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Technology Stocks : Lucent Technologies (LU) -- Ignore unavailable to you. Want to Upgrade?

To: John Malloy who wrote (9149)	8/11/1999 5:22:00 PM
From: Chuzzlewit	Read Replies (1) \| Respond to of 21876

John, I think I now understand what you are doing. Basically, you forecast the price of the stock some time in the future based on forecasted equity per share multiplied by the ratio of price per book. You also include the stream of cash dividends realized by the investor. Both numbers are adjusted to reflect transaction costs and taxes, and are discounted at a risk-adjusted rate to reflect the requirements of the investor. I have no problem with your handling of dividends, but I believe that there is a central flaw in your method of forecasting the future value of the stock. Specifically, the price to book ratio is a function of the price of the stock and the equity per share. The price is not a function of the ratio. The ratio is a function of the price. I believe you are confusing cause and effect. How else could you explain the internet phenomenon? Here you have a group of stocks with declining equity per share. Yet investors have bid them up to extreme values. I believe that investors are looking at the potential stream of future cash flows as justification for the price. The question of whether that assessment is rational or not is beside the point. If you need further demonstration of what I am talking about simply look at P/E as a function of perceived growth which is why LU trades at a much higher forward P/E than does GM. BTW, the Gordon perpetual growth model does use cost of equity in the denominator to calculate the value of a share. It uses the difference to calculate the PV of a stream of dividends on a per share basis. In fact, this relationship is one traditional method used to determine a firms cost of equity capital. I suspect we will have to agree to disagree on your method. TTFN, CTC