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To: DHB who wrote (46450)	5/9/1998 11:57:00 PM
From: Greg Jung	Respond to of 61433

Dan, dilution works directly to lower the actual earnings growth and the forward-PE valuation. So if you decreased the dilution rate by 5% the valuation could increase by (1.05)^2, or 12.5%. Notice that dilution is not a factor in the analysts' projections. They presume a given margin, a growing sales figure, and treat the ratio, earnings/share, as simply (%of sales)/constant. The growth figure I used (45%) only to match the PEG=1 value to current market. I think it may look like 45% for a short period of time, but certainly not greater than that rate, and further fluctuations are to be expected during product transitions and such. Also, the model presumes all of the earnings are retained, which they clearly are not, and if they weren't re-invested then the growth would stop. Based on expected consistency you can afford a PEG > 1 or a PEG < 1 - generally technology companies should get no better than 1 for an extended period of time. The (current) market likes to pay extra for "the future" and so they get overvalued temporarily, which is why they tend to fluctuate 100% per year. What happens if the dilution is less? Even by a half percent? How comfortable are you with that number Greg? It seems to me that it would have a greater % to the PEG. Actually I thought I'd get an explanation why we should expect $60 price if not from hype. If I plug in 30% growth rate and 5% dilution rate you get fair-value prices that would get me mugged. just adjust by the square of the difference in percentage, (1 + %/100)^2. Greg