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To: John Malloy who wrote (9090)	8/10/1999 12:31:00 AM
From: Chuzzlewit	Read Replies (1) \| Respond to of 21876

My basic approach to valuing a stock is to discount the cash that flows into and out of an investor's pocket So how do you handle a firm that pays no dividends? Since stock repurchase is the financial equivalent of a dividend, how do you handle that case? Also, I suggested using free operating cash flow which is defined as cash flow less a sinking fund for capital replacement less new capital investments. The idea is to calculate the amount of cash that the company could dispose of without impairing growth, and this is widely used as a surrogate for dividends. I have two major problems with book value. First, because it is a historic value it often bears no relationship to the fair market value of the firm's assets. For example, older companies that own considerable land will often have the land understated on their books. I think there is also the problem of the unlikely possibility of a firm actually breaking up. And second, because it is reflective of past earnings, and earnings are an accounting convenience. If I understand your method, you calculate a stub value for the stock 5 years hence and discount that value (along with dividends received in the interim) at some minimal rate demanded by investors. If that's the case, how do you calculate the stub value and how do you determine the appropriate discount rate? TTFN, CTC

To: John Malloy who wrote (9090)	8/10/1999 7:55:00 AM
From: GVTucker	Read Replies (3) \| Respond to of 21876

John, RE: your earnings model... In addition to Chuzzlewit's response (I agree with his points, and won't repeat them), there is one other issue I would take with your earnings model. I don't worry about games the firm might play with stockholder equity because investors play counter-games when they adjust the price/book ratio they are willing to pay. Whatever game both play, the stock price is always equity per share multiplied by the price/book ratio. This makes the assumption that the market is efficiently pricing the security on a price/book basis in the first place. If this is the case, then individual security selection adds no value, and you're better off just indexing everything--which, BTW, I do not do.