Fri, Dec 26, 2014, 3:12 AM EST - U.S. Markets open in 6 hrs 18 mins


% | $
Quotes you view appear here for quick access.

Nautilus Inc. Message Board

you are viewing a single comment's thread.

view the rest of the posts
  • astral_tsar astral_tsar Jan 20, 2004 9:26 AM Flag

    Value Estimate -- Comments?

    Fair enough, though perhaps the approach I used is more "unusual" in academic circles than in practice?

    What got me "riled up" is a very real content issue here. My objection w/r/t double-counting book value isn't nitpicking, it's the whole ball of wax. Growth comes from reinvestment. Here, I'll show you.

    The problem shows up in examples as simple as a savings account. Lemme contrast the "B" approach to a savings account ("A").

    B. Assume that I really do receive checks in the mail, with absolute certainty, beginning 1/1/04 and continuing on the first of the year forever. The payments are:
    1/1/04 $1
    1/1/05 $1.05
    1/1/06 $1.05^2 = $1.1025
    1/1/07 $1.05^3,
    1/1/08 ...and so on.

    Assume a risk-free discount rate r = 6%. What's the present value of those checks?

    Well, net present value turns out to be

    $1/(r-g) = $1/(6%-5%) = $100.

    Wow. Great deal.

    A. Now look deeper. Where might such checks come from? Consider a bank account that contains $20 and pays g=5% interest on the first day of every year. I leave the interest IN the savings account and let it compound.

    Here are the interest payments deposited in the account:
    1/1/04: $1
    1/1/05: $1.05
    1/1/06: $1.1025
    1/1/07: ...and so on

    Growth "g" is 5%. Exactly the same as the checks. I'm rich! But there's a catch: now I've assumed some real-world mechanism for *producing* the checks. So what's the net present value of leaving my money in that savings account?

    Less than $20.

    Right? The account loses the race against the 6% discount rate by 1% per year. I'm losing value. If I leave it there forever under these conditions, the value is zero.

    Ok, what if I want checks mailed to me? Well, the values of those checks are determined by the 5% interest rate:
    1/1/04: $1
    1/1/05: $1
    1/1/06: $1
    1/1/07: ...and so on.

    Present value:

    $1 / 6% = $16.67.

    Still less than $20. I never take the principal out, remember. All I have is the checks. But now they don't grow!

    So if I have total control over the savings account, how close can I get to the $100 value of case A? $20. I can withdraw all the money now.

    C. How come?
    Very simply from the ROI picture. What is the approximate present value of a $1000 10-year treasury bond that pays 4%? The present value is $1000! That's how they price these things!

14.58-0.17(-1.15%)Dec 24 2:48 PMEST

Trending Tickers

Trending Tickers features significant U.S. stocks showing the most dramatic increase in user interest in Yahoo Finance in the previous hour over historic norms. The list is limited to those equities which trade at least 100,000 shares on an average day and have a market cap of more than $300 million.
Virgin America Inc.
NASDAQWed, Dec 24, 2014 1:00 PM EST
Amira Nature Foods Ltd.
NYSEWed, Dec 24, 2014 1:04 PM EST