Discounting anti-lulz

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Old Sep 8, 2011, 1:56pm   #1
 
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Audio Broadcast Discounting anti-lulz

Something I could never really get my head around...

With bond you have a par which you can use as a basis for valuation techniques but how can you discount equities which have a constantly changing share price?

Should you look at implied yields from issuance date and how would that work when issuance is a dilution of value, of sorts?

Should you go way back to the IPO and look at each issuance separately?

Is this barking up the wrong tree?

And don't even get me started on equities discount factor components! Or do, whatever.

Suppose I'm just doing some aloud thinking about this madness and would enjoy some company in discussion.
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Old Sep 8, 2011, 2:04pm   #2
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Re: Discounting anti-lulz

u do 'em like a perpetuity innit. PV of all future dividends.

(there are other ways too obv)
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Old Sep 8, 2011, 2:09pm   #3
 
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Re: Discounting anti-lulz

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Originally Posted by Brock Landers View Post
u do 'em like a perpetuity innit. PV of all future dividends.

(there are other ways too obv)
Well yeh but that's boll0cks though isn't it.

and anyway what price would you use? yesterday? Today? Tomorrow? Last year? ya get me blood?
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Old Sep 8, 2011, 2:12pm   #4
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Re: Discounting anti-lulz

discounting for the new regime my allocation of anti-lulz has been exhausted.

Sorry I can't help you anymore.
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Old Sep 8, 2011, 2:28pm   #5
 
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Re: Discounting anti-lulz

scose-no-doubt started this thread new regime?
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Old Sep 8, 2011, 7:34pm   #6
 
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Re: Discounting anti-lulz

scose-no-doubt started this thread my threads get no hits
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Old Sep 9, 2011, 1:12pm   #7
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Re: Discounting anti-lulz

Quote:
Originally Posted by scose-no-doubt View Post
Something I could never really get my head around...

With bond you have a par which you can use as a basis for valuation techniques but how can you discount equities which have a constantly changing share price?

Should you look at implied yields from issuance date and how would that work when issuance is a dilution of value, of sorts?

Should you go way back to the IPO and look at each issuance separately?

Is this barking up the wrong tree?

And don't even get me started on equities discount factor components! Or do, whatever.

Suppose I'm just doing some aloud thinking about this madness and would enjoy some company in discussion.

you are barking up the wrong tree. i don't even think your in the same forest as the right tree let alone barking up it. to put it simply, you project cash flows into the future, discount these back to the present and then alter this for capital structure i.e debt/cash. the biggest thing this simplistic definition misses is perpetuity. whilst a bond isn't a perpetual security, equity is which means at some stage you have to fudge the discounting. is that what you wanted to know?

Last edited by cr6196; Sep 9, 2011 at 1:39pm.
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Old Sep 9, 2011, 1:46pm   #8
 
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Re: Discounting anti-lulz

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Originally Posted by cr6196 View Post
you are barking up the wrong tree. i don't even think your in the same forest as the right tree let alone barking up it. to put it simply, you project cash flows into the future, discount these back to the present and then alter this for capital structure i.e debt/cash. the biggest thing this simplistic definition misses is perpetuity. whilst a bond isn't a perpetual security, equity is which means at some stage you have to fudge the discounting. is that what you wanted to know?
Well this is how I did it in the past - well the way I was taught- but I had to fudge the discounting to 40 yrs or so to balance(ish) as I have no way of producing accurate CFP (who does?) so I assumed that this way wrong/not really used. Then we have the discount factor problem. WACC?
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Old Sep 9, 2011, 3:39pm   #9
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Re: Discounting anti-lulz

First, for full disclosure, I don't use DCF. In my opinion, DCF is the biggest piece of **** and it doesn't work in any way. Second, most people project, on average, out 5 years. The least being 3 and the most being 10. Once you reach the end of the period you slap on a perpetual growth rate (so in a 5 year model this would be 6+ years) using the CF from year 6. Then you PV that perpetual flow. The thing is though is that more often than not most of the final value will be perpetual growth. (I am just talking about a simple 1-stage, as you know things can be more complex with 2 or 3 stager)

The formula for the discounted perpetual growth cash flow (that you then add to discounted cash flow of Y1-Y5) I have in the spreadsheet I designed is:

(CF Y6*(1+PGR))/(WACC-PGR)

where PGR = perpetual growth rate

Now for why DCF doesn't work. First, the calculations are complex. Forecasting cash flow, net debt and working capital requirements isn't happening. Second, the value you get never sounds right and always comes out high. Third, it doesn't make any sense for most decent businesses to value the company on an income metric after capex. For example, a company may make $100 and invest it all in more equipment to earn even higher returns. In DCF, the company wouldn't be worth anything. Fourth, WACC is stupid. It is impossibly difficult and time-consuming to work out with all that beta business which doesn't even represent a good metric of risk. It makes more sense just to look at debt, look at interest expense, look at cash flows and work out what the financial position is like. Or in other words, you should realize there is a big difference between cost of debt which is quite clear and cost of equity is entirely normative. I use a model based on separating the operating and financial parts of the business and it is far more effective. I can send you over a spreadsheet if your really interested in this stuff but the point is DCF isn't great (its useful to understand why though) as it has an intellectual and theoretical logic but almost no practical logic (i.e it would work if you perfect foresight into infinity).

EDIT: just to clear up what you said earlier as well, the only time you would involve the actual market price of the equity would be in comparing it to the output of the model.

Last edited by cr6196; Sep 9, 2011 at 3:52pm.
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Old Sep 9, 2011, 4:02pm   #10
 
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Re: Discounting anti-lulz

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Originally Posted by cr6196 View Post
First, for full disclosure, I don't use DCF. In my opinion, DCF is the biggest piece of **** and it doesn't work in any way. Second, most people project, on average, out 5 years. The least being 3 and the most being 10. Once you reach the end of the period you slap on a perpetual growth rate (so in a 5 year model this would be 6+ years) using the CF from year 6. Then you PV that perpetual flow. The thing is though is that more often than not most of the final value will be perpetual growth. Exactly! Although the likes of BP have been around for 100+years :S
(I am just talking about a simple 1-stage, as you know things can be more complex with 2 or 3 stager)

The formula for the discounted perpetual growth cash flow (that you then add to discounted cash flow of Y1-Y5) I have in the spreadsheet I designed is:

(CF Y6*(1+PGR))/(WACC-PGR)
where PGR = perpetual growth rate
Makes sense. Nightmare if you have -/+ WACC growth though

Now for why DCF doesn't work. First, the calculations are complex. Forecasting cash flow, net debt and working capital requirements isn't happening. AyeSecond, the value you get never sounds right and always comes out high. AyeThird, it doesn't make any sense for most decent businesses to value the company on an income metric after capex. For example, a company may make $100 and invest it all in more equipment to earn even higher returns. In DCF, the company wouldn't be worth anything. Yeh but you can adjust that yourself Fourth WACC is stupid. It is impossibly difficult and time-consuming to work hahaha I'm glad I'm not alone in thinking this. Assumed that I was just sh*tout with all that beta business which doesn't even represent a good metric of risk. It makes more sense just to look at debt, look at interest expense, look at cash flows and work out what the financial position is like. I use a model based on seperating the operating and financial parts of the business and it is far more effective. I can send you over a spreadsheet if your really interested in this stuff but DCF isn't great (its useful to understand why though).
Yeh send the sheet. Sounds interesting. Thanks, man.
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