model.xlsCHOOSING THE RIGHT VALUATION MODELThis program is designed to help in choosing the right model touse for any occassion.Inputs to the modelLevel of Earnings(in currency)Are your earnings positive ?Yes(Yes or No)If the earnings are positive and normal, please enter the following:What is the expected inflation rate in the economy?3.00%(in percent)What is the expected real growth rate in the economy?2.00%(in percent)What is the expected growth rate in earnings (revenues) for this firm in the near future?15.00%(in percent)Does this firm have a significant and sustainable advantage over competitors?Yes(Yes or No)Differential Advantages: High growth comes from a firm earning excess returns on its projects, which in turn comes from some differential advantagepossessed by the firm over its competitors. This differential advantage can be legal (as is the case with legal monopolies like telecom), or technological,or a strong brand name (as is the case with many consumer product firms) or economies of scale. The question that is being asked relates not just tothe existing differential advantage but also to the future.If the earnings are negative, please enter the following:Are the earnings negative because the firm is in a cyclical business ?(Yes or No)Are the earnings negative because of a one-time or temporary occurrence?(Yes or No)Are the earnings negative because the firm has too much debt?(Yes or No)If yes, is there a strong likelihood of bankruptcy?(Yes or No)Are the earnings negative because the firm is just starting up?(Yes or No)Financial LeverageWhat is the current debt ratio (in market value terms) ?4.00%(in percent)Is this debt ratio expected to change significantly ?Yes(Yes or No)Dividend PolicyWhat did the firm pay out as dividends in the current year?$100.00(in currency)Can you estimate capital expenditures and working capital requirements?Yes(Yes or No)Enter the following inputs (from the current year) for computing FCFENet Income (NI)$200.00Depreciation and Amortization$50.00Capital Spending (Including acquisitions)$100.00 Non-cash Working Capital (WC)$25.00FCFE = NI - (Capital Spending - Depreciation) *(1- Debt Ratio) - WC (1-Debt Ratio) =$128.00OUTPUT FROM THE MODELBased upon the inputs you have entered, the right valuation model for this firm is:Type of Model (DCF Model, Option Pricing Model):Discounted CF Model! If option pricing model, first do a DCF valuationLevel of Earnings to use in model (Current, Normalized):Current EarningsCashflows that should be discounted (Dividends, FCFE, FCFF) :FCFF (Value firm)Length of Growth Period (10 or more, 5 to 10, less than 5)10 or more yearsAppropriate Growth Pattern (Stable, 2 stage, 3 stage):Three-stage Growth! In an n-stage model, you will estimate target operating margins (if valuing the firm)or net margins (if valuing equity) and revenue growth each year.

&C Model ChoicePage &pAswath Damodaran:The expected inflation rate can be estimated from economists' forecasts.Aswath Damodaran:If an inflation-indexed bond trades in this market, you can use the interest rate on that bond.Aswath Damodaran:This growth rate is the expected growth rate in earnings, if your firm has positive earnings or the expected growth rate in revenues, if it has negative earnings. (If you can get a forecast, use it. If not, enter last year's growth)Aswath Damodaran:This is a subjective judgment but it is a critical one.Aswath Damodaran:If your firm is a cyclical firm and the economy is in a recession, enter yes. If not, enter no.Aswath Damodaran:If your firm has similar operating margins as other firms in the business, but far more debt than similar firms, enter yesAswath Damodaran:If you have a firm that is losing money because of where it is in the life cycle or because of infra-structure costs, enter yes.Aswath Damodaran:Debt Ratio = Market value of debt/(Market value of debt + Market value of equity)Aswath Damodaran:This is a subjective judgment based upon the firm's history and how similar (or different) its leverage is to the rest of the industry.Aswath Damodaran:This is the cumulative dividends paid by the firm on its common stock.Aswath Damodaran:For some financial service firms, you might be unable to estimate cap ex or working capital.Aswath Damodaran:Enter the net income before extraordinary items from last year.Aswath Damodaran:Enter the depreciation and amortization from the most recent year.Aswath Damodaran:Enter the total capital spending, including acquisitions, from the most recent year.Aswath Damodaran:Enter the change in non-cash working capital: an increase as a positive number and a decrease as a negative number.Aswath Damodaran:If the earnings are negative because of a one-time occurrence or temporary phenomenon, answer yes.Aswath Damodaran:If earnings are negative because of where the firm is in its life cycle, answer yes.Aswath Damodaran:If your net income positive, enter yes.