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Strategies & Market Trends : Value Investing
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To: Alejandro who wrote (3712)4/1/1998 7:25:00 PM
From: Chuzzlewit   of 78673
 
Ali, I've been wrestling with the problem for some time. I think there is a good analogy to be made here to the leasing business. Suppose you lease an asset to another individual, and you want to sell that lease to a third party. What is the lease worth? Answer:

Case 1: if bankruptcy is not an issue it is the capitalized stream of payments called for under the lease.

Case 2: if bankruptcy is a potential issue, it is the sum of the capitalized lease payments likely to be received plus the liquidation value of the asset.

Now here's the point. In neither case is the historic or carrying value of the asset an issue. It is irrelevant.

I believe that it's exactly the same in a company. What I care about most are the capitalized value of future free cash flows. But if the value of those cash flows is exceeded by the value of the assets that generated them I suspect that such a business is ripe for liquidation.

Regards,

Paul
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