Comments on: The P/E Ratio Part 3 http://wheredoesallmymoneygo.com/the-pe-ratio-part-3/ A personal finance blog written by Preet Banerjee Fri, 25 May 2012 08:03:33 +0000 hourly 1 http://wordpress.org/?v=3.1.2 By: Preet http://wheredoesallmymoneygo.com/the-pe-ratio-part-3/#comment-888 Preet Sat, 12 Jul 2008 04:52:20 +0000 http://www.wheredoesallmymoneygo.com/?p=707#comment-888 Hi Deb - no problem: If you are looking for an exact formula for calculating the discount you should offer, there really isn't one (or one generally accepted model). Rather, the current stock trading price reflects what the market as a whole is valuing that discount as. They may not be right - and this is probably where your hang up is occuring. You might be looking for a method to exactly determine what discount you should offer for the stock, but no one can really do that. For example, one person may say in their mind that they believe company X will probably not go out of business in the next 10 years and they would be prepared to offer a price that has a smaller discount for risk. But they might see company Y (which is a competitor that might take big risks in company strategy) as having a small to good chance of going out of business, or having crippled future revenues if their riskier company business strategies don't pan out. They might expect a bigger discount to account for the higher perceived risk. So really, the discount quantification is more subjective. Investors who feel confident about making accurate risk assessments of a business might have a number in their head that they are willing to pay for a company and they will hold off on purchasing the stock until the market trades that stock's price down to that value. Let me know if that makes sense, or if you have any further questions. Have a great weekend! Hi Deb – no problem: If you are looking for an exact formula for calculating the discount you should offer, there really isn’t one (or one generally accepted model). Rather, the current stock trading price reflects what the market as a whole is valuing that discount as. They may not be right – and this is probably where your hang up is occuring. You might be looking for a method to exactly determine what discount you should offer for the stock, but no one can really do that. For example, one person may say in their mind that they believe company X will probably not go out of business in the next 10 years and they would be prepared to offer a price that has a smaller discount for risk. But they might see company Y (which is a competitor that might take big risks in company strategy) as having a small to good chance of going out of business, or having crippled future revenues if their riskier company business strategies don’t pan out. They might expect a bigger discount to account for the higher perceived risk.

So really, the discount quantification is more subjective. Investors who feel confident about making accurate risk assessments of a business might have a number in their head that they are willing to pay for a company and they will hold off on purchasing the stock until the market trades that stock’s price down to that value.

Let me know if that makes sense, or if you have any further questions. Have a great weekend!

]]> By: Deb http://wheredoesallmymoneygo.com/the-pe-ratio-part-3/#comment-887 Deb Fri, 11 Jul 2008 12:25:00 +0000 http://www.wheredoesallmymoneygo.com/?p=707#comment-887 Hi Preet. I have a hard time wrapping my head around DCF and this was the clearest explanation I've read on the subject. Could you expand on the last paragraph..."If you offered $40/share for something worth $71.81, this discount represents the risk..."? How does one quantify this discount? I'm finding there's a gap in my understanding from this last point to your follow-up in Part 4. Thanks!......Debra Hi Preet. I have a hard time wrapping my head around DCF and this was the clearest explanation I’ve read on the subject. Could you expand on the last paragraph…”If you offered $40/share for something worth $71.81, this discount represents the risk…”? How does one quantify this discount? I’m finding there’s a gap in my understanding from this last point to your follow-up in Part 4. Thanks!……Debra

]]> By: » The P/E Ratio Part 3 3 Some: What The World Is Saying About 3 Some http://wheredoesallmymoneygo.com/the-pe-ratio-part-3/#comment-886 » The P/E Ratio Part 3 3 Some: What The World Is Saying About 3 Some Fri, 04 Jul 2008 16:59:59 +0000 http://www.wheredoesallmymoneygo.com/?p=707#comment-886 [...] The P/E Ratio Part 3 If you recall from Part 2 of this series on the P/E Ratio, we need to figure out what we need to invest TODAY at 3% (or whatever the “risk-free” rate of return is) to replicate the earnings that will be earned at some point in the … [...] [...] The P/E Ratio Part 3 If you recall from Part 2 of this series on the P/E Ratio, we need to figure out what we need to invest TODAY at 3% (or whatever the “risk-free” rate of return is) to replicate the earnings that will be earned at some point in the … [...]

]]> By: Po http://wheredoesallmymoneygo.com/the-pe-ratio-part-3/#comment-885 Po Tue, 01 Jul 2008 02:54:36 +0000 http://www.wheredoesallmymoneygo.com/?p=707#comment-885 You have made this so clear with the way you write about intimidating topics (for a beginner like me) - you are really, really making me interested in learning more for myself - because I know there is so much - I am going to read every article on your blog. You have made this so clear with the way you write about intimidating topics (for a beginner like me) – you are really, really making me interested in learning more for myself – because I know there is so much – I am going to read every article on your blog.

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