Intrinsic Value = (2g+8.5) x EPS

Dissecting Graham's Intrinsic Value Formula


Graham's formula:
V = (2g+8.5) E x 4.4/Y

where,
V= intrinsic value
g= growth rate of earnings
E= current EPS
Y= current interest rate (average rate of high grade corporate bonds)

V = (2g+8.5) x (4.4/Y) x E

V = (Multiple) x E

Therefore the Multiple of E is a multiple of 2 components as illustrated

Multiple = (2g+8.5) x (4.4/Y)

(I) If Y is equal to 4.4
(4.4/Y) = 1
Multiple = (2g + 8.5)


(II) If Y is less than 4.4
(4.4/Y) > 1
Multiple > (2g + 8.5)


(III) If Y is greater than 4.4
(4.4/Y) < 1
Multiple < (2g + 8.5)


As we are presently in a low interest environment, let us assume that Y is equal or less than 4.4. Therefore, the multiple should be equal or more than (2g + 8.5), as in (I) and (II) above.

To be on the conservative side, we can use (2g + 8.5) as the multiple of EPS as a simple quick test to check on the stock's price and true value (intrinsic value).

Simplified Graham's formula:
V = (2g + 8.5) x EPS


EPS can be derived by multiplying [(1/PE) x Price of stock], both are readily available in the local paper.

Reminder: You shouldn't go out and buy or sell stock based on this formula alone, of course, but it's a great "quick" test of a stock's price and true value.