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John: Thanks for your two posts on MSFT CAP. They were very infomative and helped me clear up some of the misconceptions I had from my previous reviews, including some of Mr. Buffett's two step forecast model work.

I am still confused with three items in your posts. I admit this confusion could stem from my engineering background v.s. a financial background.

1. You said I have seen approximations to NOPAT that may serve folks as being good enough such as Net Income + (1-tax rate)*Interest Expense. This one baffles me. First; if the Interest Expense is 0, as in the case of MSFT, and the symbol * is meant as a multiply function; the second term become "0" and drops out of the equation - fine so far, except MSFT still has to pay taxes on income. But if the tax rate were 100%, we would end up with the second term reducing to a value of "0" and again dropping out of the equation - Not so fine, since a tax rate of 100% would reduce any amount of income to 0. Help!

2. You said The discount factor is (1+cost of capital)^-year (e.g. year in the first year is -1, second year -2, 24th years –24, etc). I feel more comfortable with (1-cost of capital)^year (e.g. year in the first year is 1, second year 2, 24th year 24, etc.) Are these the same??? To an engineer, -2 as an exponential power is the same as saying to the 1/2 power.

3. It would appear if something unrelated to the business, e.g., Marketable securities and investments, were to increase in value over time that CAP would be shorten. Or, even if adjusted net income increased faster than forecast, with everything else remaining the same, that CAP would be shortened. Am I missing something here?

I look forward to your future refinments to help us better understand CAP, and thanks for any help to clear up my above confusion.


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