View Full Version : Question Regarding Hypothetical Situaion

11-20-2001, 01:59 PM
Suppose someone owned a company that had no asset value; could not be sold; pay no dividends, the number of share is 1,000,000 and would stay constant; would be guaranteed to have retained $1 million in earnings after 10 years; and will autimatically cease to exist after 10 years with no costs incurred in terminating it's existance. Therefore the shareholders divide up $1,000,000 proportionate to the number of shares they have. How much would you pay for a share of this company today? In my opinion the answer is not clear cut. You could always say $0.01 a share and that would be too little.

11-20-2001, 03:23 PM
Is it the company or the individual shares that cannot be sold? Assuming that a market for individual shares is permitted, then the yield curve provides the answer: about 61 cents per share times the probability of default.

11-20-2001, 03:48 PM
Yes I was thinking that the shares could be bought and sold.

11-20-2001, 04:48 PM
I don't see why this isn't an elementary present value calculation?

11-21-2001, 11:04 AM
Aren't 10 year govt bonds taxed differently than long term capital gains from a stock? I suppose that a divident payed out after 10 years would constitute income and be taxed as such but one could sell the stock before the dividend is paid and realize a long term capital gain. I guess I'm missing something, have I got this all wrong? But one point is that interest rates do have an impact on company valuations.

11-22-2001, 09:56 AM

11-23-2001, 06:44 PM
If we are in a case where there is a DEFINITE cash flow assured in a future time and some taxes will need to be paid then ...

Just take the present value of the after tax amount using the rate from a ten year gov't strip. the yield curve are the rates for par bonds, and a spot curve is the curve for strip bonds (zero's).

Given this type of pricing then the value of this companies stock will fluctuate exactly as that of a ten year US tsy zero (yield and spot curves move) for the after tax amount.

I think this has been said above but what the heck..