8.21 Sensitivity Analysis
By how much do we need change the value of
key inputs to make IBM’s calculated value more consistent with
the market price?
Answering this question lets you understand what the
current market price implies for the important variables that
are predicted to drive IBM’s intrinsic value.
Your goal is to understand the underlying
economics of the company you are valuing in terms of comparing
your assessments of inputs with market implied assessments.
Valuation Tutor’s calculator has been constructed to make
this easy by allowing you to directly edit input values to see
what value equates the intrinsic value to the spot market price.
This will provide important insights into whether you
assess the current market price to be reasonable or not.
This will also provide useful experience for assessing
the relative importance of the various inputs into this
intrinsic value exercise.
For the Residual Income Model the initial
inputs to examine are the cost of equity capital, comprehensive
income and the growth behavior assumptions for IBM.
Furthermore, by inspecting implied growth rates for Book
Value of Owners Equity, you may want to take a close look at
Comprehensive Earnings projections.
The support screen that provides these implied values is
critical to this type of analysis.
Here you want to stand back and compare dividend growth,
comprehensive income growth and so on with what you think is
reasonable including conducting a similar comparison against the
previous five or more years.