Investing Basics - Feel free to ask the most basic questions

(KunalKothari) #545

Thanks for the detailed reply. Really appreciate it.

Whatever be the Prof’s estimate of intrinsic value via DCF, the intrinsic value via the Dilution Method would still be similar. It doesn’t matter what the estimate is, 200, 275, 150, or any other value. I get that.

I want to make my limited point though:

Given any intrinsic value arrived at by the Prof (or anyone else), if the company is able to issue shares at a much higher level (in this case, the market price for the shares is higher than the Prof’s estimate), the Prof’s estimate of intrinsic value will have to be revised upwards (in my opinion). That is, he will have under-estimated the value per share originally.

The same logic applies in case the company has to issue shares at a lower price than the Prof’s estimate. In this case, the Prof’s estimate will have to be revised downwards. That is, (in hindsight) he will have over-estimated the value per share originally.

Hence, I think his statement in the article is wrong.

“If Tesla is able to issue shares at a higher price (than its intrinsic value), we will have over estimated the value per share, and if it has to issue shares at a price lower than its intrinsic value, we will have under estimated value.”

As I said, I understand what he is trying to say (I have been reading his work since years), but the above sentence doesn’t make sense to me. That is my limited point.

(saurabhsharmaa2020) #546

Hi everyone, just want to know if Exchange has sought clarification from company regarding some specific News comes into Media than is there any time frame decided in which Company need to reply.

  1. If company will not reply than what kind of actions Exchange will take or nobody bother in Exchange if Co. do not provide any clarification.


(Dinesh Sairam) #547

No. The Professor thinks the stock is worth $200. He proves it with a normal DCF and also a Diluted calculation. Therefore, he says, his estimation is consistent regardless of whether there is a Dilution or not.

If someone else thinks it’s worth $250, they’d be wrong, because via the Dilution approach, they’d find out that it’s only worth $214 (An over-estimation of $36). Similary, if someone thinks it’s worth only $175, they’d be wrong too, since the value via the Dilution approach would turn out to be $194 (An under-estimation of $19).

I think you’re confused with the word ‘we’ in “If Tesla is able to issue shares at a higher price (than its intrinsic value), we will have over estimated the value per share”. What he means (At least what I think he means) is that “If Tesla is able to issue shares at a higher price (than its intrinsic value), the person assuming a higher intrinsic value will have over estimated the value per share”.

(KunalKothari) #548

I dare say that you might be wrong about this.

I think what the Prof is saying is that if other assumptions remain the same, both the DCF value and the Diluted Method value will yield the same result. This will be the case for everyone and in every case, and not just for the Prof’s $200 value that was used in the illustration. Btw, the Prof’s actual estimate of intrinsic value was $189, not $200. I think he used $200 as it is a nice round figure.

(Dinesh Sairam) #549

It’s common knowledge that issuing new shares at a higher price will increase the share’s diluted value. It’s simple math.

So why did the Prof go through the trouble of creating a complex model with assumptions just to show what can done in a 2-3 lines of formulas? He specifically states that he wanted to show how his estimated value and the dilution method yielded the same results. According to his assumptions, no figure other than $200 yields that result (I mean, the break-even).

(KunalKothari) #550

The Prof took all the trouble to demonstrate that a DCF valuation automatically incorporates the expected dilution that can be expected to occur to compensate for the negative cash flows in the initial years. That is a bit counter intuitive (which the Prof acknowledges), hence the trouble taken.

If what you are saying is right, the Prof has found the holy grail of valuation, where one value is THE right one, all others are automatically proved flawed, in which case Musk’s investor would have offered $210, not $420! :smile:

In any case, I will be happy to be proven wrong on this. Someone get the Prof on Valuepickr!

(Dinesh Sairam) #551

Nope. The value is right only given the Professor’s assumptions are, which is always debatable. Without it, it will depend on what the forecaster assumes the growth rates and discounting factor to be. The Professor was trying to show just that - I mean, how consistent his DCF value was.

I can edit the assumptions of the model and come up with a different break-even value. That wouldn’t mean my value is correct, however.

(KunalKothari) #552

That is what the Prof would say as well, about his own estimate of value.

However, given any set of assumptions by anyone, the DCF value will be similar to the value arrived at by the ‘Dilution Method’, and that is the truism that the Prof wants to demonstrate. It has nothing to do with any ‘right’ value or ‘wrong’ value, as that is subjective.

If my DCF shows the value of a Tesla share as $793, the value arrived at by the ‘Dilution Method’ would also be similar.

(Dinesh Sairam) #553

That’s exactly what I said here:

(KunalKothari) #554

The Prof corrected the error because of my comment! Yay!
Something to tell the grandkids about :grin:

(Dinesh Sairam) #555

Well damn. I stand corrected. Good work, Kunal.

(Manojlion) #556

I have few basic questions about ‘Reading a balance sheet’.

Does only the ‘Net Cash Flow’ move into ‘Reserves’ ? When does the cash from a company move into ‘Reserves’ section

Suppose if a company needs money,can the company take it from its ‘Reserves’. I am asking this question because many company seek debt from ‘banks’ or "NBFCs’, even though they have enough money in their reserves ? @dineshssairam @Gaurav_Agarwal

Please help me with this

(Gaurav Agarwal) #557

I am presenting a simplified version here for understanding -

Company declares Net Profit/Net Loss. Company pays dividend from Net Profit. The remaining net profit is added/transfered/appropriated to Reserves and Surplus. Now equation for balance-sheet is

Assets - Liabilities = Equity (Equity + Reserves & Surplus)

Or, Assets = Equity + Liabilities
therefore, when equity increases we should have corresponding increase in Assets.
Now, Cash + Bank balances are part of assets, therefore a corresponding increase has to happen in cash + bank balances.

(Manojlion) #558

Ok Thank you Gaurav.

Now I understand that ,only the 'Cash and Bank ’ present under the Other assets section in the ‘Real Liquid Money’ (which it can distribute to their investors or use for doing any future capex) present with the Company.

Is my understanding correct

(Akbar Khan) #559

BlockquoteNow, Cash + Bank balances are part of assets, therefore a corresponding increase has to happen in cash + bank balances.

The increase could be in any assets, not necessary cash + bank bal.
It depends on how the company reinvests the retained profits. It could be deployed as capital expenditure to increase fixed assets, or to increase working capital in the form of higher inventories or higher receivables. Sometimes given out as loans to other entities.
Also the cash coming in from the Loans taken can be similarly used for several purposes including paying out as dividends (yes. some companies could do that).

(Manojlion) #560

Yes Akbar bro you are correct .
My question was around Cash and Reserves…May be that is why @Gaurav_Agarwal explained me accordingly ,so that i can understand .
Thank you both for clearing my doubt