A firm's theoretical price can be thought of as the sum of its tangible value the capitalized value of its current earnings stream plus its franchise value the capitalized value of future investments offering above market returns. The price! earnings ratio (PIE) of a firm with no franchise value the base P/E is simply the reciprocal of the market capitalization rate. By contrast, the PIE of a firm with substantial franchise opportunities will be at a premium to the base PIE.

As time passes, franchise prospects become current opportunities. The funding of these opportunities leads to additional earnings and franchise value is converted into tangible value. As a result of this conversion process, the relative proportion of franchise value to tangible value declines, and so does the firm's PIE.

For the basic case where franchise opportunities are finite in scope and time, firm variables will behave in generally predictable ways. Earnings growth and PIE will be abnormally high while the franchise is being "consumed". However, over the consumption period, the firm's PIE will erode toward the base PIE, and price appreciation will lag earnings growth. Once the franchise is fully consumed, firm earnings, dividends and price will all grow at a single (generally lower) rate, determined by the market rate and the firm's retention policy.