ELD General Discussion, page-431

does anyone use these intrinsic valuation calculations used Roger Montgomery, Richard Simmons and Brian McNiven?
I have always thought that the mathematical model used actually comes close to how a business actually operates ie being principally based on return on equity, bookvalue, the expected rate of return and a payout ratio
check out the figures for Elders
Book = $5.46
ROE = 17%
expected rate of return = 15%
payout ratio = 59%
to get a multiple for divis you divide roe by expected rate of return
.17/.15 = 1.13
if all earnings are paid out a divi the intrinsic value formula is then (roe/expected rate of return) x book = intrinsic value
so
1.13 x $5.46 = $6.17
then a big assumption is made for if all earnings are reinvested by the company the above multiple is then squared
so
(ROE / Expected rate of return)^2
so 1.13^2 = 1.28
the formula then becomes
(ROE / Expected Rate of Return)^2 x book = intrinsic value
so
1.28 x $5.46 = $6.99
thing is not all earnings are reinvested so you need to incorporate the payout ratio
so
Payout ratio = 59%
so .59 x $6.17 = $3.64
amount reinvested is 41%
so .41 x $6.99 = $2.87
add them together an the intrinsic value for ELD is $6.51
current price is $6.05 so the company is probably about 7% undervalued