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To: HDC who wrote (147329)	11/12/1999 4:55:00 PM
From: Chuzzlewit	Respond to of 176387

HDC, here (very briefly) is the method I employ. Step 1: Calculate operating cash flow. This consists of adding non-cash charges back to operating earnings, and then making appropriate balance sheet adjustments such as subtracting increases in non-cash current assets and adding increases in current liabilities. Step 2: Subtract from operating cash flow new investments in plant, equipment and acquisition costs. Since the pattern of these expenditures tends to be choppy you will probably want to smooth them out. This gives you free cash flow which is used as a surrogate for dividends. Basically, this represents the amount of cash the company could part with without impairing its growth. Step 3: Forecast the growth of free cash flow over a reasonable time horizon (say five years, depending on the type of business) and assume that the company is mature at that time. Then apply a stub value to that cash flow. You might want to use around 10x free cash flow for the stub value of the company. Step 4: Discount the cash stream you have projected using the current long term risk-free interest rate plus an appropriate risk factor. The riskier the business the higher the risk adjustment needs to be. You need to use a lot of judgement here. Step 5: divide the NPV obtained in step 4 by the number of shares o/s You also need to watch hidden expenditures on acquisitions which take the form of mergers accounted for by pooling of interests. Treat these as if they were cash expenditures, because they may be treated analytically as if the acquisition were accomplished by the sale of new stock followed by the cash purchase of a business. Another hidden expense is the exercise of employee stock options. Treat these as real costs. In effect, they represent additional share of stock by the company at fairly deep discounts to the market. Hope this helps. TTFN, CTC