Friday, June 17, 2005

Summer Stroll # 9 -- The Farmer's Wife

The farmer's wife heard the young man's proposal for the goose and she agreed with her husband's refusal to sell half the goose. She knew they had a good life and she understood that the golden strategy wasn't good for anyone except the young man from Wall Street. However, after his dust had cleared the trees, she approached her husband and said, "If the young man would have offered you a million dollars for the goose and said he was going to put it in a box and go away, would you have sold it? Her husband hesitated and then laughed, "I would have sold it for far less. As I was listening to him, I was trying to figure out how much it might really be worth." The farmer's wife said, "I was trying to figure the same thing. We know from experience the goose lays more eggs in a year at a rate of 20 per month than at 30, so her value would actually go down with his first idea. We can't really do much about how long the goose lives. Maybe we could have those Purdue people come in to give us their thinking on what we can do to keep her healthy, but I think couping her up all by herself would kill her quick. That rooster she fancies might have as much to do with the golden eggs as she does. The one thing that the young man said that makes sense, though, is that the price of golden eggs might start to go up as more people decide they want one. " "That's the notion that came to me as well," said the farmer. "Figuring the present value of the goose's future egg production was easy when we kept everything still. But when we start increasing the price of the eggs, it get's a lot tougher to figure. But we really need to find a way to do it because somebody else will soon come down that road and what to buy the goose." "I'll swan to goodness," said the farmer's wife. "The young man said he expected the price of golden eggs to increase by twice the rate of inflation. Today's paper said inflation is increasing at 3%, so he must believe golden eggs will go up 6% a year. That's the same as the rate the banker said to discount future egg prices for the cost of money. That would mean that the growth in golden egg prices would wipe out the cost of money and leave us with a simple calculation: 20 eggs a month times $400 per egg, times the 60 months that we expect the goose to live. That would mean if golden egg prices grow at 6% per year, the present value of the goose is $480,000 (20 eggs/mo. X $400 p/egg X 60mo). The farmer scratched his head and said, "So the intrinsic value of the goose to us is based on what we can get out of her discounted by the cost of money, and that is about $480,000." "But what about the young man's million dollar deal. Is there no truth to it at all?" she said." "It is not real to us because we would not want to be a part of that kind of deal, but somebody else, who doesn't mind taking advantage of his partners, might come along and make an offer approaching the young man's price. If someone wants to pay a lot more than the $480,000 and it's a clean deal and we can walk away, the goose is theirs." "Pappa, we could move to Florida and buy one of those fancy condos on he beach. They are hotter than our golden eggs." "Mamma, I don't think that would work. That smart young man said he was going to Florida for his next deal. Judging, from the deal he showed us for the goose, I would not want to be on the other side of his arithmetic."