Single-stage (constant-growth) FCFF and FCFE models:
Multi-stage FCFF and FCFE models
There are several versions of the multi-stage model. In one version, we estimate the free cash flows up to a certain number of years and assume that the free cash flows will grow at a constant rate from there on. The formulas for this version are:
Another version assumes declining growth in Stage 1 followed by a long-run sustainable growth rate in Stage 2. We can use the H-model formula (discussed in DDM) for this version.
Three-stage growth models are appropriate for companies that have three distinct stages of growth – growth phase, transition phase and mature phase.