Valuation Method #1

Net present value (NPV) using discounted cash flow (DCF)

Sum of present and future cash flow, discounted with the time value of money
Hard to measure intrinsic values since small changes in variables yield huge differences in outputs
Doesn’t take growth into account
Ignores balance sheet
Terminal value often dominates the overall value

Valuation Method #2

Graham and Dodd Approach (3 elements of value)

Value of assets
- The cost to reproduce the same business with the same assets
- Potential disparity between book value and reproduction cost
Earnings Power Value (EPV)
- Assume the business neither grows or shrinks
- EPV = Earnings Power / R
- R = cost of capital (currently measured constant future)
- Has the advantage of being based entirely on currently available information
Value of Growth
- In many cases, growth creates no intrinsic values to a business
- Best applied to franchise businesses with moats

Case A: EPV < Asset values (reproduction cost)
Case B: EPV ~= Asset values
Case C: EPV > Asset values
- Without barriers of entry, competition will intensify and drive profits down until EPV ~= Asset
- Franchise value: enjoy the delta between EPV and reproduction cost due to moat

Barriers of entry exists iff the incumbent has competitive advantages that a new entrant cannot match
Competition drives down profits