Intrinsic Value Calculator (Benjamin Graham Formula)
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Understanding Intrinsic Value
Intrinsic value is a measure of what an asset is worth, based on an objective calculation or financial model, rather than the current market price. For stock investors, calculating intrinsic value is the cornerstone of value investing, popularized by Benjamin Graham and Warren Buffett.
The Revised Benjamin Graham Formula
This calculator uses the revised Graham formula which accounts for the changing interest rate environment:
- EPS: The company's trailing twelve months (TTM) Earnings Per Share.
- 8.5: The P/E base for a company with 0% growth.
- g: The expected annual growth rate for the next 7 to 10 years.
- 4.4: The average yield for high-grade corporate bonds in 1962 (Graham's benchmark).
- Y: The current yield on AAA-rated corporate bonds.
Example Calculation
Suppose a company has an EPS of $4.00, an expected growth rate of 5%, and the current AAA bond yield is 4.5%.
- Base P/E: 8.5 + (2 * 5) = 18.5
- Adjusted EPS: 4.00 * 18.5 = 74
- Interest Adjustment: (74 * 4.4) / 4.5 = 72.35
- Intrinsic Value: $72.35 per share.
What is Margin of Safety?
The Margin of Safety is the difference between the intrinsic value and the market price. If the intrinsic value is $100 and the stock is trading at $70, you have a 30% margin of safety. This buffer protects investors from errors in estimation or market volatility.