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To: Lockeon who wrote (102836)	2/18/1999 9:10:00 PM
From: Chuzzlewit	Respond to of 176387

Thanks for the compliments Lockeon. If you read my full comments on CNPEG2 (which I published on another thread) it is a bit simplistic to view it as simply the beta of a stock times its CNPEG, because there is another term implicit in the calculation -- the beta of the S&P500 which is of course 1.00, so it doesn't show up. The math behind CNPEG2 is a bit complicated, and as I said before I don't know whether it makes good theoretical sense, much less practical sense at this point. There is no reason why eps growth will reach ROE. The two calculations are totally unconnected. Let me give you a very simple example -- a bank account. Suppose the account earns 5% per annum. Suppose you have only one choice: you could either take out the interest earned at the end of each year, or you could let it grow and compound. If you took the interest out each year (which is analogous to a zero growth company) you will find that the return (analagous to ROIC) is 5%, but that the growth in eps will be 0. So, as you can see, all of this depends on what you do with the generated cash. If you can always invest generated cash at the average ROIC, then the growth in eps will eventually converge on the ROIC. But generally the spectrum of potential investments available to any business shrinks (along with potential returns), and the firm starts to accept investments with lower and lower rates of return. At the point when the rate of return is equal to or less than the businesses cost of capital it will stop making investments and pay the excess cash out to investors. That is the basis for the residual dividend theory. TTFN, CTC