Determine a Value Anchor and a Value Range

1. Determine a Value Anchor

The value anchor is obtained as follows:

= Projected EPS x Appropriate PE ratio

In our illustration, the projected EPS is 5.00 and the appropriate PE multiple is 6.87. Hence the valu anchor is 34.35. However, as valuation is inherently an uncertain and imprecise exercise, it would be naive to put great faith in a single point intrinsic value estimate. Practical wisdom calls for defining an intrinsic value range around the single point estimate.

2. Determine a Value Range

For example, in the above illustration, where an intrinsic value estimate of 34.35 has been arrived at, it may be more sensible to talk of an intrinsic value range of say 30 to 38. When you define a range like this, you are essentially saying that a "there may be a bias and error in my estimate. In view of this, feel that the value range is 30 to 38." Given this value range, your decision rule may be as follows:

Market Price*** (Decision)
< 30***********(Buy)
30 to 28********(Hold)
>38************(Sell)