re: the firm value would be $29.6/share
The problem with this type of analysis, is that you must predict what a number of variables will be for the next 10 years. Small changes in several of those variables, ends up causing very large changes in the resulting "firm value". And, in reality, you are very unlikely to guess exactly right on all those variables. If you use a reasonable range for several of the variables, (like 15-25% for the EPS growth rate, and 4-6% for the long bond rate), and do your calculations, then you end up with a range for your "firm value". And it's probably a range so wide, as to be useless. GIGO.
These models give investors a false sense of certainty, in their ability to predict the future.
If you really want to have some fun, do this type of analysis with a company like Ebay, whose market cap is currently less than the cash on the balance sheet, which means Mr. Market, in his infinite and Efficient wisdom, is placing a negative value on the actual business. |
