Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

(Hop HipldF0AV) #1

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.

Free download pdf