One of the problems you may have thought of as we worked in Chapter 8 was how do we know that projected cash flows are accurate? Certainly, I would expect someone who was passionate about a proposed project to be more optimistic about it than perhaps was really warranted, not because he or she was trying to cheat, but simply because “Love is blind.”
For example, a problem of evaluation that is much in the news these days in Time Warner and AOL. With the clarity of 20/20 hindsight, people are criticizing this merger/acquisition on the basis that the AOL stock was overvalued, and many are blaming Steve Case. In fact, Steve Case, who was President of AOL at the time, did exactly what he should have done — he used stock that was priced high (AOL) to purchase stock that was priced low. (Time Warner). That the projected profits of the AOL division evaporated with the Internet bubble shows that the guys at Time Warner made an error — not Steve Case. This is a case of billions of dollars, and the best and brightest managers at the company that publishes Time magazine and owns all the Bugs Bunny, Yosemite Sam, Tweety Bird and Taz cartoons clearly made an error. You, however, will be able to do better than they did by the end of this chapter!