Money and Finance
- Price And Value...
From Capital Returns:It should never be forgotten that, in its most basic form, investing is always and everywhere about price and value. Price is what you pay, says the Sage of Omaha, and value is what you get. By this definition, every serious...
- Should You Be Loving Mcdonald's Corporation?
Another year completed and another annual report to go through. Back in late January, McDonald's Corporation (MCD) announced 4Q 2013 and full year earnings so what better time than the present to input the new data and update my valuation analysis....
- Valuation Of Pepsico Inc. - The Long Case Looks Strong
Last week management of PepsiCo. Inc. (PEP) announced earnings for 4Q and full year 2013. The results were fairly mixed with revenue increasing around 1% over 2012. North American soda consumption continues to be a drag on the growth of the...
- Jnj Stock Analysis
I've started to try and consolidate my stock analysis spreadsheets to make it easier for myself to cruch numbers. I like JNJ and would love to get in but right now it seems that it's a little overvalued and there's just too many question marks...
- Recent Buy
Today I purchased 50 shares of Tower Group, Inc. (TWGP) at $23.43 / share in my Roth IRA. I got a little impatient in waiting for my price and raised my target up a little bit which I shouldn't have done since the market would have given me the shares...
Money and Finance
The Effect of Discount Rates on Intrinsic Value
The discount rate you use in a discounted cash flow valuation can have a big effect on an intrinsic value calculation. To illustrate, let's use an example based on the following assumptions:
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Earnings Per Share Year 0: $1.00
Growth Years 1-5: 12%
Growth Years 6-10: 10%
Growth Years 11-15: 8%
Growth Years 16-20: 6%
Growth Years 21-25: 4%
Growth Years 26-30: 2%
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Under this scenario, the net present value of those 30 years worth of earnings is $45.65 using the current risk free rate of 6% (even though the current risk free rate is lower, it is prudent to use 6% as a minimum) as our discount rate.
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However, if we change the discount rate to 10%, the value of that earnings stream is now only worth $26.43. Furthermore, if we bump the rate up to 15%, the net present value is knocked down to $15.40.
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So, discount rates have a big effect on valuation and that means that interest rates (which help determine appropriate discount rates) have a big effect on valuation. And as if that doesn't make things difficult enough, here's another fact: you can't predict interest rates over time.
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This is just further proof of the importance of only purchasing a security (or entire business) when you have a LARGE Margin of Safety between current price and intrinsic value, and it also stresses the fact that one should wait for a fat pitch before taking a swing while investing.
- Price And Value...
From Capital Returns:It should never be forgotten that, in its most basic form, investing is always and everywhere about price and value. Price is what you pay, says the Sage of Omaha, and value is what you get. By this definition, every serious...
- Should You Be Loving Mcdonald's Corporation?
Another year completed and another annual report to go through. Back in late January, McDonald's Corporation (MCD) announced 4Q 2013 and full year earnings so what better time than the present to input the new data and update my valuation analysis....
- Valuation Of Pepsico Inc. - The Long Case Looks Strong
Last week management of PepsiCo. Inc. (PEP) announced earnings for 4Q and full year 2013. The results were fairly mixed with revenue increasing around 1% over 2012. North American soda consumption continues to be a drag on the growth of the...
- Jnj Stock Analysis
I've started to try and consolidate my stock analysis spreadsheets to make it easier for myself to cruch numbers. I like JNJ and would love to get in but right now it seems that it's a little overvalued and there's just too many question marks...
- Recent Buy
Today I purchased 50 shares of Tower Group, Inc. (TWGP) at $23.43 / share in my Roth IRA. I got a little impatient in waiting for my price and raised my target up a little bit which I shouldn't have done since the market would have given me the shares...