Valuation algorithm

Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

The valuation theory in essence is very simple: you just need to estimate future cash flows and then discount these cash flows to the present day by applying an appropriate (i.e. commensurable with the level of risk) discount rate. The theory was mostly developed when computers were either non-existent or were not readily available for investors. This necessitated development of simple valuation techniques that could be performed using a hand-held calculator. However, simplified techniques require very simplified assumptions that could significantly differ from real life circumstances.

Our valuation model, which is associated with the name of its creator - the Chepakovich valuation model, is built with the possibilities presented by a computer in mind. No doubt, it is much more complicated, but, at the same time, it allows for better modeling of actual company performance.

The model not just builds on the basic concepts of the classic valuation theory, but also introduces new features that make modeling so much more realistic, such as separate forecasting of fixed and variable expenses and variable-by-year discount factor - just to mention the two most prominent features. Unlike previous models, that basically consist of one formula, the Chepakovich valuation model is a calculation algorithm, which we describe here.

Model input parameters

input
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