1. What is the Graham Formula?

The Graham Formula, developed by Benjamin Graham (the father of value investing), calculates the intrinsic value of a stock based on earnings per share (EPS), expected growth rate, and current yield. It helps investors identify undervalued stocks for long-term investment.

2. How Does the Calculator Work?

The calculator uses the Graham Formula:

Where:

• \( EPS \) — Earnings Per Share in dollars
• \( g \) — Expected growth rate as a percentage
• \( Y \) — Current yield on AAA corporate bonds as a percentage
• \( 8.5 \) — Base P/E ratio for no-growth company
• \( 2 \) — Multiplier for growth factor

Explanation: The formula combines earnings power with growth expectations while adjusting for current market interest rates through the yield component.

3. Importance of Intrinsic Value Calculation

Details: Calculating intrinsic value helps investors make informed decisions by comparing a stock's true worth with its market price, identifying potential investment opportunities and avoiding overvalued stocks.

4. Using the Calculator

Tips: Enter EPS in dollars, growth rate as a percentage (e.g., 15 for 15%), and current AAA corporate bond yield as a percentage. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Who was Benjamin Graham?
A: Benjamin Graham was an influential investor and professor, known as the "father of value investing" and mentor to Warren Buffett. He authored "The Intelligent Investor" and "Security Analysis."

Q2: What is a good intrinsic value compared to market price?
A: Generally, if the intrinsic value is significantly higher than the current market price, the stock may be undervalued. A margin of safety (typically 20-30%) is recommended.

Q3: How accurate is the Graham Formula?
A: While useful as a screening tool, the formula has limitations and should be used with other analysis methods. It works best for stable, established companies.

Q4: Where can I find the AAA corporate bond yield?
A: AAA corporate bond yields are published by financial websites, the Federal Reserve, and financial news outlets. Use current market rates for accurate calculations.

Q5: Can this formula be used for all types of stocks?
A: It's most suitable for established, dividend-paying companies with predictable earnings. It may be less accurate for high-growth tech stocks or companies with volatile earnings.