Formerly About Applied Materials Message Board

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Politics : Formerly About Applied Materials

AMAT 261.12

+2.5%

12:51 PM EST

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To: Proud_Infidel who wrote (30592)	5/28/1999 12:53:00 AM
From: shane forbes	Read Replies (1) of 70976

Brian: I found that quote interesting. My best guess is that he assumed the discount rate to be 8%. Therefore if a company is growing faster than this same 8%, the present value of the cash flows is infinite. Hence any price the market pays is too low. For instance: consider this stream of cash flows growing indefinitely at 9% and discounted at 8%: (1.09)/(1.08) + (1.09)^2/(1.08)^2 + .... each term is greater than 1 and there are infinite such terms. Hence the present value is arbitrarily larger than any number the market wants to assign. In mathematical terms the series does not converge. There is nothing magical about the number 8. This is why I suspect that something like the above is going on. Now if he said pi or e or one of those fun numbers that show up unexpectedly in infinite series then I would have been really thrilled!

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