Franchise Value Method - SS11 Reading 37 Pg. 178

CFA Level II
#1

I think my brain just exploded. Can anyone explain this method in terms that make a little more sense. Please help.

#2

P/E=(1-b)/(r-g) can be proved to be equal to P/E = 1/r + (FF)*(G) 1/r = Tangible P/E --> every $ of earning is invested in a perpetuity will earn this much. FF = Franchise Factor = 1/r - 1/ROE (Amount your ROE generates over and above your required rate of return) = (ROE-r)/(ROE.r). Bigger this number is, higher is your competitive advantage as a firm. G=Growth Factor=g/(r-g) The rest of the stuff in those two pages is the derivation of the formula above. P/E is called the Intrinsic P/E.

#3

So “G” will just tell you how sustainable the “excess ROE” aka competitive advantage is?

#4

now read the rest of it… that should make things clearer… also search for posts last year around this time by Hiredguns1… they throw a lot of light on this same subject.

#5

Thanks CP

#6

an update… tried to search for the post myself, but was unable to get it. sorry…