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Hi Dan and Marv: From my study guide for The Warren Buffett's Way he used the 30 year bond rate to set his discount rate, then about 9%.

The current 30 bond rate is about 6 3/4 or 7%, right? I have also seen agruments made that the discount (borrowing) rate should be higher, particularily for companies with more risk, e.g., smaller market cap.

Buffett used his DCF model on Owner Earnings to evaluate whether he could buy a company at a discount to its current market cap. His two step DCF model only used 15% growth rate/year for the first ten years and 5% thereafter.

Then, I believe it was in the Siebel Systems research report, John (TMFFuz) used the Intrinsic Value Model (IVM) to DCF earnings/share to predict how much of the future value was all ready priced in the stock.

Now Dan is using the IVM to predict future stock prices, right?

In any of these models, there are only 4 variables - initial cash value, growth rate, discount rate, and capitalization rate.

The initial cash value - last full year FCF, Owner Earnings, earnings/share, etc. is a look up or straight forward calculation from table numbers.
The capitalization rate is the discount rate - the year 11 growth rate, a straight forward calculation.

That leaves the annual growth rate and discount (borrowing) rates as the only real variables, each of which can create a big difference in the bottom line calculations.

One of the authors of a recent lesson in the Rule Maker Seminar called the DCF analysis a "crap shoot" because of the assumptions that had to be understood and utilized. I don't believe I would go that far, but I do agree that it should not be used as a stand alone buy/sell trigger.

Harold

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