Two stage

growth Model

Value of the Frm=Present Value of the FCf during

the high growth phase+present value of the terminal
value

Base year
Informatio
n Rs in Mn
Revenues 4000
EBIT 8% of
revenures 500
Capex 300
Depn 200
WC as a % of
Revenues 30% 1200 1320 120
Corporate tax
rate 40%
Paid up equity
Capital 300

Market value of
Debt 1250

Input for
High
Growth
Period
Length of
Growth phase 5
g for
Revenues,depn,EBI
T,and capex 10%
WC as % of
Revenues 30%
15 %pre
cost of Debt tax
D=1,E=1 31-Dec
Risk free Rate 13%

Input for stable

Growth Period

Years 1 2
1 Revenues 4400 4840
2 EBIT 550 605
Nopat=E
3 BIT(1-t) 330 363
Sub.
(Capex-
4 Depn) 110 121
WC 1320 1452
change
5 in WC 120 132
6 FCF 100 110
 Re=Rf+b(Rm-Rf)
High Growth Period= 0.20998

Stable Growth Period = 19%

Now,Present Value of Terminal Value

(FCFF6/(WAAC-g))*PV
= of 5th

Pv of FCF+PVof
Therefore ,Value of the firm = Terminal value
ue of the terminal

0
Market Risk
Premium 6%
Equity Beta 1.333

expected g for
Revenues,depn,
EBIT,and capex 6%
WC as % of
Revenues 30% 1200
cost of Debt 15 %pre tax
D=2,E=3
Risk free Rate 12%
Market Risk
Premium 7%
Equity Beta 1.0

3 4 5 Terminal 7
5324 5856.4 6442 6828.6
665.5 732.05 805.26 853.57

399.3 439.23 483.15 512.14

133.1 146.41 161.05

1597.2 1756.92 1932.6 2048.6

145.2 159.72 175.69 115.96

121 133.1 146.41 396.19 $398.58
 Re=Rf+b(Rm-Rf) WAAC= Re*We+Wd*Rd(1-t)
0.21 0.15 15%

0.19 0.15 15%

6/(WAAC-g))*PV of 5th Year

4402.06066667 2188.602151

$2,587.19
 Revenues= Rs 1000 Mn
EBIT= Rs250 Mn
Capex= Rs 295
Depn= Rs.240
WC@ 20%
t= 40%

Growth Phase 0-5 Years 5 Years

revenues,de
pn,EBIt,Cap
ex are
increasing 25% 0.25
WC @20%
Cost of Debt 15%
D:E 1.5
Rf 12%
Rm-Rf 6%
Beta 1.583
WACC= 13.9992 0.14 WAAC=Ke*We+Kd*Wd

5-10 Years
From 5-
10Years
growth Rate
rate is
declinig by
Transition Ph 3% per Year
WC 20% of Revenues
D:E 1:1 Pretax cost o 14%
Rf 11%
Rm-Rf 6%
Equity Beta 0.5
WAAC 13 0.13

Revenues,E
BIT,Capex,D
Stable epn 10% 0.10
WC 20%
D=0,E=1
Pretax cost of 12%
Rf 10%
Rm-Rf 6%
Equity Beta 0.1
WAAC 0.16 16%

2.7049 1.7049180328

99.965
250

Period Growth Rate EBIT(1-t)Capex

1 25% 187.5 368.75
2 25% 234.38 460.9375
3 25% 292.97 576.171875
4 25% 366.21 720.21484375
5 25% 457.76 900.26855469
6 22% 558.47 1098.3276367
7 19% 664.58 1307.0098877
8 16% 770.91 1516.1314697
9 13% 871.13 1713.2285608
10 10% 958.25 1884.5514169

NOW,

Terminal Value= FCFF11/(WAAC-g)

Present Value of Terminal Value

There fore value of the Firm

Present value of the firm in Growth Peri
Present value of the firm in transition Pe
Present Value of Terminal value
Value of the firm
C=Ke*We+Kd*Wd
 824.32599 494.595594

change in
Dep WC Wc FCFF D/E ß
300 250 50 68.75 1.5 1.583
375 312.5 62.5 85.9375 1.5 1.583
468.75 390.625 78.125 107.421875 1.5 1.583
585.9375 488.28125 97.65625 134.277344 1.5 1.583
732.421875 610.3515625 122.070313 167.84668 1.5 1.583
893.5546875 744.62890625 134.277344 219.421387 1.0 1.10
1063.3300781 886.10839844 141.479492 279.421997 1.0 1.10
1233.4628906 1027.8857422 141.777344 346.468384 1.0 1.10
1393.8130664 1161.5108887 133.625146 418.092526 1.0 1.10
1533.194373 1277.6619775 116.151089 490.73835 1.0 1.10

FCFF11= 539.812185510254

11/(WAAC-g) 8996.8697585

2241.3001942 8607.34337

e value of the Firm

of the firm in Growth Period 365.617112
of the firm in transition Period 610.727529
of Terminal value 2241.30019
3217.64483
100.736328
22.0061867

WAAC PV
0.14 60.3070175
0.14 66.1261157
0.14 72.5067058
0.14 79.5029669
0.14 87.1743058
0.13 100.850082
0.13 113.652619
0.13 124.710788
0.13 133.178578
0.13 138.335462