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EDIT: I found an answer to the question, but since this question has been closed, I cannot submit it. The answer would be based around this excellent video explaining step by step how to estimate the Intrinsic value of a fictitious company (though with different example numbers than mine).

I have already asked a similar question here, but this one is way more specific.

I would like to know how the value of the specific simplistic and fictitious company described below, could be determined according to the "value investing" philosophy. Warren Buffet can be seen on one of his YouTube videos, describing how he will first determine the value of a company if he was to buy the whole company. After that he will look at the current price of the company (share price * number of shares). If the latter is significantly lower, then he will buy the company.

My fictitious company is called Koki Cola and has the following characteristics. It sells 50 types of soft drinks. It earns 0.1$ for every soft drink sold across all brands and in all locations. It sells 100.000.000 soft drinks per year. The company has been around for 100 years and its sales have increased by a steady 5% during this time. The company also expects sales to increase by this much for the foreseeable future. No new competitors are expected and the current ones are not expected to be able to change the market in any way or suddenly increase their market share.

The company has 0 liabilities and 10.000.000$ in assets.

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David
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  • A clarification please, how did the company ever happen to exist and on which planet and if it exists in an utopian parallel universe. – DumbCoder Aug 30 '12 at 11:26
  • Population growth is less than 2%. At some point your company will have 100% of a market only growing 2%/yr. I hope they intend to diversify and use their excess sugar in some other product. – JTP - Apologise to Monica Aug 30 '12 at 12:53
  • None of these two comments are relevant. – David Aug 30 '12 at 16:51
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    Since your question is theoretical, yet you cite Warren Buffet, I'm compelled to point out exactly what He would, that the assumption of growth with no expansion of product offering is flawed. The origin and validity of any assumption is relevant to others, if not to you. A purely academic question is off topic here. – JTP - Apologise to Monica Aug 30 '12 at 17:14
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    I disagree with the community closure of this question. It is about investing and a particular company valuation technique. That is on-topic. It doesn't matter that the example is theoretical. – Chris W. Rea Sep 11 '12 at 00:42
  • David, you can post your answer below and edit your question accordingly. – Chris W. Rea Sep 11 '12 at 00:43

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From my interpretation of your question, you would price it as the present value of a growing perpetuity:

http://en.wikipedia.org/wiki/Time_value_of_money#Present_value_of_a_growing_perpetuity

So, assuming that growth is expected to continue at its historic rate (as you indicated), the g value would be 5%. The A value would be 100,000,000 multiplied by $0.10 which will yield the yearly profit at year 1. For i, lets assume a discount rate of 10%.

This formula would yield a valuation of this cash flow to be worth $200,000,000.00.

William
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    William, Just asking, where did the 10% discount rate come from? Why not lower? Or any other number? I ask because the PV $10M/yr is probably closer to the $200M you calculate. (The 30yr bond is currently well below this 5% number) And the 5%/yr growth should only add more to the PV. – JTP - Apologise to Monica Aug 30 '12 at 14:16