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Politics : Formerly About Advanced Micro Devices -- Ignore unavailable to you. Want to Upgrade?

To: AK2004 who wrote (28772)	2/24/1998 4:23:00 PM
From: Reginald Middleton	Read Replies (1) \| Respond to of 1573092

Nice try, but.. What about the case of non-performing assets. You can assume (you know that does) that present assets will add to future cash flows, but you still should consider present assets as capital and calculate as such. <if you seriously want to learn finance I think we should start with basics like a definition of PV sum(cf(t)p(t)D(t)) something to keep in mind is D(t) is interest rate scenario dependant that why it is important to run interest rate simulations at the same time. (I would recommend using at least 2-factor HJM for that).> Running interest rate simulations is as simple as changing the underlying assumed interest rates. If by HJM you mean the Heath model, you are going down the wrong path. Heath Jarrow is usually used for exotic interest rate options, far too esoteric (with far too amny excess assumptions) for vanilla DCF (I have spent considerable time designing my own option embedded bonds, so don't attempt to mislead). What you should have in mind is calculating the WACC and using that as your required rate of return or discount rate. The cost of capital is dependant on interest rates, business risk and deleveraged beta, which means that it varies with interest rates. A simple method of running scenario analysis on the cost of capital is to vary the target capitalization, the business risk, and the undlerlying assumed interest rates in logical and likely progressions - each of which will affect a different component of the opportunity cost ex. beta (hence deleveraged beta), and the overall WACC. This is highly documented, not only in CAPM and APM but in modern authors and pracitioners as well ex. Bennett Stewart, Joel Stern, Mckinsey reports, Journal of Finance, KPMG, Ernst & Young, and a plethora of the big banks. If you disagree with me, you disagree with the bulge bracket bank's M&A departments as well. <Now lets ignore residual spreads due to misc issues and concentrate on default risk. PV of default would be equal to PV of the spread unless defaults are modeled explicitly.> Again a sign that you seem confused. The risk of default is implicitly stated by the market in the market price of debt and beta. Public debt's market price contains a premium over the risk free rate which represents default risk. To attempt to model it out when you have such public information at hand is a text book exercise in futility (not to mention highly unnecessary), for you are bound to inject inaccurate assumptions. The leveraged beta of a share price also reflects the cash flow volatility intoduced by the use of debt. It appears as if you are attemting to throw around a lot of text book vocabulary in an attempt to convince a lay person that you know what you are talking about. You are failing. <No matter how defaults are modeled it is absolutely wrong to add the existing assets to the value of the company simply because those assets would probably contribute to your future cash flows one way or another and hence you are going to doublecount. And hence if both companies have the same cash flow patterns and the same probability of default than they are equal in value.> Well then how do you value the two software companies that have the same cash flow patterns, yet one has the 2 billion dollars worth of gold on the balance sheet. Are you going to specualte on whether the management wakes up and smells the coffee one day and then decide to sell off non-core assets to raise cash? You have to ACCOUNT for assets as CAPITAL (which would mean markeing them to market or at laest estimating thier economic book value), or you will simply have an operation in theory and fail to value the company as is. You wuld also have to adjsut this capital for the irregularities of accrual accounting which produces the accounting earnings that you are so fond of. This entails a reconcilitation to net income, adding back and adjustment of various revenue deferrals, LIFO reserves, teh capitalization of certain expenditures etc. Now you can argue that existing assets (or capital) can be converted to future cash flwos, but then you would be accounting for those assets now, wouldn't you? That is not what you said when this debate began, if I am not mistaken your statment was assets do not count in the valuation of a company. If you truly beleive that is true, ask AMD mgmt. to blow up thier best FAB/Asset:-) You made several errors in your previous posts which you have yet to correct. You have also ignored me when I pointed them out. For instance, your assertion that you should use several different discount rates for the different types of cash flows in a company is ludicrous and I have asked you REPEATEDly to explain yourelf. Nearly 10 posts later, nothing. The arbitrary tampering of disount rates is a sign that you are on the wrong path. .