Skeeter,
I'll try.
One way to value a company is based on present value of future cash flows (which is the theoretical amount of money available to shareholders or to grow the business) discounted by a discount rate which is the sum of a risk free rate (the part you've been looking at... tbills or something) plus an appropriate amount for risk called the risk premium.
You must do this on an indefinite basis as since there is still potential growth and value after a given period that you are examining. Therefore, analysts use multiple stage dcf's. For example, I assumed that INTC would grow at 19% for 10 years, and then 11% thereafter. Based on current earnings of just over $6bb, you can calculate and discount for the net present value. Divide by outstanding shares, and you have your number.
It's pretty sensitive to events far in the future, but it's truly what you are buying when you buy an equity (the stream of future cash flows), therefore I believe it to be the right model. The only arguable points are growth and discount rate. (Well maybe poor quality of earnings as MB and others would tell us).
The big debate today is the risk premium. Some argue that over the long haul equities outperform all other vehicles of investment, therefore deserve a low risk premium. For example, here are some various discount rates applied to INTC:
7% INTC 190
14% INTC 105
Therefore, you can see the today (g) the market is giving a discount rate of 14% to INTC, assuming the analysts growth rate of 19%.
Hope that helps
Richard |
