Originally Posted by
Muse
Issue 2) Returns on Equity. OCA's returns on equity are poor on any basis; the various statutory npats (reported/comprehensive) or the reasonably bogus underlying earnings. Again - dumb analogy - but lets say an equity investor has a cost of equity of 10% (nice round #), and an asset has a return on equity of (say) 5% (these are just strawman numbers before anyone gets worked up). There is no way the marginal investor who sets the market price would pay book value for an asset producing approximately half of his/her required return all things equal. They would just pay the appropriate discount to NTA to true up their cost of equity. Adopting that framework into the real world, they would also make an adjustment based on the realistic level of compounded growth that asset could achieve in the future. The discussion around the float being an asset ignores the truth that in its present liability form it enhances the ROE. Returns on equity would be substantially worse if they were removed from the analysis. A second devils advocate argument would be the ROEs are deminished because a lot of capex has been put in place but hasn't been given the time to earn (and will in the fullness of time). That I have some sympathy for but that's likewise been the case for a while.