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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: porcupine --''''> who wrote (233)	4/21/1998 4:49:00 PM
From: Reginald Middleton	Read Replies (1) \| Respond to of 1722

<My question is whether it would be more consistent to measure the corresponding cost of equity by its "current rate", i.e., its earnings yield (earnings/price)? This is the price shareholders would pay (in terms of eps dilution) if the firm financed purchased equipment by the issuance of more common stock.> This method would not include any oppurtunity costs, at least none that I am award of. In addition, earnings are close to meaningless in the accurate valuation of a company. That is the reason why bankers use DCF in evaluating an LBO or M&A transaction. GAAP and accrual accounting distortions range from minimal to highly distorted from company to company, industry to industry, and accountant to accountant. With such a high variance in standardization, the earnings based cost method would have very little meaning from company to company. <Alternatively, to change the measurement of debt to make it consistent with the measurement of equity, wouldn't the cost of debt be calculated by taking the 200-year average cost of risk-free debt, and adjusting it for the historic creditworthiness of the industry in question? > That is basically how the market prices debt. Remember that once the debt is issued (if it is fixed rate and non-callable), the price is as constant as the tax shield that it relies on. This is not the case wtih equities.