Message Font: Serif | Sans-Serif
No. of Recommendations: 1

This is a table of my outputs for UPS based on various growth rates, discounts and starting inputs by type.

7.3% growth 7.3% growth 11% growth 11% growth 14% growth 14% growth
COE 8.7% COE 9.45% COE 8.7% COE 9.45% COE 8.7% COE 9.45%
WACC 5.65% WACC 5.96% WACC 5.65% WACC 5.96% WACC 5.65% WACC 5.96%

FCFF $203/sh $181 $281 $221 $290 $259
EVA $102 $87 $148 $107 $147 $126
DivDis $45 $40 $62 $47 $62 $55
FCFE $39 $35 $55 $42 $54 $46
2 stage, 5 year high growth, 3% terminal growth

Notice that there is dramatic difference between outputs if debt is on the table. Is this really the bet the market is making? UPS is rated AA-, three steps below AAA. By its balance sheet an argument could be made for it to be a AAA rated firm. Price its debt on the open market and it is not being priced as AA-, it is being priced as being higher quality.

This is this investors conundrum; is the market being overly punitive to debt users in an era where debt is cheaper than it has been in a century? If so, we should be backing up the truck to smart debt users who are actively managing their cost of debt. OR is there fair reason for caution?

I can tell you when I run my models for companies that carry little debt I get far less variation for IV output.

I know there are ways to reconcile MVA to FCFF to FCFE, I'm not interested in making them fit. The methods are raw and basic because precision is a myth. All the FCF input formulas I use are the simplest. One can smooth them in various rolling ways I still, without getting deep, deep into the voodoo of accounting inputs translated by discount cash flow precision formula I get these variances in price.

Print the post  


When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.