Capital Spending Exceeds Depreciation by a Significant Factor for Stable Growth Period: If capital spending is 150% of depreciation in the stable growth period, then this percentage is on the high side.  The consequence of capital expenditures being too high relative to depreciation is that you might obtain an extremely low value.  Conversely, if capital expenditures are too low relative to depreciation in the stable-growth phase, then an extremely high value obtains.  Typically, in the stable growth phase, capital expenditures are similar to (or not disproportionately large relative to) depreciation.

Growth Rate: 

Supernormal growth rate is lower than stable growth rate: By definition, if you use the two stage model, the supernormal growth rate should be larger than the growth rate in the normal growth period.  More generally, if you used a multi-stage growth model which mimics the lifecycle of the firm, in the early years, growth in the startup phase could be lower than in the normal stage.  Next, rapid growth exceeding stable growth would occur.  As the firm matures, the firm could be growing a little above or possibly at the S&P500.  Point: Either use the stable growth model or alternatively, reweight your growth estimates to put a larger weight on growth components associated with higher growth rates.

Earnings Per Share is Growing at a Much Lower Rate than Capital Expenditures and Depreciation in Supernormal Growth Period: A few students had EPS growing at 4% in the supernormal growth period while capex and depreciation grew at 20%.  Once again, the stable growth rate for EPS was higher than EPS in supernormal period.

Growth Rate in Capital Expenditures during Supernormal Growth Period should typically be greater than zero and greater than or equal to the growth rate in depreciation: Some students had capex decreasing (-4%) in the supernormal growth period and depreciation increasing (1.9%) based on a 5 year historical growth rate.  Remember, value is based on expectations rather than realizations.  Realizations represent a point of departure.  As a starting point, set the expected growth rate in capex = expected growth rate in depreciation = expected growth rate in EPS to determine the FCFE value.

Calculating Growth Rate in EBIT for use in FCFF: To calculate expected g_EBIT, E(g_EBIT), this is simply a variation of expected g_EPS, E(g_EPS). Recall that to get an expected g_EPS we can use a weighted average of management's estimate of growth, historical growth, and fundamental growth via the Dupont model. Using a modification of the Dupont formula,
 

Other:

Misuse of Damodaran 2FCFE and/or 3FCFE Spreadsheet: Using the two stage or three stage FCFE model assumes that your cost of equity is lower than your initial growth rate and hence a supernormal growth model is necessary.  When you have two growth rates and both growth rates are lower  than the cost of equity (i.e., supernormal growth is way lower than cost of equity rather than approximately equal to cost of equity), you really need to set up your own spreadsheet using the general discounting model that we discussed in class.  Grow the cash flows at one growth rate over the appropriate interval and then grow the cash flows at the second growth rate over the remaining time period if a two stage model is used.  Discount these cash flows at the appropriate cost of equity to obtain the equity value.  By appropriate cost of equity, it's the cost of equity associated with each growth phase.  Your cost of equity could remain constant.

Negative Earnings Per Share: Instead of using the FCFE model, you might try valuing the entire firm using the FCFF model and then minus out the market value of outstanding debt to obtain the value of equity.  An alternative to the FCFF model is to use normalized or average earnings using a period in the recent past in which earnings are healthier. A further discussion of this is found in Damodaran on Valuation, Chapter 9: Special Cases in Valuation.

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