Raising capital in the global economy

1. How is raising money in U.S. neckcloth markets more toilsome than in the rest of the world?

Even if reapingivity growth has risen, in rescript to beg off the higher dividend growth assumptions necessary to justify the accredited valuation of the US equity market, one has to deliver that, for some reason, return on equity can stay on sustainably so high.

On Wall Street, it is indeed fashionable to point to the current high ROE as the explanation for the level of the stock market - this, after all, is what underlies the fashionable Economic Value Added nuzzle to market valuation.

For example, in arguing that the S&P500 was modestly undervalued (by about 8 per cent) comparing to the rest of the world, the Goldman Sachs US scheme team, Einhorn et al. (1998), assumed that the facing pages between a companys return on capital (ROC hereafter) and its weighted average cost of capital (WACC hereafter) would be equal to its 1998 level (approximately 4.4 per cent) in perpetuity! This assumption is curiously remarkable given that the ROC-WACC spread is, on their own numbers, before long at a record high (for the admittedly condensed sample of 1986-03). Note that the average value of the ROC-WACC spread all over the 1986-03 period is about 1.6 per cent.



It is striking that one has to assume that the ROC-WACC spread has to average more than 2 1/2 time its 1986-98 historical average in perpetuity in order to justify current equity market valuations in the US.

However, the self-assertion that the ROC-WACC spread (or the ROE) can be sustainably high in the US is at variance with both theory and history. Standard considerations of product market competition suggest that any super-normal profits essential ultimately be competed away. A strange aspect of the new paradigm guess is that we...

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