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Technology Stocks : PairGain Technologies

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To: Chuzzlewit who wrote (5234)	6/25/1997 1:12:00 PM
From: Bobo	of 36349

Paul, There is a variation of the div discount model I rely for non-dividend producing companies. The model discounts future earnings to determine a PV (fair market value) but also penalizes the company for cumulative retained earnings. A simple example for the first two years of earnings would be as follows: discount year one earnings of let's say $1 by 10% (for simplicity) to yield a NPV of $.91. Year 2 earnings of let's say $1.50 would be penalized by cost of capital of Year 1 retained earnings ($.90 * 10%). This cost of capital would be computed with our discount rate since a shareholder could reinvest the retained earnings to earn 10% elsewhere. The NPV of Year 2 earnings is the NPV of ($1.50 - $.09) or $1.23. Therefore, based on these two years the fair market value of the company would be $.91 + $1.23. I'd be interested in your thoughts. The reality of is that even this is only a rough barometer for me since growth forecasts are so tough for technology companies. Who'd of thought that cisco would grow 75% or more for 6 years. Who'd of thought Cascade would hit a wall so quickly. Regards

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