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Chipotle does not pay a dividend, but the two-stage dividend discount model can be supplanted by a more general discounted cash flow model, the free
Chipotle does not pay a dividend, but the two-stage dividend discount model can be supplanted by a more general discounted cash flow model, the free cash flow (FCF) valuation model, that discounts projected free cash flows and allows for debt in the capital structure of the firm. This FCF valuation model is discounted by the weighted average cost of capital (WACC), instead of the required rate of return on the common stock. (See the attached template for the free cash flow valuation model). A major Wall Street analyst has estimated the following free cash flows (all in $millions) for Chipotle in the years 2017 through 2020. After 2020, FCF is assumed to grow at a constant rate of 2% indefinitely. The weighted cost of capital is 10%. Assume that shares outstanding are 28 million and that there is no debt on the balance sheet. What is the value per share of common stock based on the above metrics? Be sure to show your work. How does your answer in part a) change if you assume the growth rate after 2020 is 4% instead of 2%? The market currently value Chipotle common at around $413 with a P/E on estimated 2017 EPS of around 50x. How do you reconcile your answer in part a) and b) with the current price? Briefly discuss the advantages and disadvantages of both the P/E multiple and the discounted cash flow approaches to stock valuation
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