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Warren Buffett on Interest Rates & Valuations.
Many people ask me what is a fair price for QAF Limited. Obviously, all of us will have our own answer.
Of course, depending on Mr. Market's mood, share price could go higher or lower. There is no accounting for prices or so I have heard people say.
What we can try to find out is the intrinsic value to help us make sense of the price offered by Mr. Market. After all, price is what we pay and value is what we get.
I decided to play around with some numbers to see what QAF Limited's intrinsic value should be using Discounted Cash Flow (DCF), a process which is made much easier using an online calculator I found:
http://www.moneychimp.com/articles/valuation/dcf.htm
I will try to be more conservative because I don't know all there is to know. Instead of entering earnings per share (EPS) as 10.9c, I will enter 10c.
In scenario 1, to be even more conservative, I assume zero growth in QAF Limited's earnings and a risk free rate of 3% which is a bit higher than what is offered by a 30 years bond issued by the Singapore Government now. The risk free rate is what I am going to use as the discount rate for DCF calculation.
In scenario 2, to be even more conservative, I assume a higher interest rate environment with a risk free rate of 5%. Again, I assume zero growth in QAF Limited's earnings.
In scenario 3, to be more realistic, I will assume some growth in earnings. After all, QAF Limited's EPS has grown over the last few years. I will use a risk free rate of 5% in this scenario for that conservative element.
Now, is QAF Limited's fair value at least $2.00 a share? You blur? Don't look at me. I am only a blogger. What do I know?
Read more about DCF: HERE.
Related post:
What is QAF Limited really worth?
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