Contents
- Index
Stocks: FCFE Model: 2 Stage
©2009 OS Financial Trading System
In the FTS Real Time Client the bottom RHS of the screen lets you select the analytical support from what is available. In this exercise we are using "Stocks: FCFE Model: 2 Stage" so select this support from the yellow part of the screen below.
The bottom RHS will now appear as follows. It has the main inputs from the exercise to date as well as derived values from this model. The derived values will let you make additional inferences from the current market price.
In particular the following fields are available:
Mkt Price --- current spot price
Intrinsic Value - estimated from the 2-stage abnormal growth model
Over/Under - comparison between intrinsic value and the spot price
FCFE --- Per share free cash flow to equity
Exp Return --- Computed assuming investment at the current spot price relative to the assessed intrinsic value
Growth 1: Abnormal growth rate --- this is the stage 1 growth rate in a two stage intrinsic value model
Years 1: Number of years you are applying the abnormal growth estimate to.
Disc 1: Cost of equity capital for stage 1.
Growth 2: Normal growth - this is the stage 2 growth rate in a 2-stage abnormal growth model.
Disc 2: Cost of equity capital to be applied for stage 2.
Recall the current summary of inputs computed as a first pass to date:
Current Summary:
FCFE = $9.049 per share. (input 1)
5-year Abnormal Growth: 11.4% (input 2).
Normal Growth: 4.5% (input 3)
CAPM: Cost of Equity Capital = 0.08657 (input 4)
Years 1: As a first pass we will keep this the same as the analyst abnormal growth forecast (i.e., 5-years).
Aside: Analysts in general will usually choose somewhere between 5-10-years depending upon the stock including what type of barriers to entry exist for the stock. In addition many analyst like stage 1 to cover approximately 1 business cycle and so this would indicate around 7-years for stage 1. At this stage we will remain conservative and apply 5-years.
The remaining fields are derived fields.