Graham's Growth Stock Formula


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Posted by T. Skoko on November 01, 1999 at 16:09:22:

Graham offered a simple model for valuing a stock: Price= eps*(2*Earnings Growth+ .085)* 4.4/AAA-bond yield. Now the formula was revised later to add the adjustment for AAA-bond yields, but my question goes to the portion of the formula: "(2*Earnings Growth+0.085). Specifically, the factor 8.5%...why this number? Graham stated that this represents the "fair" P/E ratio for a company with zero growth. How did he arrive at this? I have searched all over for a proper explanation of how he arrived at this, but to no avail. I would appreciate any assistance in this matter, specifically, the mathematical derivation of the 8.5% factor.


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