Sr K, here's the math:
$2.16/1.21 + 2.92/(1.21)^2 + 3.79/(1.21)^3 + ... + 11.09/(1.21)^8 + 255/(1.21)^9 = $58.35
What's more, I don't agree to add 6% and 15%. Think about a world with closer to 100% risk free rates. You can't add them, I think. I prefer to multiply, and the product is 1.219. Using this discount factor for 9 years, yields a PV for DELL of $42.91 + the COH of $1.25 = about today's price.
You may define it any way you like, but standard financial mathematics adds a premium for risk. If you prefer to use a 21.9% discount rate then your risk premium is 15.9% according to the way we calculate things. As I said, it's all in the assumptions.
While we're talking financial mathematics, you may want to consider Gordon's perpetual growth model, which values an equity as the expected dividend divided by the difference between the cost of capital and the dividend growth rate. You would use free cash flow as a surrogate for the dividend. Unfortunately,the model doesn't work here because the cost of capital is less than the growth rate (giving you a negative denominator) -- the cost of capital is at 8% or so, and the projected long-term growth rate of the PC industry at around 15%. If the differential were 1% the equity would be valued at $160!
The real take-home lesson from all of this is that Dell is a cash cow-- a characteristic unappreciated by virtually all street analysts. |
