Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Ausdauer who wrote (2589)	6/11/1999 8:27:00 PM
From: Uncle Frank	Respond to of 54805

>> Please summarize in 200 words or less Hey, how come you get 10,000 words to summarize one company, but you limit me to 200 for a macro-economic treatise <g>? I've invited the best financial analyst I know on SI to respond to your question. Hopefully, Chuzz will drop by and give us his take on the matter. Frank btw, great pics; I'm using Mr. Crustacean as wallpaper. How's the chances you can colorize Streetcar?

To: Ausdauer who wrote (2589)	6/11/1999 8:57:00 PM
From: Chuzzlewit	Read Replies (1) \| Respond to of 54805

Ausdauer, Uncle Frank invited me over to grapple with this question. I don't know that I can answer in 200 words or less (and still be clear) but in the words of Polonius to Laertes, "Brevity is the soul of wit", so let me try to be brief. Wit is more difficult. Let me start with the simple valuation issue. I would break the problem down as follows. The valuation of a firm consists of the sum of the discounted value of future free cash flows plus excess cash. For example, let's assume that we have a company with a capitalized value of $10 BB. Let us further assume that the company has excess cash (meaning cash it could part with without impacting operating earnings) of $1 BB. Obviously, the company could dividend $1BB to shareholders and the company would then be worth $9BB. The $9 BB is the discounted value of future free cash flows. From a practical point of view that means that excess cash adds value to the firm on a dollar for dollar basis and its value is not diminished by rising interest rates. Now, let's look at the impact of debt. To the extent that a firm's long-term capital is funded by debt, it is in a riskier position than a pure equity firm because the probability of bankruptcy increases with the greater level of debt. Some financial analysts have argued that the capital structure of the firm is irrelevant to the stock price because the risk of leverage is compensated by the potential added gains. However, I would argue that to the extent that firms have too much debt, increasing interest rates disproportionately punishes them because the risk is perceived to far outweigh the benefits. I hope this helped. TTFN, CTC

To: Ausdauer who wrote (2589)	6/11/1999 9:25:00 PM
From: gdichaz	Respond to of 54805

To Ausdauer: Who is to say whether interest rates are going up? There is no fundamental economic reason for that since there are few if any signs of inflation building. But of course, these days what matters is psychology, "preemptive strikes" etc. so it may happen. You have just had an excellent answer to your first question from Chuzz. Now just for chuckles, here is a comment from Chaz too re your second question. The relationship between a Fed interest rate hike and a quintessential young gorilla growth stock such as Qualcomm is roughly zero. The overall market will suffer perhaps at least temporarily but the Q will go on its merry way. Its royalty and other income will supply the necessary funds for its growth and CDMA will grow around the world so the market for the Q will be there. Note what happened when the bottom fell out in Korea. CDMA growth went on almost without pause (though there was psychological damage to the Q's short term stock price based on misconceptions). OK so I exaggerate a bit. But suggest this is closer to the truth than that the sky will fall on growth stocks if the Fed raises the short term rates it controls by a quarter of a point. Chaz too