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Strategies & Market Trends : Gorilla and King Portfolio candidates - Moderated -- Ignore unavailable to you. Want to Upgrade?

To: Mike Buckley who wrote (959)	6/15/2004 7:12:55 AM
From: John Carragher	Respond to of 2955

dcf is based on assumtions. inflate the base and the dcf is looks great be conservative then return will be less. The math of course is routine the result imo is in the eye of the beholder. I ran many a dcf on projects for marketing and many were an exercise only. They had no reality to the real world as the marketers wanted to get their projects approved. Here we are looking at volume projects same as building a service station etc. if the company sales projections are high and they do not meet projections the dcf will be of no help. If you run conservative numbers and are happy with the results then it can be a good tool.

To: Mike Buckley who wrote (959)	6/15/2004 8:48:26 AM
From: rkral	Respond to of 2955

Mike, re "I do believe a lot of people think of the discount rate at least indirectly related to risk management. If the discount rate is directly related to their perception of risk-free alternatives ... " Further clarifying with one practical example: A perceived risk-free interest rate would be risk-adjusted by adding basis points to obtain the discount rate plugged into a DCF model. And the adjustment would be greater when applying the model to an investment perceived to be riskier. BWDIK, Ron

To: Mike Buckley who wrote (959)	6/15/2004 12:07:15 PM
From: Jim Mullens	Read Replies (1) \| Respond to of 2955

Mike/ all, re: Qualcomm DCF evaluation, and “On the other hand, I do agree with you that DCF analysis doesn't address risk in the manner I think Jim was perceiving.” On the contrary, again referring to the Quicken DCF tool (no longer free) – 1. One plugs in the base year earnings 2. shares outstanding 3. The future long term growth rate 4. the Discount rate The Quicken discount rate variable considers both the cost of money (LT Bond) and investment/ market risk. If one only wanted to discount to present value without any “investment “ risk one would plug in 5½ to 6% (30 year T Bonds) U.S. Treasury Bonds Maturity Yield Yesterday Last Week Last Month 30 Year..............5.39......5.52........5.44 I’ve run various scenarios with 6% for the QTL segment as I consider the Q’s royalty revenue to be more stable than QCT’s as 3G CDMA/WCDMA ramps. For QTL alone I got the following “intrinsic” value per share at various growth rates- 1.FY 03 earnings...$639.310M 2. Growth rates.....................38%......30%......25%......17% 3. Discount rates......................6%.......6%........6%........5% 4. Result= “intrinsic” $/sh......$240......$137....$95..........$58 As one increases the discount rate (compensating for higher risk), the “intrinsic” value declines. As I recall, Quicken uses 11% as the benchmark discount rate for the more mature S&P companies with lower betas, but a default rate of 15- 16% for most companies. In that same Quicken exercise I used the following for QCT- 1. FY 03 earnings...........$533,456M 2. Growth rate...........................20% 3. Discount rate........................11% (S&P benchmark) 4. Result= “Intrinsic” $/SH......$35.81 Combining the results- QTL $/sh...............$95 at 25% growth 6% discount rate QCT.........................36 Cash..........................7 Other.............................. Total......................$138 Running the above with the Quicken default discount rate of 15- 16% as I recall lowers the QCOM “intrinsic” value to somewhere in the $60’s / share. That’s why I believe the DCF methodology, with its discounting mechanism (if one uses the higher rates), is not an appropriate tool to value Qualcomm as it cautions against owning as not worth the risk.