Versions of the Model
AswiththedividenddiscountandFCFEmodels,theFCFF
model comes in different forms, largely as the result of
assumptionsabouthowhightheexpectedgrowthisandhow
longitislikelytocontinue.Inthissection,weexplorethe
variants on free cash flow to the firm models.
Stable-Growth Firm
AswiththedividenddiscountandFCFEmodels,afirmthat
isgrowingataratethatitcansustaininperpetuity—astable
growthrate—canbevaluedemployingastablegrowthmodel
using the following equation:
where
FCFF 1 = Expected FCFF next year
WACC = Weighted average cost of capital
gn= Growth rate in the FCFF (forever)
Twoconditionsneedtobemetinusingthismodel,bothof
whichmirrorconditionsimposedinthedividenddiscountand
FCFEmodels.First,thegrowthrateusedinthemodelhasto
be less than or equal to the growth rate in the
economy—nominalgrowthifthecostofcapitalisinnominal
terms,orrealgrowthif thecostofcapitalisarealcost of
capital. Second, the characteristics of thefirm have to be
consistentwith assumptionsof stablegrowth.In particular,