Graham 2.1

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Graham 2.1 is a numerical method used in financial modeling and valuation to estimate the intrinsic value of a stock or a security. This method, developed by Benjamin Graham, is based on a discounted cash flow analysis (DCF) and takes into account the company's earnings and dividend potential, as well as the required rate of return for that specific security.In Graham's Method, the intrinsic value is obtained by calculating the present value of future earnings and dividends, using a long-term sustainable growth rate, and deducting a factor to account for the dividends already paid to shareholders. The result is discounted using the required rate of return, which is expressed as a percentage, and is adjusted to account for the different classes of preferred and common stock.Graham 2.1 involves some key assumptions and calculations, such as:1. Earnings per share (EPS) must be stable and predictable, with little variability.2. Earnings should be steady and have some level of predictability.3. The long-term earning growth rate for the company is stable and consistent.4. The required return (also known as the 'required rate of return') reflects the company's level of risk and the opportunity cost of investing in that particular security.5. The present value of the dividends paid must be subtracted from the net asset value to account for the fact that dividends have already been paid to the shareholders.6. The discount rate for preferred stock is higher than that for common stock, as preferred stockholders are entitled to fixed dividend payments.The Graham 2.1 formula for calculating intrinsic value is:Intrinsic Value (IV) = [EPS x (Market Multiple – Growth Rate)] / (Required Rate of Return – Growth Rate) - Net Current Assets per ShareWhere:- EPS is the Earnings Per Share- Market Multiple is the relationship between company's price and earnings per share or price-to-earnings ratio (P/E)- Growth Rate is the sustainable growth rate for the company's earnings- Required Rate of Return is the rate at which the investor expects to receive a return on their investment- Net Current Assets per Share is the current assets less current liabilitiesIn summary, Graham 2.1 is a valuation technique based on DCF analysis, used to estimate the intrinsic value of a security by calculating its present value of future earnings and dividends adjusting for the required return, market multiple, and growth rate. The formula is used to make informed investment decisions based on a fundamental analysis of the company's financial position and statements.