Two-Stage Dividend Discount Model

THREE-STAGE FCFE DISCOUNT MODEL

This model is designed to value the equity in a firm with three stages of growth - an initial period of high growth, a transition period of declining growth and a final period of stable growth.

Assumptions 1. The firm is assumed to be in an extraordinary growth phase currently. 2. This extraordinary growth is expected to last for an initial period that has to be specified. 3. The growth rate declines linearly over the transition period to a stable growth rate. 4. The relationship between capital spending and depreciation changes consistently with the growth rate. The user should enter the following inputs: 1. Length of each growth phase 2. Growth rate in each growth phase 3. Capital Spending, Depreciation and Working Capital in each growth phase. 4. Costs of Equity in each growth phase

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Inputs to the model

General Inputs Current Earnings per share =
$44.88

(in currency) (in currency) (in currency) (in currency) (in currency)

Current Dividends per share = $14.97 Current Capital Spending/sh = $54.70 Current Depreciation / share = $25.28 Current Revenues/ share = Working Capital/ share = Chg. Working Capital/share = $328.33 ($231.03) $1.66

Do you want to enter cost of equity directly? If yes, enter the cost of equity = Beta of the stock = Riskfree rate= Risk Premium= Earnings Inputs 0.8 5.00% 8.50%

No

(Yes or No) (in percent)

If no, enter the inputs to the cost of equity for the initial high growth stage (in percent) (in percent)

Growth Rate during the initial high growth phase Enter length of extraordinary growth period = Do you want to use the historical growth rate? If yes, enter EPS from five years ago = Do you have an outside estimate of growth ? If yes, enter the estimated growth: 5 No $0.90 No 20.00% (in years) (Yes or No) (in currency) (Yes or No) (in percent) Yes (Yes or No)

Do you want to calculate the growth rate from fundamentals? If yes, enter the following inputs: Net Income Currently = Interest Expense Currently = Book Value of Debt = Book Value of Equity = $324.90 $257.20 $1,051.00 $1,326.00

(in currency) (in currency) (in currency) (in currency)

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Tax Rate on Income= ROA = Retention = 21.03% 66.64%

32.00% D/E = Interest Rate= 77.00% 24.47%

(in percent) (in percent) (in percent) (Yes or No)

The following will be the inputs to the fundamental growth formulation:

Do you want to change any of these inputs for the high growth period? Yes If yes, specify the values for these inputs (Please enter all variables) ROA = Retention = 15.00% 66.64% D/E = Interest Rate= 77.00% 8.25% (in percent) (in percent)

Do you want to change any of these inputs for the stable growthYes period? If yes, specify the values for these inputs ROA = 12.00% D/E = Interest Rate= 77.00% 14.00% (in percent) (in percent)

(Yes or No)

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Specify weights to be assigned to each of these growth rates: Historical Growth Rate = Outside Prediction of Growth = Fundamental Estimate of Growth = Growth Rate during the transition period Enter length of the transition period = 5 (in years) Yes (Yes or No) 100.00% (in percent) (in percent) (in percent)

Do you want the beta to adjust gradually to stable beta? If no, enter the beta for the transition period = Growth Rate during the stable phase Enter growth rate in stable growth period? Will the beta change in the stable period? If yes, enter the beta for stable period = 5.00% Yes 1

(in percent) (Yes or No)

Capital Spending, Depreciation & Working Capital Do you want all these items to grow at the same rate as earningsYes ? If not, enter the growth rates for each of the following items: Capital Spending Depreciation High Growth 20.00% 20.00% 12.00% Transition period 12.00% Revenues 18.00% 12.00% 6.00% (in percent) (in percent) (in percent) (Yes or No)

Stable Growth Do not enter Do not enter

Do you want to keep the current fraction of working capital to revenues? No (Yes or No) If no, specify working capital as a percent of revenues: 5.00% (in percent) (Yes or No)

Do you want to use the current debt ratio as your desired mix? Yes If no, enter the following inputs for financing mix, Desired debt financing proportion - Capital Spending 15.00% Desired debt financing proportion - Working Capital 15.00% (in percent) (in percent)

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Stable Growth Inputs for Capital Expenditures and Depreciation Is capital spending to be offset by depreciation in stable period? No (Yes or No) If no, enter capital expenditures as % of depreciation in steady 150% state: (in percent: > 100%)

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Before reviewing the output, check to see if any warnings appear on the next page.

Warnings

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Output from the program

Initial High Growth Phase Cost of Equity = Current Earnings per share= 14.44% $44.88 43.50% 43.50% $44.88 $16.62 $0.94 $27.32

Proportion of Debt: Capital Spending (DR)= Proportion of Debt: Working Capital (DR)= Current Earnings per share= (Capital Spending - Depreciation)*(1-DR) Change in Working Capital * (1-DR) Current FCFE

Growth Rate in Earnings per share - Initial High Growth phase Growth Rate Historical Growth = Outside Estimates = Fundamental Growth = Weighted Average 14.82% 14.82% 100.00% Weight

Growth Rate in capital spending, depreciation and working capital High GrowthTransition period Stable Growth Growth rate in capital spending = 14.82% Growth rate in depreciation = Growth rate in revenues = 14.82% 14.82% Earnings g Earnings g Earnings g 5.00% 5.00% 5.00% 5.00% (in percent)

Working Capital as percent of revenues =

The dividends for the high growth phase are shown below (upto 10 years) Year Earnings 1 $51.53 2 $59.16 $21.91 3 $67.93 $25.16 4 $77.99 $28.89

(CapEx-Depreciation)*(1-DR) $19.09

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Chg. Working Capital *(1-DR) $1.37 FCFE Present Value $31.07 $27.15

$1.58 $35.67 $27.24

$1.81 $40.96 $27.33

$2.08 $47.02 $27.42

Transition period (upto ten years) Year Growth Rate Cumulated Growth Earnings 6 12.85% 12.85% $101.06 7 10.89% 25.14% $112.06 $41.51 $2.27 $68.28 0.88 12.48% $27.58 8 8.93% 36.31% $122.06 $45.21 $2.07 $74.78 0.92 12.82% $26.77 9 6.96% 45.80% $130.56 $48.36 $1.76 $80.44 0.96 13.16% $25.45

(CapEx-Depreciation)*(1-DR) $37.43 Chg. Working Capital *(1-DR) $2.38 FCFE Beta Cost of Equity Present Value End-of-Life Index Stable Growth Phase Growth Rate in Stable Phase = FCFE in terminal year = Cost of Equity in Stable Phase = Price at the end of growth phase = $61.25 0.84 12.14% $27.82

5.00% $119.62 12.50% $1,594.98 $136.63 $131.31 $444.59 $712.53

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

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T MODEL

ages of growth - an initial nd a final period of stable

to be specified.

istently with the growth rate.

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rcent: > 100%)

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5 $89.55 $33.17

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$2.39 $53.99 $27.51

10 5.00% 53.09% $137.09 $50.78 $1.35 $84.96 1 13.50% $23.68 1

Terminal Year

$143.94 $22.90 $1.42 $119.62

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erminal Year

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