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

To: qveauriche who wrote (129512)	6/3/2003 11:30:02 PM
From: Stock Farmer	Read Replies (1) \| Respond to of 152472

qveau, are you sure it's just that you don't like the conclusion? This model acts as a first-order approximation. In this is an implicit understanding that harvesting a return on capital is far more complex. But not as far out as you might suggest it to be. After all, a discounted free cash flow analysis does indeed rest on exactly the same premise. With the assumption that the entire amount of discounted free cash flow is available for distribution. "The problem I have with it as a practical guide to valuation is that it falsely presumes the death of capital in the ordinary course of business. ". If this is the only problem you have with the model, then indeed it has more merit than you think. For the model does not assume the death of capital. It assumes only two things: that there are distributions to shareholders, and that one day the company shuts its doors for the last time. You wrote "I don't think its contemplated that a properly managed company would ever, in the anticipated trajectory of the life of that enterprise, arrive at a point of zero value of its assets." Arguable, but this is not the point. Imagine you sit on the board of Ace Printing which has amongst its key assets an offset printing machine, you know that it wears out. And as its last days draw near you can decide whether to buy another offset printer, buy a different printing machine (maybe a laser printer)... etc... or even exit the business altogether. It is not uncommon that the later choice is often contemplated. In fact it is usually amongst the better managed businesses that such a path is executed, BEFORE the value of the assets decline below the value which their continued use will fetch. In which case the well managed companies will dispose of the asset at its maximum value. Sell it to someone for what it is worth. And maybe distribute the proceeds to the owners. Assets do not evaporate in the process of a company's value going to zero. They merely change hands. They leave the company and the owners of the company enjoy the proceeds. That is, in the better managed companies. Other companies hang on to the assets and indeed they waste away beyond the point of salvage. There are miles and miles of rusting iron laid down across the planet, one-time "assets" of railroad companies which no longer exist. The definition of a company shutting its doors for the last time is that there are no more assets within to distribute to shareholders. It is only at this point that a holder of a share should expect to have the shares valued at $0. Even acquisition is covered by the theory. As a purchaser, with a slight twist that truncates the series without substantial modification to the result from the standpoint of our purchaser at point "A". I think you mistook the term "distribution" to mean only cash dividends. A distribution also includes the proceeds of disposition of the company's capital assets. Whether by sale in whole or in part to another company, whether by dividend, or actually in pieces. Which anticipates preservation of capital, not its death. Please check again qveau. The sums are relentless. The most we (plural, all future shareholders) can expect to receive from a company is the expected future distributions by that company to ourselves. Individually we may pick each other's pockets and shift wealth around between us, but in the end the only increase in our collective wealth by the process of owning the company comes from the company and nowhere else. If you doubt this, I would appreciate a clear description of how it works. If we choose to pay more than we expect will be distributed back to us, then we are choosing to distribute an expected loss between us. The higher the gap, the higher the expected loss. That is an inescapable conclusion. Whether or not the conclusions that must follow are easy to digest. John