Wednesday, March 05, 2008

Off-topic: applying DCF modeling in the stock market

I have always thought of the stock market as a Platonian reflection of the real world of companies. See the table.
We have learned that mathematics isn't restricted to the lofty world (left side). Just the same, DCF modeling shouldn't be restricted to the real world of companies. (The reverse is not true: check out this line from a recent KPN press release: "The initial consideration is based on a multiple of current earnings (...)." Letting this slip through the CFO's office should be enough to get him fired, but I suppose he's allowed to 'steal a horse' for a change.)
However, it isn't easy to reconsile True Value (DCF-based) and Market Value, other than by declaring that "ultimately, the value will show", or crap like that (what is that supposed to mean: 'ultimately'? Is that 2040?). Since it is a moving target, the value may never show.

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