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Strategies & Market Trends : Professional Equity Analysis - the Pursuit of True Value

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To: cape radical who wrote (27)	1/27/1997 5:21:00 PM
From: Reginald Middleton	of 102

<i believe that the cost of capital value that you assumed for CSCC is awfully low. i would assume ca. 20% for any unleveraged high tech company based on a beta of 2. a beta of 1 is ca. 12%.> The beta of CSCC is 1.17 when combined with the long rate and the historical broad market equity risk factor comes out to 13.63%. <do you assume 100% of sales and marketing as investment capital? or do you use a fudge factor and assume that 50% is investment and 50% expense? i find it difficult to assume that all of S&M is invested capital.> All of S&M is investment capital. If you assume only a portion as capital you will skew the results. Think of it this way, if you only measure part of your personal portfolio as an investment and the other part an expense, you would overstate its performance in good years and understate it in bad years. Eventhough 100% of S&M is considered investment capital, the investment does not necesarily pay off (exceed the after tax operating expenses plus the cost of capital). When it doesn't, it is considered a destruction of the capital.

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