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Technology Stocks : Dell Technologies Inc.
DELL 141.69+2.1%2:39 PM EST
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To: Michael Bakunin who wrote (109240)3/12/1999 1:17:00 PM
From: Chuzzlewit  Read Replies (2) of 176387
 
It isn't. It is priced on the perception of future cash flows. Only a complete idiot would invest on the basis of a cash flow yield in perpetuity of a little over 1%.

But ask yourself this: suppose we had an infallible crystal ball which showed that the cash flow would increase by 40% every year for the next six years, and remain constant (a perpetuity) thereafter. Now assuming a cash flow yield of 1.333% (this is your number: 1/75), we would expect that the cash flow yield 6 years hence would be 10.039% based on current dollars. Now let's assume 100 dollars were invested in such an enterprise today. One might expect cash flows to be $1.8667, $2.6133, $3.6587, $5.1221, $7.1710, followed by a perpetuity of $10.0394.

Now at the time of the beginning of the perpetuity the perpetuity itself might have a value of $154.45 (we are dealing with a certain environment so I have used a 6.5% discount rate). Discounting that back to the present we would have a value of $105.85. But the PV of the intervening cash flows need to be added back as well, so we would have $1.8667/1.065 + $2.6133/(1.065)^2 + ...+ 7.171/(1.065)^5. The sum of all of these terms is $122.14 which is the present value of all of the terms discounted at 6.5% (again under certainty).

Now I don't mean to imply that any of the assumptions above are realizable -- only that this is the motivation of the investor ---> the future.

TTFN,
CTC
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