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Hi Hewitt,

Thanks for your message - I hope the stock market experience is not too awful for you at the moment. I totally understand your priorities, and really appreciate your help, especially when you have such worries and concerns.

My only questions at the moment are about excess cash and enterprising interest. I am trying to use the new method you wrote about in earlier messages on this board (I have now read most of the stuff on here, very valuable to me). In your QSII post:

Excess Cash calculation: costs = COGS + SG&A + R&D + TAX + Investment in fixed and working capital.

1) R&D is the actual money spent that year, not the adjusted one we get by depreciating it, correct?

2) You gave formulas in several posts, some of them include tax in the costs and some don't.
so:
a) Do I include tax in costs?
b) Which tax number? Defensive, enterprising or the number directly from the income statement?

3) Once you have the costs, I calculate excess cash as
(cash and equivalents from balance sheet) - costs/4. Or should I be using total revenues: (total revenues) - costs/4?

I end up with a negative number for excess cash - how do you handle this situation? I've thought to:

a) Set excess cash to zero.
b) Subtract it? This would increase Gross Enterprising Capital, because it's a negative number?
c) Something else?

If you have time to help me out, I'd really appreciate it.

Best wishes to you and your family during this hard time.

Dot
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Dot -

There are 10x as many interesting companies/stocks today vs. a year ago, due to the stock market implosion. What is "hard" is finding the time to study all these companies.

1) R&D is the actual money spent that year, not the adjusted one we get by depreciating it, correct?

actual $$$

2) You gave formulas in several posts, some of them include tax in the costs and some don't.
so:
a) Do I include tax in costs?
b) Which tax number? Defensive, enterprising or the number directly from the income statement?


Yes, unless you want management to go to jail. Defensive. But if GAAP or the cash tax figure at the bottom of the cash flow statement. We do not need to be precisely correct here.

3) Once you have the costs, I calculate excess cash as
(cash and equivalents from balance sheet) - costs/4. Or should I be using total revenues: (total revenues) - costs/4?


former. remember, we are assuming a firm needs enough cash to cover the next three months of operating expenses and investment outlays. now this is just a generalization. maybe, given the current credit freeze-up, we should use four months, six months, or even more.

I end up with a negative number for excess cash - how do you handle this situation? I've thought to:

a) Set excess cash to zero.
b) Subtract it? This would increase Gross Enterprising Capital, because it's a negative number?
c) Something else?


If a company has $10 million in cash and you estimate operating cash at $13 million, then they do not have any excess cash.

Happy to answer any more questions you have. If you want to do a FAQ, we can post it on the earningspower.com site. Also, I'm sure the author will acknowledge your contribution if he writes an improved version of the first edition.


Hewitt
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Hi Hewitt,

Thanks - that is so helpful! Wow, that would be so neat, to have an FAQ on your website. I don't even want to think about seeing my name in a book on investing - I wouldn't buy that book :-)

I'm afraid I have one more question. Digging back further into the past years of KCI, I see they have two years where they show a "Series A convertible preferred stock dividend". This is described in the footnotes as a payment in kind, I guess that means they paid in common stock?

I'm not sure how to handle this on either the defensive or enterprising income statements, and I haven't been able to find anything this board about preferred stock.

When you have a moment, if you could help with this, that would be wonderful.

Thanks again!
Dot
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