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Politics : Ask Michael Burke
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To: Knighty Tin who wrote (69128)10/15/1999 11:15:00 AM
From: Freedom Fighter  Read Replies (1) of 132070
 
Mike,

Here's a question.

AG.com and much of Wall St. keep talking about lower risk premiums on stocks as a possible rationale for much higher than average stock prices. AG did it again last night.

The calculations needed to demonstrate it are simple enough.

However, it seems to me that there simply must be some relationship between the cost of capital and its return no matter what the risk premium actually is.

Even under the remote possibility that the world is indeed a much less risky place (tell that to Asia), if you raise the price of stocks in relation to the active capital/equity of the businesses (replacement costs) you are lowering the cost of capital.

At that snapshot in time, the return on active capital would still be at the same level.

This should encourage all sorts of active investment geared towards capturing those higher active investment returns relative to passive stocks returns. (If risk premiums on stocks are lower so should the risk premium on the active capital that makes up the business.)

That investment would eventually either lower the returns on the active capital or raise the cost of capital.

Both would be value reducing regardless of the risk premium.

IPO's would drive down prices.

Higher borrowing costs would reduce the values.

Lower returns on active capital would lower free cash flow levels and values.....

What am I missing? (g)

Wayne
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