Nirvana wrote:
- quote -

I detect a finance homework question...for extra credit you might want
to note:

a) when looking at real companies there is usually very little
confidence in a sustained, 5-year, 25% earnings growth rate. If it's
23%, 18%, 13%, your DCF model blows up - outputs are very sensitive to
the actual growth rate. This is the Achilles heel of the DCF model for
growth companies (see 90's stock bubble for dozens of examples).

b) nobody, and I mean nobody, in the real world is ever in a position of
choosing between investing in a 2% 5-yr bond and a growth stock, and
making the decision based on a DCF model. They might as well ask, "would
you rather have a ham sandwich, or a subscription to Money magazine?" Huh?

-Tad
"still bitter about those silly finance homework problems"

The math is simple, the assumptions are not. With the Bond, I can
calculate a PV because I am assuming the cash flow streams are constant
(no chance of default for example... lets assume it is a government
Bond). The question comes in the assumptions:

If the 5 years on the bond takes you to maturity than the calculation is
a definate. If it does not and you assume you will sell the bond in the
secondary market than you must assume what you will sell it for to get
the last cash flow number.

Likewise, the fact that the earnings grows 25% per year tells me nothing
about the stock price. Since I am assuming that it does not pay a
divident you basically have two cash flows (out when you buy, in when you
sell). What you can buy it for is an assurity, what you will sell it for
5 years from now is an absolute guess. However, given what you have
shown, my guess is that the stock is already overvalued at 70x P/E so my
guess is that the appreciation is minimal unless you are hoping for a
qualcomm type run up. That is not economics, that is gambling.

worrylesswarrior[at]yahoo.com (Nirvana) wrote in
news:34e36f1b.0309021437.eed7464[at]posting.google.com:

- quote -

give me the stock... and yes...

What would you rather have: A bond which pays you 2% for the next 5
years, or a stock which trades at $44.40 and PE = 70. It's earnings
growth rate is 25%.

In using the discounted cash flows model to determine your answer
here, is it neccessary to discount the bond's interest payments or
not?