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To: Sig who wrote (137800)	7/27/1999 10:39:00 AM
From: Chuzzlewit	Respond to of 176387

Good morning Sig, Debt load and prospective debt are separate issue. In a nutshell, companies that have a high, continuing reliance on to finance their operations are punished in a rising interest rate environment (utilities come to mind). Companies with considerable debt on their balance sheet facing a downturn in business increased bankruptcy risk in such an environment. What I am talking about is how growth companies are disproportionately impacted by increasing interest rates (which is why the NASDAQ is so vulnerable compared to the DOW). Let me illustrate this with an example. Suppose we have two companies with exactly three expected cash flows. Let say that the cash flows are 10, 10 and 10 for the no-growth company, and 5, 10, and 15 for the growth company. At a 0 discount rate the value of those cash flows would be 30 -- there is no discounting. But now, suppose we apply a 10% discount rate. The value of the first company will be 10/1.10 + 10/(1.10)^2 + 10/(1.10)^3 = 24.869. But the second company will be worth 5/1.10 + 10/(1.10)^2 + 15/(1.10)^3 = 24.080. As you can see, the promise of those future cash flows is worth less. The problem is that this kind of analysis assumes that all other things are equal, but clearly they are not. Certain businesses do somewhat better in modest inflationary environments because they regain pricing power -- something that is lost in deflationary trends. That adds to the bottom line after adjusting for inflation because profit margins tend to go up. TTFN, CTC