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| Date: Thursday 15th 2008f May 2008 10:54:13 PM |
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Q & A - Calculating Fair Price - 11/10/2006 |
| By: Hari Wibowo |
| Name: Meaghan |
| Website: N/A |
| Date posted: Fri, Nov 10, 2006 5:08 AM |
| Question: Can you please advise how I would calculate the "Fair Price" on the following: |
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Current Market Price is $ 26.53. NPAT: 7,900 M. |
| Share on Issue: 6.056 Million shares |
| Year 0 Year 1 |
| EPS: $ 1.30 $ 2.89 |
| P/E Ratio: 20.40 9.17 (ind. avg P/E = 14.15) |
| Thanking you in advance. Meaghan |
| Answer: |
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Hi, Meaghan. Thank you for submitting your question to Novice Investing. For stock with strong EPS growth here, it is more complicated than pure linear no-growth EPS. Assuming that the stock continues to earn $ 2.89 in EPS from year 1 onwards, here is how we get into the fair value of the share: |
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Inflation assumed: 3% per annum |
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10 yr bond: 4.58% (source: CNN Money) |
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Yield expected : 3 % more than 10 year bond |
| : 4.58% + 3% = 7.58 % |
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Fair P/E value : inverse of yield |
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: 1 divided by 7.58 % = 13.19 |
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Fair Price at Year 1 : (P/E x EPS) + EPS earned on year 0 |
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: (13.19 x $ 2.89) + $ 1.30 = 39.42 |
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Fair Price now : FP year 1 * ( 100% - Inflation rate ) |
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: $ 39.42 * 0.97 |
| : $ 38.24 ( +/- 5% error) |
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While I realize that this is crude calculation. This is a good enough estimation if you are trying to invest 3-4 years down the road. The really big assumption here is the EPS growth year 2 onwards. Generally, no company can produce 122.3% of EPS growth consistently year over year. Thus, this calculation shows a 0% growth in EPS after year one. Hope this one helps |
| Hari - Novice Investing |
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END |
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Hmm, I am confused. And I have questions |
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I'm fine, thanks. Bring me back to main page |
| Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding any securities. |
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