Formerly About Applied Materials Message Board

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Politics : Formerly About Applied Materials

AMAT 265.39

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3:59 PM EST

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To: Proud_Infidel who wrote (30592)	5/26/1999 1:10:00 PM
From: Robert O	Read Replies (2) of 70976

BK, I remember reading that and thinking it was an interesting concept. I mean if companies are valued as just discounted cash flows, then a company that will ultimately grow infinitely large should demand any price today. I tried to think it out as follows. A Perpetuity = Cash Flow/Interest Rate. So a $50,000 perpetuity a year (to forever) requiring a 10% rate puts today's value as $50,000/.10 = $500,000. A growing perpetuity = Cash Flow/(Rate-Growth). If, ultimately the numerator is infinitely large, one could argue today's value must be infinite as well. Of course knowing growth will continue is key since if it didn't one would be hesitant to back up infinite trucks for the promise of the massive future value of the company. So time is important. Also, I agree that 8% is somewhat arbitrary for the authors to use since even a company that is guaranteed to grow forever at any positive rate above inflation also would become infinitely large. Where are the math Phds on the board... there are some interesting 'large number' paradoxes that might help illuminate this better. RO

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