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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1670  
Subject: Re: Discount conundrum Date: 5/16/2011 1:49 PM
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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.

jack
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