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Since Mr. Heiserman posts here, I was wondering if he could help me calculate the Enterprising Income Statement. I'm finding it a lot more difficult to put it together than the Defensive Income Statement.

The company in question is Cleveland-Cliffs (CLF). They have no intangible assets, so no need to calculate those. The debt is a little tricky. Here's what I see in Yahoo Finance:

How do I account for "Deferred Long Term Liability Charges" and "Minority Interest"?

Also, is there a free source for the current "Cost of Equity" shown in Table 6.5?

And I can't find anything on the balance sheet for deferred tax assets.

Any assistance you (or other posters on this board) can give me would be greatly appreciated. :)

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Ken -

Thanks for your patience.

Yahoo is useful, but when constructing our two alternate income statements we want to go to the source. Here is the link:

Okay, so you want to talk about taxes. Here's my take. At year-end 2006 and 2007 CLF had $117M and $62M, respectively, of deferred tax assets, which includes both current and long-term. Meanwhile, deferred tax liabilities were $118M and $189M, respectively. Thus, net deferred tax assets were $(1)M and $(127)M, respectively. CLF's investment in net deferred tax assets in 2007, therefore, was $(126)M. This is a source of cash in the enterprising income statement. We subtract this source of cash from the provision for taxes; i.e., GAAP taxes of $84M minus the negative investment in net deferred tax assets of $126M equals enterprising taxes of $(42)M.

In plain English, because CLF's deferred tax assets shrank (a reduction of assets is source of cash) and its deferred tax liabilities increased (an increase in liabilities is also a source of cash), the balance sheet changes turned a tax expense into income. Many companies enjoy negative investments in deferred tax assets, but normally the negative investment isn't big enough to turn impact the tax provision as is the case with CLF in 2007.

Your other questions are good ones, but before we proceed I want to make sure I answer you tax question fully.

As for the cost of equity, I tend to use the 10-year Treasury yield plus 500 basis points, or a minimum of 10.0%. As an additional layer of security, I also buy companies when they sell for 50%-75% of intrinsic value.

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Hi Hewitt,
I first want to thank you for your book. Furthermore, I noticed that you posted in your previous post that you tend to buy companies selling for less than intrinsic value. How do you calculate intrinsic value? I understand how you put together the enterprising and defensive income statement, but I am a little confused as to how intrinsic value is calculated. Thanks.

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investinginfinity -

Thanks for buying the book, first of all.

Second, I estimate intrinsic value using a short-hand method before I run the numbers through my model, and then if the earnings quality and competitive advantage pass muster then I use a more detailed approach. I want to stress that this approach does not always work, as readers who recall my "Christmas present in October" comments about First Marblehead can attest.

The reason I value the company twice is to save time. If a company doesn't look to offer a minimum 15% CAGR every year for the next three years, then I move on to the next company. Time is precious and I am trying to avoid value-traps. If, however, my minimum return looks achievable, then I will create an Earnings Power Chart, think about competitive advantage, and also value the business using 3-4 approaches, including the Croesus Test which I introduce at the end of the book.

My next column for Real Money shows how to estimate your annualized return for the next three years. It is a simple model that uses Yahoo data. I track about 80 companies and every day I hit the MSN 'update quotes' button and my Excel SS automatically recalculates my 3-year CAGR, as well as the longer-term PIV-ER numbers. (See posts from last Fall on PIV-ER to learn more.) A reader of this board showed me how to link MSN quotes to my SS, and this function have saved lots of time. I'll explain how you can do this in my column, which I will post here.

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