Free H-Model Calculator: How To Use It
The H-Model is a widely used valuation method for estimating the fair value of a company by incorporating two growth phases: an initial high-growth period followed by a slower, perpetual growth phase. This guide will walk you through using our free H-Model Calculator step-by-step and demonstrate how to use it for a mock company, XYZ Corp, using Free Cash Flow (FCF) per share as the key input.
Step 1: Input "Dividend or FCF per Share (D₀)"
Enter the company's Dividend per Share (D₀) or Free Cash Flow per Share (FCF). For this example, let’s assume XYZ Corp has an FCF per share of $2.00.
XYZ Example Input: $2.00
Step 2: Input "Initial High Growth Rate (% per year)"
This represents the expected growth rate during the initial high-growth period. For XYZ Corp, we assume an initial high growth rate of 50%.
XYZ Example Input: 50%
Step 3: Input "Terminal Growth Rate (% per year)"
The terminal growth rate is the rate of growth expected after the high-growth period ends. For long-term projections, you might use a number like 3%, based on factors like GDP growth or the 10-year Treasury yield.
XYZ Example Input: 3%
Step 4: Input "Discount Rate (% per year)"
This is the rate used to discount future cash flows to their present value, accounting for risk and time. For this example, we use a 10% discount rate.
XYZ Example Input: 10%
Step 5: Input "Length of High Growth Period (years)"
This input represents how long you expect the company to experience higher-than-average growth. In this case, we assume 10 years of high growth before settling into slower, long-term growth.
XYZ Example Input: 10 years
Growth Rate Progression Example
For the H-Model, the growth rate will decline linearly from 50% in year 1 to 3% at the end of year 10. To calculate how the growth rate changes each year:
Initial growth rate = 50%
Terminal growth rate = 3%
High-growth period length = 10 years
The decline in growth rate each year will be as follows:
This means the growth rate will decrease by 4.7% each year.
Example Growth Rates for XYZ Corp:
Year 1: 50%
Year 2: 50% - 4.7% = 45.3%
Year 3: 45.3% - 4.7% = 40.6%
Year 4: 40.6% - 4.7% = 35.9%
Year 5: 35.9% - 4.7% = 31.2%
Year 6: 31.2% - 4.7% = 26.5%
Year 7: 26.5% - 4.7% = 21.8%
Year 8: 21.8% - 4.7% = 17.1%
Year 9: 17.1% - 4.7% = 12.4%
Year 10: 12.4% - 4.7% = 7.7%
Year 11 onwards: 3% (terminal growth rate)
Now, the calculator uses this declining growth rate progression over the high-growth period and adjusts the cash flows accordingly, so you get a smooth transition to the stable, long-term growth phase.
Step 6: Press "Calculate"
After inputting the data, hit Calculate to generate the stock's estimated fair value based on the H-Model. As you can see, based on the inputs, XYZ stock has a fair value of $96.57 per share.
