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Strategies & Market Trends : Professional Equity Analysis - the Pursuit of True Value
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To: Winston Chang who wrote (73)2/14/1997 3:50:00 PM
From: Reginald Middleton   of 102
 
<On the other hand, just knowing that a company is returning more than its cost of capital shouldn't necessarily mean it is a worthwhile investment. What valuation measures do you use so that you don't end up purchasing EVA "at any price"? >

You can discount projected EVA to its present value to get an Exact estimate of what you should be paying for a stock, See the EVA and DCF projections at rcmfinancial.com
Then see the discounting matrix which brings it all back to today's values at rcmfinancial.com

<I do not totally understand the derivation of EVA, but my sense from reading your prior articles is that it is not market value based, viz. that it is based to a large extent on book value measures (similar to ROE) than on capitalization measures (like PE or PSR).)>

EVA is simply a hybrid version of DCF. It does not rely on book values, for they can be easily mistated (ex. acquistion costs as compared to current market price, etc.). What it does rely on are cash inflows and outlows, the cost of the capital to develop those flows, the anticipated regularity of those flows, and the discounting of those flows to a present value. Its all about cash money.
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