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Notes For FI306

The document evaluates three valuation models for Texas Roadhouse: Dividend Discount Model (DDM), Free Cash Flow to the Firm (FCFF), and Free Cash Flow to Equity (FCFE), concluding that FCFF is the most accurate due to the company's lack of debt and its ability to capture overall cash flow. Sensitivity and scenario analyses indicate that Texas Roadhouse's valuation is highly sensitive to market conditions, with a current recommendation to hold the stock as it appears overvalued. Despite this, the company has strong growth potential, brand loyalty, and financial flexibility, suggesting it may be a strong buy in the future.

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9 views3 pages

Notes For FI306

The document evaluates three valuation models for Texas Roadhouse: Dividend Discount Model (DDM), Free Cash Flow to the Firm (FCFF), and Free Cash Flow to Equity (FCFE), concluding that FCFF is the most accurate due to the company's lack of debt and its ability to capture overall cash flow. Sensitivity and scenario analyses indicate that Texas Roadhouse's valuation is highly sensitive to market conditions, with a current recommendation to hold the stock as it appears overvalued. Despite this, the company has strong growth potential, brand loyalty, and financial flexibility, suggesting it may be a strong buy in the future.

Uploaded by

rachel.tullata
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Dividend Discount Model (DDM):

●​ Benefit: The benefit of using Dividend Discount Model is that Texas Roadhouse
consistently pays and grows its dividends, making dividend-based valuation valuable.​

●​ Negative: It does not capture the full value of reinvested earnings or future expansion,
which are important growth drivers for Texas Roadhouse.​

Free Cash Flow to the Firm (FCFF):

●​ Benefit: The benefit of using FCFF is that it fully captures Texas Roadhouse’s overall
cash generation before financing decisions, which is important since the company has
no debt.​

●​ Negative: It can overestimate value slightly if future capital expenditures or reinvestment


needs are underestimated.​

Free Cash Flow to Equity (FCFE):

●​ Benefit: it directly measures the cash flows available to Texas Roadhouse’s


shareholders, with minimal adjustments needed due to its no debt.​

●​ Negative: Since FCFE and FCFF are so similar for Texas Roadhouse, FCFE does not
provide much additional insight beyond what FCFF already shows.

The best between all three models is FCFF because:

●​ It captures the full operating cash flow of Texas Roadhouse before financing decisions.​

●​ It is the most accurate model for a company like TXRH that has no debt.​

●​ It reflects both the company’s reinvestment strategy and future growth potential better
than DDM or FCFE.
Sensitivity Analysis

●​ Sensitivity analysis shows that Texas Roadhouse’s valuation changes significantly with
small shifts in discount rates (7%–10%) or growth rates (3%–6%), reflecting its position
as a growing company in a mature industry.

Scenario Analysis

●​ In a Bull Case (lower discount rate, higher growth rate):​

○​ Investors are more optimistic about the economy and Texas Roadhouse’s future
expansion.​

○​ The models show the stock could be worth much more, especially because
TXRH has strong growth, no debt, and loyal customers.​

●​ In a Bear Case (higher discount rate, lower growth rate):​

○​ If the economy slows down or if inflation stays high, the value drops pretty
significantly.​

○​ Even though TXRH is a strong company, slower growth and higher risk hurt the
valuation a lot.​

●​ What this means for TXRH:​

○​ Texas Roadhouse’s valuation is highly sensitive to market conditions.​

○​ Right now, the company looks overvalued based on base-case assumptions, but
if growth stays strong and rates fall, the stock could become a strong buy later.​

○​ This shows that timing and economic conditions really matter when investing in a
stock like Texas Roadhouse.

Final Thoughts:

●​ Start with the recommendation:​

○​ "Based on our valuation models, we recommend a Hold on Texas Roadhouse


because it currently looks overvalued."​
●​ Talk about the primary model you relied on:​

○​ "The main model we used was FCFF because it captures the full operating
performance of the company and looks at the business as a whole."​

○​ "However, it does not fully capture public sentiment or future expansion


opportunities, which could impact the stock price beyond what the numbers
show."​

●​ Explain the ‘Looking Ahead’ section:​

○​ "Even though the models show it is overvalued right now, Texas Roadhouse still
has a lot of positives that make it worth watching."​

○​ "The company has no long-term debt, which gives it financial flexibility."​

○​ "It also has strong brand loyalty and consistent revenue growth year over year,
showing it is managing expansion well."​

○​ "Finally, the company maintains strong consumer demand and has solid
long-term fundamentals, which means there could be a better time to buy it in the
future."

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