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Technology Stocks : Qualcomm Incorporated (QCOM) -- Ignore unavailable to you. Want to Upgrade?

To: Wyätt Gwyön who wrote (116103)	3/28/2002 2:34:25 PM
From: Rocket Scientist	Read Replies (3) \| Respond to of 152472

OK, starting with 90cents per share, and accounting for dilution of 3% per year, I get an NPV of Case 1 (13% discount rate, eps growth 30%X5yrs+15%X5yrs+6%X20yrs) earnings of $27.50. Does that agree with your model? I would tinker with the assumptions as follows: 1. 3% dilution may be right for years when the stock price appreciates, but for the 20 years when the assumed earnings model suggests slow growth, it's an unreasonable assumption. Let's try setting annual dilution at 10% of EPS growth rate. 2. IMO, a discount rate of 13% is too high compared to the "risk free" return available from treasuries and the current inflation rate. I would argue that the risk of earnings decline let alone actual loss of shareholder equity over a sustained period of time is pretty small for Qualcomm (as opposed to the risk that earnings will not grow fast enough to justify any given day's P/E.) For purposes of discounting the value of future earnings I would take the 450 basis point historical equity risk premium you note in a later post and add that to the 3.5% treasury rate for a discount rate of 8%. 3. Finally, there has to be a terminal multiplier applied to the last year's EPS to account for the (assumed) fact that the company is an ongoing business. Sure, neither QCOM nor any other company can forever grow substantially faster than the overall economy, but that doesn't mean they disappear or become non-profits. Making the corrections above and using a terminal multiplier of 20 and the "wildly optimistic" 30/15/6 growth rate model I get an NPV of 83. A more realistic growth rate of 20/10/4 provides an NPV of 45.