Derivatives: Darth Vader's Revenge Message Board

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Non-Tech : Derivatives: Darth Vader's Revenge

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To: Henry Volquardsen who wrote (889)	4/7/1999 10:31:00 AM
From: Freedom Fighter	Read Replies (1) of 2794

Henry, >>I can understand your reluctance to use the 20% return on equity. But 4.5 to 6.5% is probably too low.<< This wasn't the return on equity. It was a profit growth assumption. >>Any stock with a long term growth expectation in the 6.5% area would be trading at much lower multiple. A middle ground is probably more in order. << Amazingly that is the long term growth rate for the S&P500 including the peak to peak earnings growth for this cycle. All this double digit stuff we hear about is measuring recession level earnings to peak growth which in my view is totally incorrect. >>Another way to tweak the model is to come at it from the other direction. Make an assumption that the equity should crossover the bond return at some specified point. 5 to 7 years sound right to me. Then taking your reinvested bond as the given calculate what return on equity would be needed over that period. Then you can make an assessment of whether that return seems attainable.<< I use a variation of this, but I love this one too! New spreadsheet coming up. Thanks Wayne

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