Replies to post #508986 on Fannie Mae-No Politics (FNMA)

[Cubshawk]

You ask why I claim you use current market cap as the basis for future valuation? Uh, because your entire post is based on it.

Your future share price valuation numbers/calculations are based on current market cap - which of course is complete gibberish. There's absolutely no relation between current market cap and future share price in the open market.

Future share price will be based on earnings per share times a multiplier. Current market cap is completely irrelevant. If you want legitimate future share price estimates - use EPS. Run those calculations.

You will have to be way more specific than this. To make a share price estimate, you need to answer the following questions:

1) What is the market cap? (for FnF combined, using combined numbers is much easier)
2) How much capital do they need to raise?
3) What proportion of the companies' equity will the new buyers insist on? (this answer should be higher than #2 divided by #1)
4) Will the warrants be exercised?
5) Will the juniors be offered a conversion? If so, will it be full or partial, and at what rate?
6) Will the seniors be converted to commons? If so, at what rate?
7) If any of #4, $5, or #6 is yes, what order do the four events occur in: junior conversion, warrant exercise, senior conversion, equity raise?

Only then can you actually make an educated estimate.

Let's start with the high end and make everything extremely optimistic.

1) $300B (<== CURRENT MARKET CAP AS BASIS FOR YOUR CALCULATIONS)
2) $100B
3) 40%
4) No
5) No
6) No
7) N/A

With 1.8B existing shares, the new buyers get 1.2B so that they have 40% of the total: 1.2B / (1.2B + 1.8B) = 40%. This makes for 3B shares. $300B market cap divided by 3B shares is $100 per share. (<== CURRENT MARKET CAP AS BASIS FOR YOUR CALCULATIONS) So we hit your number right on the nose, but it's the absolute highest, top-end number in this model...

...Lowering the market cap to $250B keeps the conversion and warrant shares the same, but means #3 has to be more than 40%, so I'll use 60%. Then the new buyers get 33.45B shares, and the share price is $300B / (1.8B + 2.66B + 17.84B + 33.45B) = $5.38, so Treasury's warrants are worth just shy of $96B. I think this is highly plausible, and I assign a 50% probability. The prefs end up at 107% of par.