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I agree;

A firm beleiver in Risk/Reward trade off.

If equity held any priority in bankruptcy, the risk would be lower, so the return should follow.

Using the 1% shock you had mentioned for earnings. I then gave a 1% chance of bankruptcy for each year. Over 30 years, there is a 26% chance of BK. Using todays current rates are 4.64% 30 yr bond.

So if I can have 4.64% risk free I would expect at least a 6.27% return with 26% chance of default.

If the company does "plow" the money back in, then there is more risk and for a any company, (size, sector, stage) I would expect the average return provided by that type of company in the past. In this example you use 10%, but for a small cap, value you may expect more???

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