cpxest - Sheet1 There are three ways in which you can...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Sheet1 Page 1 There are three ways in which you can estimate the capital expenditures, especially in stable growth. Approach 1: Assume Net Capital Expenditures are zero. (Cap Ex is 100% of Depreciation) This approach, which is the most widely used in DCF valuation, especially when it comes to stable growth periods, is also the most dangerous when combined with assumptions about growth in cash flows. It raises the legitimate question of how growth is feasible with no net investment. It is defensible when the growth in earnings is expected to be zero. Approach 2: Assume that Capital/Expenditures/Depreciation approaches the industry average (see dataset) Assume that the capital expenditure/depreciation ratio for this firm will approach that of the industry or sector in which the firm operates. To see what the averages are for different sectors of the U.S. economy scroll down to Table 1. The net cap exp is also estimated as a percent of revenues and after-tax operating income. Use the ratio that best fits your firm. Approach 3: Estimate the net capital expenditures needed based upon return on capital Approach 3: Estimate the net capital ex and working capital investment needed based upon the growth rate and the return on capital of the firm. Typical returns on capital in different sectors are in table 1. To calculate the net capital expenditures for your firm as a percentage of after-tax EBIT enter the following: Expected Growth Rate in Operating Income = 5.00% Expected Return on Capital = 15.00% Expected Net Capital Ex and Chg in WC as % of after-tax EBIT = 33.33% (Cap Ex = 133.33 Deprec'n - Change in WC) As an example, Thus, if your after-tax EBIT in year 5 is $ 100 million, and you want to estimate net capital expendiutures and working capital requirements in year 6, given a stable growth rate of 5% forever after that:
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/29/2012 for the course FIN 6000 taught by Professor Banko during the Fall '11 term at University of Florida.

Ask a homework question - tutors are online