Model Choice
CHOOSING THE RIGHT VAL
This program is designed to help in cho
use for any occassi
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Model Choice
Inputs to the mod
Level of Earnings
Are your earnings positive ? Yes
If the earnings are positive and normal, please enter the following:
What is the expected inflation rate in the economy?
What is the expected real growth rate in the economy?
What is the expected growth rate in earnings (revenues) for this firm in the near future?
Does this firm have a significant and sustainable advantage over competitors?
Differential Advantages: High growth comes from a firm earning excess returns on its projects,
possessed by the firm over its competitors. This differential advantage can be legal (as is the case with
or a strong brand name (as is the case with many consumer product firms) or economies of scale. The
the existing differential advantage but also to the future.
If the earnings are negative, please enter the following:
Are the earnings negative because the firm is in a cyclical business ?
Are the earnings negative because of a one-time or temporary occurrence?
Are the earnings negative because the firm has too much debt?
If yes, is there a strong likelihood of bankruptcy?
Are the earnings negative because the firm is just starting up?
Financial Leverage
What is the current debt ratio (in market value terms) ?
Is this debt ratio expected to change significantly ?
Dividend Policy
What did the firm pay out as dividends in the current year?
Can you estimate capital expenditures and working capital requirements?
Enter the following inputs (from the current year) for computing FCFE
Net Income (NI)
Depreciation and Amortization
Capital Spending (Including acquisitions)
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Model Choice
∆ Non-cash Working Capital (∆WC)
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Model Choice
FCFE = NI - (Capital Spending - Depreciation) *(1- Debt Ratio) - ∆ WC (1-Debt Ratio) =
OUTPUT FROM THE MODEL
Based upon the inputs you have entered, the right valuation model for this firm is:
Type of Model (DCF Model, Option Pricing Model):
Level of Earnings to use in model (Current, Normalized):
Cashflows that should be discounted (Dividends, FCFE, FCFF) :
Length of Growth Period (10 or more, 5 to 10, less than 5)
Appropriate Growth Pattern (Stable, 2 stage, 3 stage):
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Model Choice
CHOOSING THE RIGHT VALUATION MODEL
his program is designed to help in choosing the right model to
use for any occassion.
Page
Model Choice
Inputs to the model
(in currency)
(Yes or No)
3.00% (in percent)
2.00% (in percent)
firm in the near future? 15.00% (in percent)
er competitors? Yes (Yes or No)
rning excess returns on its projects, which in turn comes from some differential advantage
antage can be legal (as is the case with legal monopolies like telecom), or technological,
oduct firms) or economies of scale. The question that is being asked relates not just to
(Yes or No)
occurrence? (Yes or No)
(Yes or No)
(Yes or No)
(Yes or No)
4.00% (in percent)
Yes (Yes or No)
$100.00 (in currency)
Yes (Yes or No)
$200.00
$50.00
$100.00
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$25.00
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- ∆ WC (1-Debt Ratio) = $128.00
PUT FROM THE MODEL
del for this firm is:
Discounted CF Model ! If option pricing model, first do a DCF valuation
Current Earnings
FCFF (Value firm)
10 or more years
Three-stage Growth ! In an n-stage model, you will estimate target operating
or net margins (if valuing equity) and revenue growth ea
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differential advantage
echnological,
s not just to
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ng model, first do a DCF valuation
e model, you will estimate target operating margins (if valuing the firm)
s (if valuing equity) and revenue growth each year.
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