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

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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
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