Cash Is King On October 1 1974

into different spread cohorts and conducted separate regressions of market-to-book against growth. As the theory would predict, growth is much more important for high spread companies as shown on Exhibit 5.4. The slope of the regression line for high spread companies is significantly positive; for low spread companies it is relatively flat and not statistically different than zero.

In another test, we applied the DCF approach to the valuation of 31 companies. We developed cash-flow forecasts based on projections from the Value Line Investment Survey and discounted the cash flows at the weighted average cost of capital (WACC). As Exhibit 5.5 shows, we found a strong correlation with the companies' market values.

These results are not scientific proof, and we cannot test our hypothesis more directly by measuring expected future growth and returns. But these

Exhibit 5.5 Correlation between Market Value and DCF Value for 31 Large U.S. Companies, 1999

tests do provide more evidence that cash flow, led by the combination of revenue growth and spreads, drives the value of companies.

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