Graham-Dodd value of (A)

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Intrinsic Value
Upside potential

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Intrinsic value =

 [   (Book value - Goodwill ) x

     + (Net income - Dividends ) / %

     + (Dividends ) / %

 ] / Number of shares

Following the spirit of Benjamin Graham and David Dodd's teachings, we assume that intrinsic value (V*) of a stock is composed of the following three components (on a per share basis):

  • Tangible book value (TBV), which serves as a proxy for assets' replacement costs or assets' fair value.
  • Value attributed to retained earnings, which are defined as the difference between Net Income (NI) and Dividends (Div). The value of this component is calculated as the value of a perpetual bond with the coupon equal to the company's average yearly retained earnings, and the required rate of return for retained earnings (RRRre) of 20%.
  • Value attributed to dividends. The value of this component is calculated as the value of a perpetual bond with the coupon equal to the company's average yearly dividend (Div) and the required rate of return for dividends (RRRd) of 10%.

V* = TBV + ((NI – Div) / RRRre) + (Div / RRRd)