Excess Cash Projections

Excess cash projections required a lot of assumptions as compared to share price where we have used only three parameters and used different stochastic models to compare the results.

Assumptions taken are “point in time” and are made of: CFO, Debt, CFI, Dividend, Cash, and Number of shares. In the list only CFO remains fixed and all other changes are due to policy change in our model.

As expected the model is not as stable and the projections of excess cash is dependent on too many assumptions where CFO is the toughest to project. Distribution and return of capital can be modeled using the excess cash projections where we can also tweak the amount of Repo, dividend and debt. The problem of the upward biases in the consensus estimates remains the challenge to deal with as no stochastic process can be applied to any of the processes used in cash projections.

While we might see that different companies may value the excess cash in a different way - to get an idea of this - we should look at Return equation regressed with factors that include sets of leverage, return, market, risk, efficiency and based on our findings we can project what to do with the excess cash - so there are two ways to look - company specific and sector specific way.

And there are research that try to predict the excess value of cash of $1 which may vary from .25 to approx. 2.

Ways to look at cash to get at optimal value:

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•            Sector story - each sector has different dynamics.
•       Growth story - payout story - return story - numbers should be same to get a good idea.
•       Leverage and Market cap story.