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The cost of capital inputs that are the most difficult to estimate are the company s beta and the equity risk premium. Neither number can be directly observed in the market. When first valuing a company, we usually find the company s beta on the company s profile link on the Web site, Yahoo Finance. If we are seriously considering an investment in the company, we ll check several sources that publish betas, such as AOL Personal Finance whose data is provided by S&P ComStock, and MSN Investor to get a couple of different estimates of beta. Then, we typically use the average of the betas, or the highest beta value in order to have a more conservative estimate of intrinsic value. Our estimate of the equity risk premium has been a steady 3 percent for the past several years, with one exception. Due to the enormous uncertainty and fear that gripped the stock market in the weeks immediately after 9/11, we upped our risk premium to 5 percent. That change had a uniformly negative effect on stock value and drove down intrinsic values for stocks by 15 percent to 35 percent. After the United States began its retaliation and the war in Afghanistan looked as if it was going to be successful, we reduced our equity risk premium to 3 percent.

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Unlike the telephone industry that began its colorful life under the scrutiny of a small number of like-minded individuals (Alexander Graham Bell and Theodore Vail, among others), the cable industry came about thanks to the combined efforts of hundreds of innovators, each building on Parson s original concept. As a consequence, the industry, while enormous, is in many ways fragmented. Powerful industry leaders like John Malone and Gerald Levine were able to exert Tito-like powers to unite the many companies, turning a loosely cobbled-together collection of players into cohesive, powerful corporations with a shared vision of what they were capable of accomplishing. Today, the cable industry is a force to be reckoned with and upgrades to the original network are underway. This is a crucial activity that will ensure the success of the industry s ambitious business plan and provide a competitive balance for the traditional telcos.

The traditional cable network is an analog system based on a tree-like architecture. The headend, which serves as the signal origination point, serves as the signal aggregation facility. It collects programming infor-

The final input associated with the cost of common equity is the amount of stock outstanding Since this number is the divisor in the calculation of intrinsic stock value, the amount of stock outstanding is a very important input Many corporations, especially high-tech companies like Microsoft, Cisco, and Intel, make stock options a large part of the compensation package for many employees Eventually, when and if those options become vested and are in-the-money meaning the market price of the stock is greater than the exercise price on the options, they present a serious dilution problem for stockholders and negatively affect stock value A major question being debated in the financial markets relates to the dilution effect of stock options and how it affects the calculation of the amount of shares outstanding.

Downloaded from Digital Engineering Library @ McGraw-Hill (www.digitalengineeringlibrary.com) Copyright 2004 The McGraw-Hill Companies. All rights reserved. Any use is subject to the Terms of Use as given at the website.

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Rigid Coax 1/2 "S emi-

mation from a variety of sources including satellite and terrestrial feeds. Headend facilities often look like a mushroom farm; they are typically surrounded by a variety of satellite dishes (see Figure 6-6). The headend is connected to the downstream distribution network by one-inch diameter, rigid coaxial cable, as shown in Figure 6-7. That cable delivers the signal usually a 450 MHz collection of 6 MHz channels to a neighborhood, where splitters divide the signal and send it down halfinch diameter, semi-rigid coax that typically runs down a residential street. At each house, another splitter (see Figure 6-8) pulls off the signal and feeds it to the set-top box in the house over the drop wire, a local loop of flexible quarter-inch coaxial cable.

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Currently, there is much discussion in the financial press, the accounting industry, and in Washington about options and compensation issues for corporate executives Some corporate officials have resorted to questionable accounting practices for a period of time to boost earnings and stock prices to cash in on options The EVA (economic value added) mantra of maximizing the value of stock for current shareholders has been bastardized into temporarily pump up the price of shares so that management can cash in on its options and screw the shareholders The granting of $11 billion in shares to the top management of Computer Associates that we describe in 3 is a good example of a terrible incentive program.

Downloaded from Digital Engineering Library @ McGraw-Hill (www.digitalengineeringlibrary.com) Copyright 2004 The McGraw-Hill Companies. All rights reserved. Any use is subject to the Terms of Use as given at the website.

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