Benjamin Graham's Growth Valuation Formula

• The original formula, V = EPS x (8.5 + 2g)
• V = Intrinsic Value
• EPS = Trailling 12Month EPS
• 8.5 = P/E ratio for 0% growth stock
• g = growth rate for next 7-10 years
• The formula was revised as Graham included a required rate of return, V = EPS x (8.5 + 2g) x 4.4 / Y
• 4.4 = What graham determined to be his minimum required rate of return. The prevailing (1962) rate on triple A corporate bonds listed on the New York Stock Exchange  of 4.4 per cent.
• Y = AAA corporate bond rate. This can adjust the 4.4% RFR to the present.
• Adjust EPS (Based on Jae Jun)
• Normalized EPS - EPS shouldn't be calculated based on single 12 month period.
• It have to be adjusted to a normalized number by ignoring one time hugre or depressed earnings based on 5 year or 10 year history (depending on the company you are looking at)
• EPS is never really a good number on its own as it is highly prone to manipulation with modern accounting methods
• management will never understate earnings on purpose.
• companies may follow accounting procedures which inflates earnings, they will never go out of their way to make it lower than it is.
• Projected EPS - use the projected EPS for a pure growth stock with exponential growth like characteristics ONLY, else the stock value will become absurdly high.
• EPS by analysts are also always over optimistic, so by following Wall Street guidance, you’re starting off on the wrong foot.
• Adjust Growth Rate(Based on Jae Jun)
• The growth is a big element of the overall valuation.
• No Growth P/E - Depending on your conservativenes, you can change 8.5 to 7 ~ 8.5 (EY 14.3% ~ 11.8%)
• Growth rate - you could just use the analyst 5yr predictions from Yahoo or other sites.Or, a regression of the historical EPS to project the following year is a method I like to use.
• The “2 x G” however, is quite aggressive. So I’ve recently reduced the multiplier to 1.5 instead of 2.
• This is understandable - Graham never experienced companies with growth rates of 20-30% which is common today (There was no Amazon or Facebook in Graham's time).
• Corporate Bond Rate
• Use the 20 year A corporate rate which is just above 6%. This provides a slightly more conservative intrinsic value than the 20 year AAA or AA.
• MGS Rate - http://www.bnm.gov.my/index.php?tpl=govtsecuritiesyield
• MY Corporate Bond Rate - http://www.bpam.com.my/op/O1002.asp 
• Final Adjusted Formula, V = EPS x (7 + 1.5g) x 4.4 / Y
• Margin of Safety -  Warren Buffett has on occasions suggested that the correct margin of safety should be about 25 per cent and this seems a good figure to us but again it would depend upon how much confidence we had in the assumed growth rates. If we were highly confident, we might accept a smaller margin and vice versa. If less confident, then the discount figure used should be greater.
• This formula is not the most correct or indeed the only way of working out the intrinsic value of a share. It was offered by Graham as a rule of thumb method fifty years ago. Its most appropriate use is, we would think, as a filtering and checking mechanism.

"It seems logical to me that the earnings/price ratio of stocks generally should bear a relationship to bond interest rates. Viewing the matter from another angle, I should want the Dow or Standard & Poor's to return an earnings yield of at least four-thirds that on AAA bonds to give them competitive attractiveness with bond investments." - Benjamin Graham

References:-

• How to Value a Stock with the Benjamin Graham Formula - Jae Jun
• Finding intrinsic value: The Graham Formula - Julian Livy
• Analysts Continue To Use Wrong Benjamin Graham Formula - Serenity 
• Investing For Beginners With Benjamin Graham - Serenity