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Author: madmarv Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1933  
Subject: Re: DCF Analysis Date: 12/9/2004 3:57 AM
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Your market value problem as stated does not have enough information for a thorough analysis so headmaster B.Graham will assign a speculative rating to your security. For instance, you do not provide a beginning capital amount so an adequate return cannot be promised. Too, all kinds of cost of capital sirens are going off in my head.

Why are you jumping on his throat? Stevn specifically asked that you take his numbers at face value. It is clear that he is interested in discussing valuation methodology separately from all other aspects of security analysis.

So why did Marv write the B Co. business is worth $20 for that share? He's adding both income streams (as if they were both retained in the business) – but one is retained to increase B Co. market value and one paid out to the owner Stevn who presumably can earn 10% p.a. growing 5% elsewhere in the economy on that cash (taxes not considered).

No, I said that I assumed EPS = FCF. Under this assumption, the dividend is irrelavent to the analysis and the IV is calculated as $1 / (10% - 5%) = $20.

A great BIG Note: Stevn has not gained any economic business value (or net worth in this economy) here today because he started B Co. with his 10 bucks and that is all the market value is today even though it promises to grow!

You're not looking at the economics correctly. If you go through the DCF calcs, you will see that the discounted value of the dividend stream grows year by year. For example, assuming dividends = FCF, the PV at present (Year 0) is $0.50 / (10% - 5%) = $10. In Year 5, the then current dividend is $0.61 and the discounted sum of future (Year 6+) dividends are is $0.64 / (10% - 5%) = $12.76. Note that the $12.76 is in Year 5's $, which is a 5% CAGR over the Year 0 value. At Year 10, the value is $0.78 / (10% - 5%) = $16.29, and so on. The only way the IV (in Year 0's $) could be something other than $10 is if the cash flow stream itself were to change. For example, changing the assumed growth rate from 5% to 7%. It would increase the IV, but do not confuse this with value creation. The value of the company increases each year because of the earnings retained.

Marv
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