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Assumptions 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 dividend payout ratio is consistent with the expected growth rate. Inputs needed 1. Length of high growth period 2. Expected growth rate in earnings during the high growth period. 3. Dividend payout ratio during the high growth period. 4. Expected growth rate in earnings during the stable growth period. 5. Expected payout ratio during the stable growth period. 6. Current Earnings per share 7. Inputs for the Cost of Equity How the model works The expected dividends are estimated for the high growth period, using the payout ratio for the high growth period and the expected growth rate in earnings per share. The expected growth rate is estimated either using fundamentals: Expected growth = Retention Ratio * Return on Equity Alternatively, you can input the expected growth rate. At the end of the high growth phase, the expected terminal price is estimated using dividends per share one year after the high growth period, using the growth rate in stable growth, the payout ratio in stable growth and the cost of equity in stable growth. The dividends per share and the terminal price are discounted back to the present at the cost of equity changes. If your cost of equity in stable growth is different from your cost of equity in high growth, the cost of equity in the second half of the stable growth period will be adjusted gradually from the high growth cost of equity to a stable growth cost of equity. Options Available You can make this model into a three stage model by answering yes to the question of whether you want me to adjust the inputs in the second half of the high growth period. If you do, I will adjust the growth rate, the payout ratio and the cost of equity from high-growth levels to stable growth levels gradually. You can also make this a stable growth model by setting the high growth period to zero.
Model
10
Do you want to calculate the growth rate from fundamentals? No (Yes or No) If no, enter the expected growth rate in earnings in high growth period= 44.91% & the equity reinvestment rate during the high growth period 150% If yes, the following will be the inputs to the fundamental growth formulation: Non-cash ROE = 2.80% (in percent) Equity Reinvestment Rate = 149.97% (in percent) Do you want to change any of these inputs for the high growth period? No If yes, specify the values for these inputs (Please enter all variables) Non-cash ROE = 27.83% (in percent) Equity Reinvestment Rate = 149.97% (in percent) Do you want to change any of these inputs for the stable growth period? Yes If yes, specify the values for these inputs ROE = 20.00% (in percent) Do you want me to gradually adjust your inputs during the second Yes half? Inputs for Stable Growth Period Enter growth rate in stable growth period? Stable equity reinvestment ratio from fundamentals is = Do you want to change this equity reinvestment rate? If yes, enter the stable period equity reinvestment rate = Will the beta to change in the stable period?
10.00% 50.00% No
(in percent) (in percent) (Yes or No) (in percent) (Yes or No)
Yes
If yes, enter the beta for stable period = Enter the risk premium to use in stable period =
0.80 4.95%
22%
ngs Calculation
Current $2,122.00 Average $2,025.20
Normalizing Net Cap Ex Choose the approach to normalized earnings 0 Approach 1: Average Net Cap Ex over last 5 years -5 Net Cap Ex $1,391.00 EBIT $4,833.00 Approach 2: Industry average Industry average net cap ex/ EBIT
-4 $1,485.00 $5,001.00
-3 $1,996.00 $4,967.00
-2 $2,332.00 $3,982.00
22%
Normalizing Non-cash Working Capital Choose the approach to normalized earnings 1 Approach 1: Average Net Income over last 5 years Total non-cash working capital current year= 180 Revenues in current year = 2253 Revenues last year = 1598 Approach 2: Industry average Industry average non-cash WC/ Revenues
22%
Normalizing Net Debt Issued Choose the approach to normalized earnings 1 Approaches 1 or 2: Current Book or Market Debt Ratio Book value of debt in current year = 1794 Approach 2: Industry average Industry average debt to capital ratio =
15%
Year 1 2 3 4 5 6 7 8 9 10
Expected GrowthNet Income Equity Reinvestment Rate FCFE 44.91% $104.85 149.97% ($52.40) 44.91% $151.93 149.97% ($75.92) 44.91% $220.16 149.97% ($110.02) 44.91% $319.03 149.97% ($159.43) 44.91% $462.29 149.97% ($231.02) 37.93% $637.61 129.98% ($191.14) 30.94% $834.92 109.98% ($83.35) 23.96% $1,034.98 89.99% $103.61 16.98% $1,210.74 69.99% $363.29 10.00% $1,331.81 50.00% $665.91
Cost of EquityPresent Value 14.71% ($45.68) 14.71% ($57.70) 14.71% ($72.89) 14.71% ($92.08) 14.71% ($116.32) 14.56% ($84.01) 14.41% ($32.02) 14.26% $34.83 14.11% $107.04 13.96% $172.16 ($186.65)
Present Value
Net Income without interest income from cash= $72 Growth rate in EPS = 44.91%
The dividends for the high growth phase are shown below (upto 10 years) 1 Expected Growth Rate Net Income 44.91% $104.85 2 44.91% $151.93 149.97% ($75.92) 14.71% 131.58% ($57.70) 3 44.91% $220.16 149.97% ($110.02) 14.71% 150.94% ($72.89) 4 44.91% $319.03 149.97% ($159.43) 14.71% 173.14% ($92.08) 5 44.91% $462.29 149.97% ($231.02) 14.71% 198.61% ($116.32)
10.00%
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Equity Reinvestment rate in stable growth = 50.00% Cost of Equity in Stable Phase = Price at the end of growth phase = 13.96% $18,497.38
Present Value of FCFEs in high growth phase = Present Value of Terminal Equity Value = Value of equity in operating assets = Value of Cash and Marketable Securities = Value of equity in firm = Value per share =
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