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# Berkshire Hathaway Inc. Message Board

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• Rickson9 Rickson9 Jul 8, 1998 4:34 PM Flag

## Jim - Dollar is always a dollar?

Robert Hagstrom calculated intrinsic value in his
book The Warren Buffett Way, but he didn't derive any
mathematical proofs. This was probably to keep it relatively
simple. The equations would show what would happen to the
investment under 3 different conditions:

1) bond
grows faster than the company
2) bond grows slower
than the company
3) bond grows at the same rate as
the company

Hagstrom only had examples of when
#2 was true.

After being confronted by an
individual who wanted the proof (I wasn't able to produce it
at that instant), I went back to my desk and
scribbled it out on a scrap piece of paper at work (I
couldn't concentrate after that kind of
challenge).

Basically it just shows mathematically what is intuitive.
That is, that if a company grows slower than a bond,
buying the bond is more prudent etc.

For anybody
who wants to try it, just derive the Future Value
forumula (using P=present value, F=future value,
I=interest rate, n=time in years). This formula applies both
for the bond and the company. This is supposedly
Buffett's first method of finding the future worth of a
company.

Then equate both future values F(bond) = F(company).
This is equivallent to 'discounting'.

When you
get to the bottom of the solution you will have three
solutions. I(bond) > I(company), I(bond)=I(company) and
I(bond) < I(company).

Cheers,
JimC

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