Intrinsic Value Calculation

Inputs			Default	Input Values (used for calculations)
Your Investment Horizon in Years (Max of 10):			5	5
Most Recent Reported EPS (Earnings Per Share):			#N/A	0.1151
Projected EPS Growth Rate:			#N/A	15.00%
Projected Average Annual PE Ratio:			NA	10
Average Dividend Payout Ratio:			#VALUE!	35%
Desired Minimum Annual Return:			NA	10%
Current Stock Price			NA	$1.40

Calculations
Estimated Earnings Per Share after year 5:	$0.23
Forecasted Stock Price after 5 Years:	$2.32
Total Estimated Dividends for the next 5 Years:	$0.08
Total Estimated Stock Value after 5 Years:	$2.40
Current Share Price:	$1.40
Estimated Intrinsic Value:	$1.49
Estimated Margin of Safety:	-6.27%

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Inputs Default Input Values (used for calculations) Your Investment Horizon in Years (Max of 10): 5 5 Most Recent Reported EPS (Earnings Per Share): #N/A 0.1151 Projected EPS Growth Rate: #N/A 10.00% Projected Average Annual PE Ratio: NA 10 Average Dividend Payout Ratio: #VALUE! 35% Desired Minimum Annual Return: NA 15% Current Stock Price NA $1.40

Calculations
Estimated Earnings Per Share after year 5:	$0.19
Forecasted Stock Price after 5 Years:	$1.85
Total Estimated Dividends for the next 5 Years:	$0.06
Total Estimated Stock Value after 5 Years:	$1.92
Current Share Price:	$1.40
Estimated Intrinsic Value:	$0.95
Estimated Margin of Safety:	31.87%

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INTRINSIC VALUE: THE RIGHT PRICE TO PAY

INTRINSIC VALUE

Both Warren Buffett and Benjamin Graham talk about the intrinsic value of a business, or a share in it.  That is, to buy a business, or a share in it, at a fair price. 

But, having regard to the possibility of error in calculating intrinsic value, the careful of investor should provide a margin of error by only buying the business, or shares, at a substantial discount to the intrinsic value.

Buffett is said to look for a 25 per cent discount, but who really knows?

DEFINING INTRINSIC VALUE

Buffett’s concept, in looking at intrinsic value, is that it values what can be taken out of the business. 

He has quoted investment guru John Burr Williams who defined value like this:

‘The value of any stock, bond or business today is determined by the cash inflows and outflows – discounted at an appropriate interest rate – that can be expected to occur during the remaining life of the asset.’ – The Theory of Investment Value.

The difference for Buffett in calculating the value of bonds and shares is that the investor knows the eventual price of the bond when it matures but has to guess the price of the share at some future date.