To: porcupine --''''> who wrote (623 ) 8/13/1998 5:13:00 PM From: Axel Gunderson Read Replies (3) | Respond to
Porc - don't tell me, you've been thinking about this stuff a little in your spare time, haven't you? Wow, an impressive amount of work.To arrive at an appropriate discount rate for a given company, it is necessary to forecast the future equity premium. relative valuations are not affected greatly so long as the forecasting interval is reasonably short . Since crystal ball gazing is hazardous enough, I think the use of short periods (a few years at most) is a reasonable limit. If a company obviously appears to be undervalued on this basis, it is probably reasonable to suspect a fat pitch. The enterprising investor will be in a limited number of positions anyway, so the "need" for less obvious bargains is mitigated.Admittedly, no one would accuse GM of underleverage...GM bonds yield somewhere between 6% and 9%, depending upon the series. Notwithstanding the 2 dozen strikes of the past five years, the common shares have a considerably higher average cash earnings yield than the average interest yielded by the bonds. Why not buy back the stock? can not know that going forward, they will be generating higher average cash earnings yield than the average interest yielded by the bonds. There is some level of leverage which might be considered optimal (or safe) and if GM is above that level, it would be prudent of them to pay down debt while cash earnings are high - for that is the only practical time for them to do so.
