business valuation

&C Two-Stage FCFF Discount Model

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Aswath Damodaran: Enter the current EBIT for the firm. If your current EBIT is negative, you will have to normalize EBIT.

Aswath Damodaran: Enter the total interest expenses, corresponding to the dollar debt that you enter below.

Aswath Damodaran: Enter the current capital expenditures, including acquisitions made. You might want to normalize this, if it is volatile.

Aswath Damodaran: Enter the aggreate depreciation and amortization claimed by the firm.

Aswath Damodaran: Enter the effective tax rate if it is greater than 35%, or 35% if the effective tax rate is lower.

Aswath Damodaran: Enter aggregate revenues during the year.

Aswath Damodaran: Non-cash WC = Inventory + Acc Rec - Acc Payable

Aswath Damodaran: Enter the change in non-cash working capital from last year to this year.

Aswath Damodaran: Enter total interest-bearing debt. If you are capitalizing operating leases, add them here.

Aswath Damodaran: Enter the total shareholders equity.

Aswath Damodaran: Enter the current market price per share.

Aswath Damodaran: Enter number of shares in the same units as inputs above.

Aswath Damodaran: If you can estimate the market value of the debt, enter that here. Else, enter the book value of debt from above.

Aswath Damodaran: You should almost never use the book value debt ratio. You can try this, if you want, to see how much value will shift.

Aswath Damodaran: In some cases, you might want to replace the current debt ratio with the industry average debt ratio.

Aswath Damodaran: Enter the length of the growth period. I will restrict you to 10 years.

Aswath Damodaran: If your firm has leverage which is out of the industry norm, you should generally say yes here.

Aswath Damodaran: If you said yes to the previous question, you should enter the industry-average or optimal debt ratio.

Aswath Damodaran: Generally, you should try to input the beta below. You can override this by inputting a cost of equity directly.

Aswath Damodaran: Enter the cost of equity in percent terms, if you want to input it directly.

Aswath Damodaran: Enter the current beta for the firm. Use the bottom-up beta, if you can get it.

Aswath Damodaran: Enter the current long term government bond rate.

Aswath Damodaran: Enter the risk premium for equities over riskfree investments. You can use an implied or historical premium.

Aswath Damodaran: The best way to do this is to use the firms's rating (actual and synthetic) and estimate an appropriate interest rate by adding a default spread to the long term treasury bond rate.

Aswath Damodaran: If your firm has had a volatile or short history, you might want to ignore the historical growth rate.

Aswath Damodaran: Enter the EBIT from five years prior to the current year. Thus, if the current year is 1998, look up earnings in 1993.

Aswath Damodaran: Tough to get for operating income. You can look up analysts estimates for EPS growth over next 5 years.

Aswath Damodaran: If you are entering EPS growth, you should reduce it to reflect the fact that operating income grows slower than EPS.

Aswath Damodaran: You should try to do this, if you want an internally consistent vauation.

Aswath Damodaran: This is estimated using the inputs from above on EBIT and book value of capital.

Aswath Damodaran: Estimated from cap ex, working capital and EBIT estimated above.

Aswath Damodaran: Compare your firm's numbers to those of the industry. If they look strange, you might want to change them below.

Aswath Damodaran: Replace with a more reasonable ROC. Two possible choices - the firm's average ROC over time, the sector's ROC or the firm's cost of capital.

Aswath Damodaran: Replace either with the firm's average reinvestment rate over time or sector average.

Aswath Damodaran: This defines the weight to be attached to the historical growth rate. If earnings history has been volatile, input zero.

Aswath Damodaran: Reflects how much you trust analysts to do a good job of predicting expected future growth.

Aswath Damodaran: Should be whatever is left over in terms of weight. The weights have to add up to one.

Aswath Damodaran: This is the growth rate after your high growth phase. Since it is forever, it cannot be greater than 5-6%. If your firm might still have growth potential at the end of high growth, go with the upper end of the range. Else, go lower.

Aswath Damodaran: If your beta currently is a high number (>1.20) or a low number (<0.80), you will want to move it at least towards these limits - 1.20 for high beta, and 0.80 for low beta.

Aswath Damodaran: Enter the beta for the stable period. Keep between 0.80 and 1.20.

Aswath Damodaran: Generally, firms get more stable as they age. The cost of debt should get lower for high risk firms.

Aswath Damodaran: Enter the cost of debt for a safer firm. I would use an A rating for riskier firms in stable growth.

Aswath Damodaran: If you have a reasonable cap ex/depreciation ratio, relative to the sector, answer yes. If not, enter no.

Aswath Damodaran: If the capital expenditures currently are very high relative to depreciation, set this to a lower number than the growth rate in earnings and depreciation.

Aswath Damodaran: If depreciation is higher than cap ex currently, set this growth rate above the growth rate in cap ex.

Aswath Damodaran: If margins are expected to improve over time, this rate will be lower than the growth rate in earnings.

Aswath Damodaran: If your firm's non-cash working capital as a percent of revenues is close to industry average, say yes. Else, say no.

Aswath Damodaran: Enter the industry average working capital as a percent of revenues.

Aswath Damodaran: Generally, it is not a good idea to say yes. Where will your growth come from?

Aswath Damodaran: Enter the industry average cap ex/depreciation ratio

Aswath Damodaran: Yes or no. If yes, enter the return on capital that your firm will have in stable growth. If no, enter cap ex as a percent of depreciation in the cell below.