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Strategies & Market Trends : Buffettology -- Ignore unavailable to you. Want to Upgrade?

To: jhg_in_kc who wrote (430)	10/17/1998 6:49:00 PM
From: James Clarke	Respond to of 4691

Wow - you're throwing a lot at me here. Distinction between ROE and ROIC is the denominator. ROIC you use debt + equity in the denominator and add after tax interest back to the numerator. Same concept though. What discount rate to use. I usually use 9-15% depending on the business. With interest rates where they are now, finance theory tells me I should be using 8-10%, but this is where you've got to understand the theory to use it. What discount rate you use is a simple concept in the end. How much do you consider a fair return on the investment? If you discount a stream of cash flows at 10% and calculate a value of $20, and pay $20 for the stock, expect to make 10% if you are right on the cash flows. If you use the long bond rate, expect to make 5%. But if you do that, why not buy the long bond, so you don't have to worry about calculating cash flows or risk of being wrong. I consider 10-15% a fair return for the risk I am taking, so that's the discount rate I use. More later - have to put some steaks on the grill. Good discussion. Jim