andallowsforthecyclesthatareusuallyseenincommodity
prices.Second,thereinvestmentismeasureddirectlyinthis
valuation by looking at capital expenditures and working
capitalinvestmentsratherthanindirectlythrougharetention
ratio.
Two-Stage FCFE Model
Thetwo-stageFCFEmodelisdesignedtovalueafirmthatis
expectedtogrowmuchfasterthanamaturefirmintheinitial
periodandatastablerateafterthat.Inthismodel,thevalue
ofanystockisthepresentvalueoftheFCFEperyearforthe
extraordinary growth period plus the present value of the
terminal price at the end of the period.
where
FCFEt= Free cash flow to equity in yeart
Pn = Value of equity at the end of extraordinary growth
period
ke=Costofequityinhigh-growth(hg)andstable-growth(st)
periods
Theterminalvalueforequityisgenerallycalculatedusingthe
stable growth rate model,