DCF Model v4

							                                    Initial Condition                     In theory, the two most fitting inputs for a d
FCF / FCFE / EPS / DPS:                                          $1.00    are free cash flow (FCF) and free cash flow
(Free Cash Flow / -to Equity / Earnings per Share / Dividends)            a DCF model is an NPV (Net Present Valu
                                Growth Expectations                       is theoretically acceptable to use it to disco
Growth rate for the first period:                                5.00%    appropriate. Earnings may be used for a ba
First period length (<=10, integer):                               5      analysis but one must be careful to make p
                                                                          strays from cash inputs. All inputs need to
Growth rate for the second period:                               0.00%
Second period length (<=10, integer):                              0      Be careful to make reasonable assumption
                                                                          periodicity of each phase. It is realistic to b
Growth rate for the third period:                                0.00%    growth the longer you make the period for
Third period length (<=10, integer):                               0
                                                                          Sustainable growth represents the expecte
Sustainable growth rate in perpetuity:                           3.00%    forever, which is a long time, so be conserv
(Must be less than the discount rate and economic growth)                 firm's average growth over the next 100 pe
                                     Discount Rate
Risk-adjusted rate (CAPM) / WACC / Benchmark return:             10.00%   The Capital Asset Pricing Model (CAPM) g
                                                                          used with FCFE and in calculating the Wei
                                       Valuation                          Capital (WACC), used with FCF. Cost of e
Stock value per share:                                           $16.02   discount earnings per share (EPS) and div
                                                                          If using some other metric discount with an


Created by Chris Ferrell, report errors to ferrellc@msu.edu.
Version 4.0, updated 8/28/06
n theory, the two most fitting inputs for a discount cash flow model
are free cash flow (FCF) and free cash flow to equity (FCFE). Since
a DCF model is an NPV (Net Present Value) model at heart I believe it
s theoretically acceptable to use it to discount dividends, where
appropriate. Earnings may be used for a back of the envelope
analysis but one must be careful to make prudent judgments as one
strays from cash inputs. All inputs need to be on a per share basis.


Be careful to make reasonable assumptions about growth and the
periodicity of each phase. It is realistic to be more conservative about
growth the longer you make the period for each phase.


Sustainable growth represents the expected growth rate of the firm
orever, which is a long time, so be conservative. Think about the
irm's average growth over the next 100 periods.


The Capital Asset Pricing Model (CAPM) gives the cost of equity,
used with FCFE and in calculating the Weighted Average Cost of
Capital (WACC), used with FCF. Cost of equity can be used to
discount earnings per share (EPS) and dividends per share (DPS).
f using some other metric discount with an appropriate benchmark.
   CAPM
          re = rf + β*(rm - rf)
rf, Risk-Free Rrate:                5.00%
rm, Market Return:                10.00%
β, Beta of Security:                1.00


re, Expected Return =             10.00%
(r can be used as the cost of equity)


   WACC
      WACC = E / A * Re + D / A * Rd * (1 - Tc)
A, Assets (in aggregate dollars):                   $100.00
E, Equity (in aggregate dollars):                    $40.00
D, Debt (in aggregate dollars):                      $60.00
Re, Cost of Equity (CAPM):                          10.00%
Rd, Cost of Debt (market return):                    5.00%
Tc, Corporate Tax Rate:                             40.00%


WACC, Weighted Avg. Cost of Capital =                5.80%



Created by Chris Ferrell, report errors to ferrellc@msu.edu.
Version 4.0, updated 8/28/06
                 Tier 1
                   FV            PV                    Tier 2                    Tier 3
0          0      $1.00         $1.00            5       FV          PV      0    FV       PV
1          1      $1.05         $0.95
2          2      $1.10         $0.91
3          3      $1.16         $0.87
4          4      $1.22         $0.83
5          5      $1.28         $0.79
6
7
8
9
10
                                $4.36                               $0.00                 $0.00




                                                                    NPV
                                                                     PV
                                                                    $16.02


     Created by Chris Ferrell, report errors to ferrellc@msu.edu.
     Version 4.0, updated 8/28/06
Perpetuity
   PV
 $11.66