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Hi. I hope you had a chance to look at what I did in the last fifteen to twenty

Â minutes because I think what's important about that is. If I could spend hours on

Â it literally it reflects a thinking process and just making things exactly

Â precise to be able to run this stuff. I can do it individual but I encourage you

Â and I will warn you whenever some stuff is easy or not. Remember I told you earlier a

Â joke that you know, if you don't know how to divide, learn how to very quickly. Here

Â I would pause and remember though with one thing, one warning is that don't spend too

Â much time on theory. Theory is only useful in business if it's practical and this

Â stuff is so practically useful to do stuff I'll come to in a second. So, before we

Â jump into an example, let me just wrap up what we talked about another way. When you

Â think of any stock. Any companies equity and for the time being, as you'll know

Â that, you can think of it using this simple formula. P-naught equals EPS / R

Â plus PVGO. Remember one, one, this is a conceptual way. It's not. It's, I'll, I'll

Â tell you what it means in a second. So quickly, definition. What is EPS? As I

Â said, everything is per share, like the prices per share. You don't have the whole

Â company trading. Of course there are, prices these days of companies where your

Â mind starts getting boggled about, how the heck is anybody going to buy one of those

Â shares? Anyway, where EPS is the cash flow per share, and PVGO is the present value

Â of growth opportunities. So it has to do with whatever we did right now. So let me,

Â let me ask you this. What is the price of a stock? The price of a stock is the

Â present value of dividends. Just conceptually, right? Now, there are two

Â formulas that come about. One is when you have no growth and one you have growth,

Â right? Pretty straightforward, and we know where growth is coming from, how it's

Â generated. We spent of some time on it. So let me ask you, which company would have

Â the first piece applicable to? We just did examples. Which of the two examples would

Â have the first piece applicable? Green Utility. So Green Utility, look what I've

Â done. I'm going to assume Green Utility's PVGO is by default, by definition zero and

Â the reason is it's not putting anything back. So, if you're not putting anything

Â back, this formula becomes irrelevant. Why? Because if there's no growth, what is

Â the price of your stock? Dividend over R but remember, if you're not going, putting

Â anything back, this is also EPS over R. So the first piece of this formula is telling

Â you what would you look like that part of a company you can think of which has

Â nothing to do with future growth. Can you think of companies who are not going to

Â grow at all? Sure you can. But what I'm saying is, you can think of every company

Â as having two pieces. One without growth, and one with growth, right? Remember,

Â everything is incremental, right? So, if it is without any growth, you're thinking

Â of the company. And many companies are just that but you can think of any company

Â in that way. What would you think of the formula? Div one / R but because dividend

Â is exactly equal to earnings per share. Why? Earnings per share is being paid out

Â totally as dividends because you're not planning to grow, right? But which comes

Â first? Remember the engine of growth. What comes first? Earnings per share or

Â dividend? Earnings per share. Never put dividend before earnings per share because

Â you're again doing MC Hammer, can't touch this. Cash flow, earnings per share come

Â from whom? Your assets and dividends are payments to your liabilities or the way

Â you're financed. Okay? So this is pretty straightforward. So this is the formula of

Â no growth. What is the formula of growth? What happens with growth? With growth you

Â have your existing assets, but then you have something more and that's called

Â future growth opportunities. And what was the formula for that? P naught = dev one /

Â R - G, right? So how do we figure out PVGO? And this is the point of this

Â exercise. So suppose I want to know if whether there is PVGO or not. The first

Â thing I h ave to recognize is for PVGO to happen you have to be prepared to

Â re-invest in the firm. But to figure out your PVGO, you can do this simple

Â exercise. Think of the firm without any growth and think of the firm with growth,

Â the difference between the two is called PVGO, right? Make sense? Because PVGO. If

Â it's zero, what is G in the formula here? If you are not planning to grow, G is

Â zero. You are not reinvesting and the two formulas collapse. So keep this big

Â picture, I love this. One final question for you, think about it. Suppose I asked

Â you in the 70s, 60s and so on, you looked at the whole stock market of the world.

Â What part of it would belong to the first part? That is, the value of the existing

Â assets with organic growth but not land growth versus what did the future

Â opportunities look like? Relative to after the Internet came through and .coms

Â emerged and after the fall out, right? You don't necessarily have to think of the

Â peak of it. Well, things have flipped. For many companies, it used to be that your

Â business as usual was generating most of your value. But now, what has happened?

Â The growth opportunities reflect value, right? So, so that's what a major

Â breakthrough like the internet does for society, okay? And, and technological

Â innovations. Anyway, so I'm going to now start doing examples and I'm going to do,

Â go a little bit simple, slow. And this is a very good opportunity for you to

Â practice. Suppose you know this about Macrosoft, Inc. Macrosoft, Inc is expected

Â to earn ten% on its existing assets. Questions, what does that ten% mean? Is it

Â the r or is it the IRR of it's existing assets? And remember if some number is

Â reflected as belonging to your assets, it has to be ROI, return on your investment.

Â Has $60 capital per share so what have I done? I've taken Macrosoft and how did I

Â get $60 capital per share? Remember, your starting off, you have say $1,000,000

Â worth of investment, right? And you divide that by number of shares. That's what the

Â 60 is so let's assume for simplicity. You have $6,000 of inve stment in 100 shares.

Â That 60 is just a function of that division. And why were we doing this?

Â Because remember, everything in stocks is per share. The market capitalization rate

Â is twelve% and please any calculation you do is meaningless unless you know what the

Â heck you're doing, right? And because plus all the numbers are wrong, right? So

Â remember that. What does market capitalization rate mean? And remember,

Â this is another word that I'm now beginning comfortable to throw at you.

Â This guy is also what we usually call the little r. As soon as the word market is

Â used, you know that it is something that is being used to evaluate you, okay? So

Â where did I get this? And with, by the way, the next, rest of this class, almost,

Â at least the next two weeks, are all about this. Because we haven't touched risk and

Â return as yet. Where is it coming from? Similar businesses. I'll let you figure

Â out who is doing similar business to Macrosoft. The company is not planning to

Â grow. What should Macrosoft, Inc's shares trade at? Let's take a five minutes break.

Â Do this problem. Stare at all the concept that I gave you earlier on. The good news

Â here is there is no growth. So tell me, what is the value of this stock? And try

Â to spend some time, and we'll come back and do it together.

Â