Yeah absolutely, I agree. Predicting the future earnings of the company is the most important thing, but you need book value (BV, oysters) to generate EPS.
If you see, changing from BV at todays money or future money changes the valuation from $18 to $25. Does this mean $18 or $25 is the correct price? Probably not, the hurdle (discount rate) is only used as a yardstick to make valuations comparable across companies. Some other investors might have a different view of the hurdle needed for the risk, and that might change according to the opportunity cost of other investments/bonds.
Yet we should not use a model that counts something twice.
EPS is literally book value (BV) times ROE.
So in that model we are suming EPS and thus assuming that we get them and they are NOT reinsvested in the company. So book value does not grow (maybe it grows as per inflation as it is mostly assets)
So we sum everything you can get from the business (EPS) for 10 years.
But you cannot sum the BV at todays money price as you need it to generate income.
BV can be added as some kind of terminal liquidation value proxy but discounted at todays price of money.
Take a look at the residual income valuation model which is derived from dividend discount model. It is an equivalent model which should give the same result with the same assumptions. It is equivalent to a DCF (math proven) but you start with the BV and you add to the BV changes the EPS generated above the hurdle rate every year, discounted to the present value.
Where the residual income is income above the hurdle rate expected for a certain book value. RIt = BVt * (ROE - r)
If a company does not generate more than your hurdle rate (cost of equity), then you would just sell it (assuming fairly priced) or vote to liquidate the business, as income less than hurdle rate is a technical loss for the business.
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