Intrinsic Value

To find the intrinsic value you need to have the following information about the company you are searching:

Owners Earnings

Long-term bond rate

To find how much you might save or lose:

Intrinsic Value

Value of business

Buying price(note:buying price will be replaced by ‘marked price’ in the following example)

Example

Warren Buffett himself made a very salutary transaction in 1973. He bought a company called Washington Post. Information he had:

Owners earnings=10.4 million dollars

Long term bond rate=6.5%

Value of Washington Post=150 million dollars

Market Price=80 million dollars

Intrinsic Value/Value of business formula: Owners Earnings/Long term bond rate

Step 1(calculate)=10.4/0.068

Step 2(Estimate)=152(Estimated price:150)

Finding how much Buffett saved formula:

Value of business-market price

Step 1(calculate)=150-80

=70

Buffett saved 70 million dollars by buying a company at 80 million dollars when it was worth 150 million dollars.

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