Question

Professor: If creating a FCFE valuation model should you do it on a per-share basis or is it better to start with Net Income? And if you do start with Net Income is the fundamental determinint of growth still b(ROC+D/E(ROC-interest rate(1-tax rate))?

Answer 1

It is better to do it in aggregate terms... And your growth rate, assuming your ROE is stable, is b * ROE (you don't need to use the expanded version).

Answer 2

But if you expect the debt level (for example) to change around, then would you want to use the expanded version?

Answer 3

If you expect the debt level to change, it is much better to either use a FCFF model or do a detailed forecast starting with revenues, working through margins and coming down to cash flows.

Answer 4

Okay, thank you very much!

Answer 5

So if you are valuing a firm with a stable level of debt or one that will not change a great deal than using a FCFE model is better? And if valuing a company whose debt level (D/(D+E)) is expected to change than use the FCFF model?