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Future Earnings Discounted Plus Equity Model PDF Print E-mail
Written by Dr. Econ   
Wednesday, 13 July 2011 00:00

There are many different ways to estimate the fair value of a company. I look at it from a financial engineering perspective. Let’s say there is a project. You invest your capital in the project. You expect the project to make a minimum return for your investment. At the same time, you need to know what the downside of the project is. In the worst case, you will lose your money up to the equity value. Thus, the companies already have this equity in them. By purchasing a stock, you pay for the rest.

The companies make profit. They are supposed to make profits. If they do not, make sure to stay away from the company. As a shareholder, you are the owner and at least theoretically you are entitled to receive the profits. I would rather prefer it in my pocket in form of a dividend check, but still it is in the company’s account which I am entitled a portion of. The profits continue growing in the long term. However, analysts have almost no idea about what will be the profit growth after 5 years. Therefore 5 years is a good cut-off point for the profits. The company still keeps making profits, but we assume the profits to stay constant.

Based on the above logic FED+ Fair Value is calculated as the following:

Fair Value = E0 + E1 / (1+r) + E2 /(1+r)2 + E3/(1+r)3 + E4/(1+r)4 + E5/(1+r)5 + Disposal Value

Fair Value = E0 + E0 (1+g)/(1+r) + E0(1+g)2/(1+r)2 + … + E0(1+g)5/(1+r)5 + E0(1+g)5/[r(1+r)5]

The earnings after the last period act as a perpetuity that creates regular earnings:

Disposal Value = D = E0 (1+g)5/[r(1+r)5] = E5 / r

Fair Value = E0 + E0 (1+g)/(1+r) + E0(1+g)2/(1+r)2 + … + E0(1+g)5/(1+r)5 + E5 / r

FileDescriptionUploaderFile sizeLast modified
Download this file (FairValueFinalWeb.xlsx)FED+ Fair Value EstimatorDownload Excel FileDr. Econ14 Kb22/08/11 22:29
Last Updated on Thursday, 06 October 2011 06:51


0 #9 Alain Gorissen 2013-05-11 08:50
Do you get your numbers from Morningstar? These are the numbers from which stock ?
0 #8 drmeyer 2013-03-26 11:31
Cell C11 is locked which prevents putting in an accurate book value per share.
0 #7 Jim 2013-03-20 12:09
What's the definition of g?
What is FED an acronym for?
What is definition of disposal value?
You assume everybody knows what your symbols and acronyms represent ... bad form
0 #6 Dr. Econ 2012-10-12 10:05
Math Dr.

I use automated systems to get data from Morningstar. Unfortunately, you have to do it manually at the current stage.
+1 #5 Dr. Econ 2012-10-12 10:04

The estimator works very well for large cap companies with stable growth estimates. It fits best to companies where average P/E is between 10 to 20.

As long as earnings estimates hold, the model works well. A perfect example has been Apple.
0 #4 Simon 2012-10-07 23:50
Is this estimator reliable?
+1 #3 MathDr 2012-03-14 19:52
Where do you get all of Exs, r and g used in your formula for a particular stock?
+2 #2 Deb Smitters 2011-11-19 16:12
Quoting EconDr:
If you have any problems with the FED+ Fair Value Estimator Excel File, please let me know about it.

Where in the world does one get Line 10 Discount Rate (Default Rate 11%)for each listed company and Line 12 Corporate Bond Yield (AAA or BAA depending on the company) listed on the stock market. The Note on Graham Margin of Safety for teh Yield Data Here: research.stlouisfed.org/fred2/categories/119 is of no help
+4 #1 EconDr 2011-08-23 20:47
If you have any problems with the FED+ Fair Value Estimator Excel File, please let me know about it.

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