Question
In the readings it covered implied growth estimates and intrinsic value, please explain in detail what each one is, and give an example of a
In the readings it covered implied growth estimates and intrinsic value, please explain in detail what each one is, and give an example of a company and analyze its implied growth basing this on an industry analysis and its intrinsic value
Intrinsic Value = Eps x [PE + (2 x forecast annual earnings growth %)]
Put into words, a companys intrinsic value is its latest annual earnings multiplied by a factor equal to its PE plus twice the projected earnings growth rate.
Graham modified the formula to account for the notion that stock valuations vary inversely with prevailing interest rates. That is, stocks tend to trade at higher valuations when interest rates are low, and vice versa (see Chapter 2). Graham used AAA (highest quality) corporate bond rates as a proxy for prevailing interest rates. The AAA corporate bond rates were around 4.4 percent when he first devised the formula, so the revised version looks like:
Intrinsic Value = Eps x (4.4/AAA bond rate) x [PE + (2 x forecast annual earnings growth %)]
(where AAA is the current yield of AAA-rated corporate bonds)
Implied growth = (Dividend/price) - expected rate of return
Use both methods
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