Model 101

Our Most Basic Model

Model 101 is our most basic model. It is in the the spirit of "as simple as possible but no simpler." It calculates the value of an equity using:

  • The book value from the most recent annual balance sheet
  • An estimate for this fiscal year's earnings
  • An estimate for next fiscal year's earnings
  • An estimate for the annual dividend
  • Your Estimate of the long-term growth rate of residual earnings
  • Your required return for investing in the company

Take a look at the formula and try the model for yourself − we'll guide you at every step!

The model is based on the work of Stephen H. Penman of Columbia Business School. For an in-depth look at the theory behind it, we recommend reading Accounting for Value.

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Calculations

$$Value_0 = B_0 + {Earnings_1 - (r * B_0) \over (1 + r)} + {Earnings_2 - (r * (B_0 + Earnings_1 - d_1)) \over [(1 + r) * (r - g))]} $$ $$Where:$$ $$ Value_0 = Current\,Value\,of\,the\,Stock$$ $$ B_0 = Book\,Value\,from\,the\,Lastest\,Annual\,Filing$$ $$ Earnings_1 = \,Earnings\,Estimate\,for\,This\,Year$$ $$ Earnings_2 = \,Earnings\,Estimate\,for\,Next\,Year$$ $$ d_1 = Expected\,Dividend\,for\,this\,Year$$ $$ g = Long\,Term\,Growth\,Rate\,of\,Residual\,Earnings$$