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Strategies & Market Trends : MDA - Market Direction Analysis

SPY 670.92

+0.1%

Nov 7 4:00 PM EST

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To: JDinBaltimore who wrote (34287)	11/27/1999 10:33:00 AM
From: Vitas	Read Replies (2) of 99985

Stock valuations: csf.colorado.edu exerpt: "If a company's earnings are expected to grow at a rate, G, of 25%, then the discount rate on the future income stream from the company can be calculated as 4.8% - 25% = -20% (rounded to whole number). The discount formula then gives the present value of the income expected as [(1-20%)^10 -1] / [(-20%) X (1-20%)^10] = 42. This would be the P/E expected. If the expectations are spread in a range of 30% to 20%, then the top estimate would make for a 67 P/E while the lower one would be 27. Since the people expecting the lower rate would be out of the market, the price would be skewed towards the upper range and above the mean, at say halfway or P/E 57. The earnings are viewed as those expected for the next annual report. This model explodes above 30% growth rates giving incredible numbers such as P/E 120 at 35% growth rate, 240 at 40% etc.. A secondary model is used for high growth companies. ....."

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