Questions on Intrinsic Value Calculation

Hello, I wanted to ask when using the Buffet Intrinsic Valuation method, why do we have to use the Book Value per share, can't we use the total company equity as the book value and then divide the calculated "total company intrinsic value" by total shares outstanding?

I know the later method sounds wrong, but just not sure why it is wrong and also the logic seems right if you calculate the total value of company first and then derive the per share intrinsic value.

Can you please provide comparison between these two calculations?

Thank you,

Leon

Comments

  • Hi there Leon,

    We tend to use per share figures simply because we are buying fractional ownership in the company, not buying it outright. You could use the aggregate figures for both company equity and total shares outstanding and essentially get the same result but since we are genereally buying shares of common stock it makes more sense to calculate it on a per share basis.

    Regards,

    David
  • Hi David,

    Thanks for the answer, but I have used both the per share calculation and the aggregate value of business to calculate intrinsic value per share (IVPS). The final figure does not match up.

    My take is that shares outstanding each year which affects the values of BVPS and Dividends Per Share is different each year. Obviously these two inputs will affect the final IVPS.

    That being said, the IVPS would not be the same if you did calculation based on the aggregate value of business ( calculated with annual total equity and annual total dividends ) first. Then divide with last year shares outstanding.

    Am I missing something here?

    Regards,
    Leon
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