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Discounted Earning

Questions › Category: Valuation Quadrant › Discounted Earning
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Eric Voon asked 9 years ago

Dear fiftperson:
 
Would like to ask bout calculating intrinsic value using discounted earning. I done all my calculation just exactly like the method of discounted cash flow, then until step 6 im a lil bit confused. let say i got all my discounted EPS projected for 10 years, then i sum up all together, the sum value is not yet the intrinsic value right?. Is it that i should take that sum value multiply with a reasonable PE value then only i get the intrinsic value? 
 
 

Bluezheiz replied 4 years ago

Hi Victor, intrinsic value is the present value of All future cashflows. To be more conservative (i.e. to get lower intrinsic value) should we use shorter period, say 5 years instead of 10 years for future cashflow? How to determine how many years to use?Thanks.

Victor Chng replied 4 years ago

Hi Bluezheiz,

When it comes to investing, we want to be long term driven and have the mindset to hold at least 10 years or more. Hence, I think the 10 years mark is the bare minimum. If you want to use the 5 years mark is also possible, just that you will get a smaller value for your intrinsic value

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The Fifth Person answered 9 years ago

Hi Eric,
 
That sum value is the intrinsic value. You don’t have to multiply it with the P/E.

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Eric Voon answered 9 years ago

QUOTE
Victor Chng has answered your question at “Discounted Earning“: 
Hi Eric,   The Intrinsic Value (IV) is the sum of all the discounted EPS projected. If you want to use PE method, use only the last year of the discounted EPS projected to multiply by the PE
 
Didnt know why i cant view this reply by Victor from here so im just gonna copy paste from my email. I just did both the method, sum of all discounted EPS, and PE x final year discounted EPS, both figure shows quite big difference of IV. im using only PE value of 10 which i thk is the safest among any industry and this gives a higher IV than the sum-ed DEPS. So in your opinion, which figure is most likely reliable? 

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Victor Chng answered 9 years ago

Hi Eric,  
 
Calculating intrinsic value using the DCF model requires a lot of projections. Therefore the more you project, the less accurate the intrinsic value will be. I would encourage you to use the most conservative intrinsic value.