RBD - Restaurant Brands

[Snoopy]

Snoopy wrote
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Not sure you really need to go to the trouble of working out the return on the return. I use an ROE target of 15% minimum for new companies that I invest in. If say the cost of capital was 7%, I might equally say my target was 8% above the cost of capital. But what is the difference between that and a gross ROE target of 15%? I would say nothing.

Sauce responded
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Well it allows you to put a value on compounding growth.

Snoopy counteresponded
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Using gross figures like my 15% still allows you to do the compounding growth calculation. The only thing you have to remember is that when looking at the result after a few years is that if you use a 'gross return figure', there is an underlying profit in there which you would have got anyway by just investing in government bonds, roughly akin to that cost of capital. But I fail to see how moving the zero return point up to say 7% allows you to put a value on compounding growth. If you didn't do that you can still measure compounding growth equally well.

SNOOPY

[Sauce]

Snoopy wrote
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Not sure you really need to go to the trouble of working out the return on the return. I use an ROE target of 15% minimum for new companies that I invest in. If say the cost of capital was 7%, I might equally say my target was 8% above the cost of capital. But what is the difference between that and a gross ROE target of 15%? I would say nothing.

Sauce responded
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Well it allows you to put a value on compounding growth.

Snoopy counteresponded
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Using gross figures like my 15% still allows you to do the compounding growth calculation. The only thing you have to remember is that when looking at the result after a few years is that if you use a 'gross return figure', there is an underlying profit in there which you would have got anyway by just investing in government bonds, roughly akin to that cost of capital. But I fail to see how moving the zero return point up to say 7% allows you to put a value on compounding growth. If you didn't do that you can still measure compounding growth equally well.

SNOOPY

I am pretty sure I understand you....

Correct me if I am misunderstanding something obvious, but I believe the net return after the discount is the present value. So by discounting it to determine the 'present value' it allows you to compare with prevailing prices simply and easily helping you to determine if a margin of safety exists.

So yes you could value the compounding growth without the discount rate. But for purposes described above and since it is not hard, why not build in the required return/discount rate.

Again, I hope I am not displaying my ignorance here, but this seems intuitive to me.

Cheers

Sauce

[h2so4]

Snoopy wrote
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Not sure you really need to go to the trouble of working out the return on the return. I use an ROE target of 15% minimum for new companies that I invest in. If say the cost of capital was 7%, I might equally say my target was 8% above the cost of capital. But what is the difference between that and a gross ROE target of 15%? I would say nothing.

Sauce responded
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Well it allows you to put a value on compounding growth.

Snoopy counteresponded
------------------------

Using gross figures like my 15% still allows you to do the compounding growth calculation. The only thing you have to remember is that when looking at the result after a few years is that if you use a 'gross return figure', there is an underlying profit in there which you would have got anyway by just investing in government bonds, roughly akin to that cost of capital. But I fail to see how moving the zero return point up to say 7% allows you to put a value on compounding growth. If you didn't do that you can still measure compounding growth equally well.

SNOOPY

SD

On a $1000 1year bond paying 7% how much can I pay today for my bond to earn 15%? Answer $930.43(intrinsic value)

$1000 1year bond @ 7% = $1070.(compound growth calculation)

$1070 discounted at %15 today = $930.43 (discounted cashflow valuation)

The discounted cash that I can take out of my bond during its remaining life is $930.43 if I hope to earn 15%.