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The Discounted EPS ROIC_CICC Value Formula is applying the Same Principle concept of Mauboussin but with different formula layout.
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Mauboussin’s principle is applied in my Discounted Model in the following way:
My basic concept is:
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In the long enough run, if a company could barely survive and operational, its growth rate must at least equal cost of capital (discount rate), this form the first part of my equation in the survival mode.
The first part is survival mdoe, the period is hence short, it is set as the same as the cost of capital, k itself.
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The second part of my equation will be determined by the remaining period, i.e. the economic spread; 0 years for 0 spread, 15 years for 15 spread, straight forward.
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Literally,
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CAP Period (Years)
= First Period + Second Period
= CICC + (ROIC - CICC)
= ROIC
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Discounted EPS ROIC_CICC Value
=
EPS × CICC
+
EPS × (1÷CICC Factor)×(1-(1÷CICC Factor)^(roic-cicc))÷(1-1÷CICC Factor)
.
Since Mauboussin uses ROIIC, k, we can match accordingly:
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Discounted EPS ROIIC_k Value
=
EPS × k
+
EPS × (1÷k Factor)×(1-(1÷k Factor)^(roiic-k))÷(1-1÷k Factor)
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The Growth in the first part of the my equation is the survival growth (k itself).
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(A)
Let's calculate using the data in exhibit 21 in the Reference 1’s PDF.:
EPS = 102.50,
Roiic = 15,
k Factor = 1.07
k
= 100 × ( k Factor - 1 )
= 7
.
Discounted EPS ROIC_CICC Value (survival mode + economic spread)
= EPS × k
+
EPS × (1÷k Factor)×(1-(1÷k Factor)^(roiic-k))÷(1-1÷k Factor)
=
102.50 × 7
+
102.50 × (1÷1.07) × (1-(1÷1.07)^(15-7)) ÷ (1-1÷1.07)
= 717.5 + 612.0580968869
= $ 1329.5580968869
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Compared to $1,464.3 in exhibit 21 in the Reference 1’s PDF.
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(B)
Injecting 2.5% terminal growth into the survival growth 7%, we have 2.5+7=9.5%.
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Discounted EPS ROIC_CICC Value (survival mode + economic spread)
=
EPS × (1.095÷k Factor)×(1-(1.095÷k Factor)^(roiic-k))÷(1-1.095÷k Factor)
+
EPS × (1÷k Factor)×(1-(1÷k Factor)^(roiic-k))÷(1-1÷k Factor)
=
102.50×(1.095÷1.07)×(1-(1.095÷1.07)^7)÷(1-1.095÷1.07)
+
102.50×(1÷1.07)×(1-(1÷1.07)^(15-7))÷(1-1÷1.07)
= 787.7827815198 + 612.0580968869
= $ 1,399.8408784067
.
Compared to $1,464.3 in exhibit 21 in the Reference 1’s PDF.
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Reference 1’s PDF:
Competitive Advantage Period
The Neglected Value Driver
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Reference 2: