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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era
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To: Reginald Middleton who wrote (242)4/23/1998 7:50:00 PM
From: Freedom Fighter  Read Replies (1) of 1722
 
Reginald,

When I do use CAPM I use the 30 year and +5.5%. I will reread the 20 year bond case. 5.5% is the number I have seen most often. 5.8% is a new one to me. If it is most commonly used now, thanks for the tip. I will need to research further.

The CAPM model I got from Mckinsey was actually quite sophisticated in my view. We may be talking about a different spreadsheet. The reason I say so is that my girlfriend is in the business and does spreadsheets for a firm that manages money for some very wealthy and famous clients. While hers are of extraordinary quality (she's watching me type this) in some ways they are not as good as the Mckinsey model. If hers are good enough for billionaires.....

<Small changes in the terminal growth rate assumptions, like will it be
5% or 6% or 6.5% can produce dramatically different conclusions. Let's
face it noone knows these things.>

>No one knows anything about the future. This statement applies to a >lot of topics outside of CAPM and DCF:-)

I do agree with you on this. However, this particular issue always gave me the most trouble about the model from an intuitive point of view. The terminal/residual value makes up the largest percentage of the ultimate calculated value, yet it is based on the least knowable thing (the distant future). The difference in your result between the assumption of 5% or 6.5% is absolutely dramatic and often enough to be the difference between a sell or a buy conclusion let alone a buy/sell or hold. What do you use and how do you determine it? I have developed my own ideas about how to handle this.
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