosmetics
$
31.41
Trucking/Transp. Leasing$
55.87
Utility (Foreign)
$ 1,945.99
Water Utility
$
21.43

$
31.90
$ 159.06
$ 191.71
$
39.59
$ 237.87
$
89.26
$
25.55
$
69.67
$ 240.39
$
35.25
$ 393.14
$
32.63
$ 158.36
$ 330.00
$
53.58
$
99.66
$ 4,154.35
$
51.39

162.42%
395.61%
157.37%
108.16%
186.08%
249.75%
202.52%
240.21%
151.01%
131.12%
143.51%
121.51%
162.51%
94.76%
170.55%
178.37%
213.48%
239.78%

Page 3

1.26%
3.92%
1.07%
0.12%
7.31%
5.99%
1.62%
4.83%
4.33%
1.32%
5.20%
0.88%
2.00%
-0.12%
2.02%
5.17%
26.18%
16.64%

23.00%
71.07%
19.96%
0.31%
38.13%
34.29%
19.49%
63.73%
58.70%
16.56%
20.57%
11.87%
23.94%
-1.07%
18.36%
58.88%
81.78%
66.16%

Sheet1

Cap Ex = 133.33 Deprec'n - Change in WC)

Page 4