Showing posts with label John Burr William Stock valuation calculator. Show all posts
Showing posts with label John Burr William Stock valuation calculator. Show all posts

Saturday 10 March 2012

DCF Valuation: The classic work of John Burr Williams

The valuation model for estimating the investment value of an operating enterprise in the private market, independent of the stock market price quotations, is based on the discounted cash flow (DCF) method using the time value of money. 


The classic work of John Burr Williams (see the models section at theory ) is the basis for the development of most equity valuation models, and his work is here referred to as the DCF Model rather than the narrower misleading name of Dividend Discount Model or DDM


For academic models of equity valuation, see Investments by Brodie, Kane and Marcus in General Books, or go to textbook models. For less academic approaches to firm valuation, see Damodaran on Valuation in Special Books, or go to his practical modelsof equity valuation. For a practical firm valuation model, see the McKinsey model tutorial with an example company valuation and downloads in a working paper at the Stockholm School of Economics. The McKinsey approach is the subject of the book titled Valuation by Tom Copeland et al in General Books.

The general model can be expressed verbally, mathematically, and graphically. 


Thus, in words:

1. If you commit your cash to a particular investment opportunity, then what cash can you expect to get out of it in return? What is your reward for abstinence and risk-taking?

2. What are the estimated net cash flows attributable to this proposed investment; i.e., what are the expected dividend distributions and the future terminal selling price?

3. What is the present value of these net cash flows, discounted at an appropriate rate of interest? This is the intrinsic economic value of the equity investment.

4. What is the margin of safety, both in dollars and in percentage? Is the intrinsic value per share of common stock greater than the stock market asking-price quotation by an amount sufficiently compelling to justify a long-term commitment to this particular investment?


Mathematically, the DCF model can be expressed both in an abstract standard form for the general case and in many concrete forms for simplifying special cases. Conceptually, the DCF Model is like an ideal of Plato which manifests itself in different empirical forms. We refer to these empirical forms types of the DCF Model. In all forms, the net present value of the investment, i.e., its intrinsic economic value, is equated with the sum of the products of each net cash flow and its discount rate. After intrinsic value has been estimated from fundamental data, it can be expressed in terms of earnings, book value, dividends, sales, cash flow, or other accounting measures, but this is not necessary. 

Graphically, the model can be expressed in two dimensions as a horizontal time line with vertical bars showing positive and negative net cash flows, above and below the line respectively, from the date of your investment at time zero to the date of your future sale at the end of your horizon for this investment.


http://www.numeraire.com/value.htm

Friday 11 December 2009

John Burr Williams Stock Valuation Calculator

John Burr Williams Stock Valuation Calculator
By Stock Research Pro • September 4th, 2009

John Burr Williams (1900 – 1989) was one of the first economists to advocate the need to arrive at a stock’s “intrinsic” value when considering it for investment. Williams believed that, due to the inherent volatility of the stock market, investors should consider the ability of the company to pay dividends over the long-term. It was Williams who popularized the dividend discount model (DDM) as a conservative approach to stock valuation; discounting future cash flows (dividends) to a present day value to arrive at the real value of a stock.


Who was John Burr Williams?

John Burr Williams was a student of chemistry and mathematics at Harvard University. He then went on to graduate from Harvard Business School in 1923. After graduation, Williams went to work as a security analyst before returning to Harvard to earn a Ph.D in economics in 1940. William’s work, The Theory of Investment Value, provides mathematical models case studies regarding stock valuation and is considered a much-underappreciated work on the subject. Williams spent his entire professional life working in the management of security analysis and privately-held investment portfolios. He was also a visiting professor of economics at the University of Wisconsin-Madison.


Williams’ Approach to Stock Valuation

Williams’ writings and teachings did not attempt to teach investors to beat the stock market or obtain great wealth from stock investing. Instead, they served as a wake-up call to stock investors by encouraging them to take a less speculative approach to the market and focus instead on investment value. In Williams’ view, reported earnings were far too imprecise to be trusted and the only thing an investor could count on was a check in the mail.




The John Burr Williams Formula

Williams’ equation for discounting future dividends accounts for current dividends, a target rate of return defined by the investor, and a projected growth rate for company dividends over an infinite time period.

The formula can be written as:

Intrinsic Value = D / (I – G)

Where:

D = current dividend
I = required rate of return
G= growth rate

For this formula to work, the growth rate cannot exceed the investor’s target rate of return.

Click here to use the calculator:
John Burr Williams Stock Valuation Calculator
http://www.stockresearchpro.com/john-burr-williams-stock-valuation-calculator