7.21 Application Using the Valuation Tutor

7.21 Application Using the Valuation Tutor

First launch the FTS Real Time Trader from the System Manager and select Datasets, Download FTS Datasets.

The Free Cash Flow Model is highlighted in the screen below:

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Click beside this model to reveal the choices:

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There is a wide variety of choices depending upon what source data you want to work with plus what finer points you want to deal with. The model variations are as follows

Basic FCFE Model
Basic FCFF Model
Derived Form FCFF Model
- Income Statement Form
- Cash Flow Statement Form

The above model vary in terms of their base inputs and this is reviewed in Appendix A. In the following we will assume that you are working with the Basic FCFE (2-Stage) model and thus all models will require both Abnormal and Normal Growth Estimates plus Stage Cost of Equity Capital and Stage 2 Cost of Equity Capital Estimates. In appendix A we will review the additional available models.

Working Through the Steps Using the Basic FCFE Model

Step 1: Click on 2-Stage

This makes the two Cost of Equity Capital Estimates Live. Click on CAPM to select this option for each one as follows (from the current default FTS Dataset):

The red fields are derived fields.

The basic set of inputs are: (as derived in this chapter to date)

Current Summary on a Per Share Basis:

Derived Value: FCFE per share = 13.939/1.341 = $10.39

5-year Stage 1 Growth: 0.10

Normal Growth: 0.045

Years in Stage 1: 5-years

Risk free rate (both stages) = 0.0419

Beta = 0.76

Equity Premium = 0.055

These are entered directly into the Calculator to override the default numbers by double clicking on a cell field and entering in the new numbers:

Clearly our first pass estimate is not consistent with the market and this may often happen. Your goal is to understand the underlying economics of the company you are valuing in terms of how from the firm side the three major decisions impact upon your assessments as well as how economy wide constraints impact upon your analysis. To check what is going on we will apply both sensitivity analysis as well observe what input values are implied from the current market.