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:
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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
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Calculate the Terminal Value at the End of Year 5:
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First calculate FCFE6 = $3.0170*(1+0.05) = $3.1679
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Terminal Value (TV5) = FCFE6 / (Ke - g) = $3.1679 / (0.12 - 0.05) = $3.1679 / 0.07 = $45.26
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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 -
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.