Capital Markets Spring 2020
Don’t Overreact Navigating Through a Crisis
I • A significant decline in aggregate earnings can be scary and can potentially move stock prices violently • However, we believe the value of a company (or group of companies) with stable, long- term cash flows should not change much based on short-term cash flow fluctuations
Value of $100 Per Year over 30 Years @ 7% Cost of Capital
Value of $100 Per Year After Falling 40% in Year 1 and Gradually Returning to $100 for Years 4 to 30
A 40% short-term decline leads to only a 5% reduction in long-term value
Source: Alger. Both values based on discounted cash flow using 7% cost of capital.
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