Initial Condition In theory, the two most fitting inputs for a discount cashflow model

FCF / DPS / EPS: $0.66 are free cashflow (FCF) to equity (FCFE) or to the firm (FCFF). Since
(Free Cash Flow / Dividends / Earnings per Share) a DCF model is a NPV (Net Present Value) model at heart I believe it
Growth Expectations is theoretically acceptable to use it to discount dividends, where
Growth rate for the first period: 25.00% 32 appropriate. Earnings may be used for a back of the envelope
First period length (<=10, integer): 1 analysis but one must be careful to make prudent judgments as one
strays from cash inputs. All inputs need to be on a per share basis.
Growth rate for the second period: 12.00%
Second period length (<=10, integer): 5 Be careful to make reasonable assumptions about growth and the
periodicity of each phase. It is realistic to be more conservative about
Growth rate for the third period: 5.00% growth the longer you make the period for each phase.
Third period length (<=10, integer): 4
Sustainable growth represents the expected growth rate of the firm
Sustainable growth rate in perpetuity: 2.00% forever, which is a long time, so be conservative. Think about the
(Must be less than the discount rate and economic growth) firm's average growth over the next 50 periods.
Discount Rate
Risk-adjusted rate (CAPM) / WACC / Benchmark return: 8.68% The Capital Asset Pricing Model (CAPM) gives the cost of equity,
used with FCFE and in calculating the Weighted Average Cost of
Valuation Capital (WACC), used with FCFF. Cost of eqity can be used to
Stock value per share: $35.00 22.93 $ discount earnings per share (EPS) and dividends per share (DPS).
If using some other metric discount with an appropriate benchmark.
In theory, the two most fitting inputs for a discount cashflow model
are free cashflow (FCF) to equity (FCFE) or to the firm (FCFF). Since
a DCF model is a NPV (Net Present Value) model at heart I believe it
is theoretically acceptable to use it to discount dividends, where
appropriate. Earnings may be used for a back of the envelope
analysis but one must be careful to make prudent judgments as one
strays from cash inputs. All inputs need to be on a per share basis.
Be careful to make reasonable assumptions about growth and the
periodicity of each phase. It is realistic to be more conservative about
growth the longer you make the period for each phase.
Sustainable growth represents the expected growth rate of the firm
forever, which is a long time, so be conservative. Think about the
firm's average growth over the next 50 periods.
The Capital Asset Pricing Model (CAPM) gives the cost of equity,
used with FCFE and in calculating the Weighted Average Cost of
Capital (WACC), used with FCFF. Cost of eqity can be used to
discount earnings per share (EPS) and dividends per share (DPS).
If using some other metric discount with an appropriate benchmark.
Tier 1 Tier 2 Tier 3
0 FV PV 1 FV PV 6 FV PV
1 1 $0.82 $0.76 2 $0.92 $0.78 7 $1.52 $0.85
2 3 $1.03 $0.80 8 $1.60 $0.82
3 4 $1.15 $0.83 9 $1.68 $0.79
4 5 $1.29 $0.85 10 $1.76 $0.77
5 6 $1.45 $0.88
6
7
8
9
10
$0.76 $4.14 $3.23
NPV
PV
$35.00
Perpetuity
PV
$26.88
CAPM The Capital Asset Pricing Model (CAPM) is used to judge a security based on a comparrison
r
e
= r
f
+ *(r
m
- r
f
) that analyzes risk (volatility) with respect to expected market return.
r
f
, Risk-Free Rrate: 3.61%
r
m
, Market Return: 10.00%
, Beta of Security: 0.90
r
e
, Expected Return =
9.35%
(r can be used as the cost of equity)
WACC The Weighted Average Cost of Capital (WACC) formula intreprets cost of equity as the expected return
WACC = E / A * R
e
+ D / A * R
d
* (1 - T
c
) from CAPM. It then uses cost of debt as a given and weights the degree to which different forms
A, Assets (in aggregate dollars): $42,075,000 of company financing options (debt vs. equity) have been used. The sum of the products is the WACC.
E, Equity (in aggregate dollars): $35,061,000
D, Debt (in aggregate dollars): $7,014,000
Re, Cost of Equity (CAPM): 9.35%
Rd, Cost of Debt (market return): 8.00%
Tc, Corporate Tax Rate: 34.00%
WACC, Weighted Avg. Cost of Capital = 8.68%
The Capital Asset Pricing Model (CAPM) is used to judge a security based on a comparrison
that analyzes risk (volatility) with respect to expected market return.
The Weighted Average Cost of Capital (WACC) formula intreprets cost of equity as the expected return
from CAPM. It then uses cost of debt as a given and weights the degree to which different forms
of company financing options (debt vs. equity) have been used. The sum of the products is the WACC.