Model 10-05A

General 4-Stage Model

(Revenue Growth Model)
Revenue Period 0 (R0)

$1,000

Number of Periods (n)

Growth Rate of Revenues (g)
Operating Margin (m)
Tax Rate (T)
Cost of Capital (k)
Investment Requirements Rate (I)
h = (1+g)/(1+k)

Stage 1: Period 1- 5

Stage 2: Period 6- 15

Stage1

Stage2

Stage3

Stage4

5
55.6%
-5.0%

10
33.0%
30.0%

5
5.0%
15.0%

3.0%
10.0%

0.0%
15.0%
6.0%
1.353

20.0%
15.0%
6.0%
1.157

40.0%
15.0%
6.0%
0.913

40.0%
15.0%
2.0%
0.896

n1
1
V 0 =R0 m1 ( 1T 1 )I 1 h t
t=1 1

V 20 =R0h n1 m2 (1T 2 )I 2
1

n2

] h2

(1,490)

19,788

2,235

4,229

t=1

Stage 3: Period 16- 20

Stage 4: Period 21 ==> Inf

V 30 =R0h n1h n2
2
1

[ m3 ( 1T 3 )I 3 ] h3
t=1

V 40 =R 0h n 1h 2 h 3 [ m 4 (1T 4 )I 4 ]
n

(1+ g4 )
(k 4 g4 )

Total PV = $
Total PV / REV1
Total PV / NOIstage 2, period 1
1 / (k4 - g4)

24,762

15.91
6.80
8.33

Notes:
V0i = PV of Stage i free cash flows at time 0. For example, V 01 = PV of Stage 1 free cash flows at time 0
Terminal Value = Vn4 = (NOIN4+1(1-T4) - RN4+1I4) / (k4 - g4)
NOIN4+1 = NOI for Period 1 in Stage 4
REV1 = R1 = revenues for Period 1 in Stage 1
NOI1 = net operating income for Period 1 in Stage 1

Model 10-05B

General 4-Stage Model

(Based on rb=g)
Net Operating Income Period 0 (X0)

Number of Periods (n)

Growth Rate of Net Operating Inc. (g)
Tax Rate (T)
Cost of Capital (k)
Investment Opportunities Rate (b)
Marginal Profitability Rate (r)
h = (1+g)/(1+k)

Stage 1: Period 1- 5

Stage 2: Period 6- 10

Stage 3: Period 11- 20

Stage 4: Period 21 ==> Inf

$2,535
Stage1

Stage2

Stage3

Stage4

5
16.0%

5
22.0%

10
14.0%

3.0%

35.0%
11.9%
130.0%
12.3%
1.037

35.0%
11.9%
90.0%
24.4%
1.090

35.0%
11.9%
80.0%
17.5%
1.019

35.0%
11.9%
20.0%
15.0%
0.920

n1
1
V 0 =X 0( 1T 1 )( 1b1 ) h t
t =1 1

n2

h2

V 20 =X 0h n ( 1T 2 )( 1b2 )
1 1
t =1

h3

1,288

6,741

33,882

( 1+ g 4 )
V 40 = X 0h n1h 2 h 3 ( 1T 4 )( 1b 4 )
2
3
( k 4 g4 )
1
n

(2,757)

3
V 0 =X 0h n 1h n2 ( 1T 3 )(1b 3 )
2
1
t =1
n

Total PV = $
Total PV / X1
Total PV / Xstage 2, period 1

13.31

1 / (k4 - g4)

11.24

39,154

6.03

Notes:
V0i = PV of Stage i free cash flows at time 0. For example, V 01 = PV of Stage 1 free cash flows at time 0
Terminal Value = Vn4 = XN4+1(1-T4)(1-b4) / (k4 - g4)
XN4+1 = net operating income for Period 1 in Stage 4
X1 = net operating income for Period 1 in Stage 1