Thereturnonequitymayalsohavetobemodifiedtoreflect
thefactsthattheconventionalmeasureofthereturnincludes
interest income from cashand marketable securities in the
numeratorandthebookvalueofequityincludesthevalueof
thecashandmarketablesecurities.IntheFCFEmodel,there
isno excesscash leftin thefirmandthereturnon equity
shouldmeasurethereturnonnoncashinvestments.Youcould
construct a modified version of the return on equity that
measures the noncash aspects.
Theproductoftheequityreinvestmentrateandthemodified
ROE will yield the expected growth rate in FCFE.
This growth rate can then be applied to the noncash net
income tovalue theequityin theoperatingassets. Adding
cashandmarketablesecuritiestothisnumberwillyieldthe
total value of equity in the company.
Variations on FCFE Models
Aswiththedividenddiscountmodel,therearevariationson
the free cash flow to equity model revolving around
assumptionsaboutfuturegrowthandreinvestmentneeds.In
this section,we examineversionsof theFCFEmodel that
parallel our earlier discussion of the dividend discount model.