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.