Page 39 - FINAL CFA II SLIDES JUNE 2019 DAY 7

READING 30: FREE CASH FLOW VALUATION
LOS 30.i: Explain the single-stage (stable-growth), two-stage, and
three-stage FCFF and FCFE models and select and justify the
appropriate model given a company’s characteristics.
MODULE 30.5: FCF OTHER ASPECTS

Single-Stage FCFF Model Single-Stage FCFE Model

Multistage Models:
How Many Variations Are There?

• Two-stage versus three-stage models (several variations
depending on how we model growth within the stages).

• Forecasting growth in total free cash flow (FCFF or FCFE)
versus forecasting the growth rates in the components of free
cash flow: The simple free cash flow model, in which we
forecast total FCFE or FCFF, looks a lot like the multistage
dividend discount models. The benefit of using free cash flow
models, however, is when we refine our approach by
forecasting the values and/or growth rates in the components
of free cash flow over the first stage and then calculate free
cash flow in each year using one of our formulas. There are
even variations of this approach in which we start with earnings
per share instead of sales.