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The Coca-Cola Company Message Board

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  • Novalis_97 Novalis_97 Apr 5, 1998 1:13 AM Flag

    Value = present value of cash flows, not

    I derived the formula because the guy asked me how the growing perpetuity formula was derived. In practice, no one needs to know how the formula is derived -- they just need to use the formula, which is one of the simplest formula in all of finance: PV = C/(r-g). While the derivation is hard, the formula isn't.

    I agree that Coke is a spectacular company. But even Warren Buffett won't buy Coke stock if it's overpriced, which he
    determines through discounted cash flow valuation, not P/E ("a superficial, shorthand valuation method at best"). Buffett won't buy a
    company's stock unless its stock price is 33%-50% below its intrinsic value per share. Buffett follows this procedure so he can
    MAXIMIZE his returns, not just get average returns. Discounted cash flow analysis has helped Buffett become the most successful
    investor in history.

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