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Numerical Examples

FCFE Valuation Models

These examples illustrate how to value a stock using the Constant Growth FCFE Model and the Two-Stage FCFE Model.

Example 1: Constant Growth FCFE Model

  • Company: StableGrowth Inc.
  • Current FCFE per Share (FCFE0): $2.50
  • Expected Constant Growth Rate of FCFE (g): 4% (0.04)
  • Required Rate of Return on Equity (Ke): 10% (0.10)

Using the Constant Growth FCFE Model formula:

P0 = FCFE1 / (Ke - g)

First, calculate FCFE1 (Expected FCFE next year): FCFE1 = FCFE0 * (1 + g) = $2.50 * (1 + 0.04) = $2.60

Now, calculate the Intrinsic Value (P0): P0 = $2.60 / (0.10 - 0.04) = $2.60 / 0.06 = $43.33

  • Intrinsic Value of StableGrowth Inc. Stock = $43.33

Example 2: Two-Stage FCFE Model

  • Company: FastTrack Technologies
  • Stage 1 (High Growth - Years 1-5): FCFE is expected to grow at a rate of 15% per year for the next 5 years.
  • Stage 2 (Stable Growth - Beyond Year 5): FCFE is expected to grow at a constant rate of 5% per year indefinitely.
  • Current FCFE per Share (FCFE0): $1.50
  • Required Rate of Return on Equity (Ke): 12%

Solution:

  1. Calculate FCFE During the High-Growth Phase (Years 1-5):

    • Year 1 (FCFE1): $1.50 * (1 + 0.15) = $1.725
    • Year 2 (FCFE2): $1.725 * (1 + 0.15) = $1.9838
    • Year 3 (FCFE3): $1.9838 * (1 + 0.15) = $2.2813
    • Year 4 (FCFE4): $2.2813 * (1 + 0.15) = $2.6235
    • Year 5 (FCFE5): $2.6235 * (1 + 0.15) = $3.0170

  2. Calculate the Terminal Value at the End of Year 5:

    • First calculate FCFE6 = $3.0170*(1+0.05) = $3.1679

    • Terminal Value (TV5) = FCFE6 / (Ke - g) = $3.1679 / (0.12 - 0.05) = $3.1679 / 0.07 = $45.26

  3. Discount the FCFE and Terminal Value Back to the Present:

    Year FCFE Discount Factor (1.12)^-t Present Value
    1 $1.725 0.8929 $1.540
    2 $1.9838 0.7972 $1.581
    3 $2.2813 0.7118 $1.624
    4 $2.6235 0.6355 $1.667
    5 $3.0170 0.5674 $1.711
    5 $45.26 0.5674 $25.684
    Total: $33.807

  4. Calculate the Intrinsic Value of the Stock:

    • Intrinsic Value (P0) = $1.540 + $1.581 + $1.624 + $1.667 + $1.711 + $25.684 = $33.807

Therefore:

  • The estimated intrinsic value of FastTrack Technologies' stock using the two-stage FCFE model is $33.807 per share.
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