Help with Graham's Intrinsic Value Formula

I have been re-reading through The Intelligent Investor for the past few days and I came accross Graham's infamous Intrinsic Value Formula. For those of you who don't know it, it is as follows:

Intrinsic Value= (Normal) Earnings x (8.5 plus twice the expected annual growth rate)

One of the examples Graham points out in a chart is Xerox. Via this formula Graham shows Xerox with an estimated annual growth rate of 32.4% in 1963. For the life of me I can not figure out how he came to this figure. Graham supplies a chart which shows Xerox, in 1963, of having a P/E ratio of 25 and EPS of $.38.

Can anyone shed some light on how graham figured out the Projected Growth Rate? If you have the book, this formula and chart is on pg.295-296(4th revised edition, edited by Jason Zweig)

And just to verify, when Graham refers to "Annual Growth Rate" that is in relation to the Earnings per share, correct?

Where am I going wrong :S?!

Thank you everyone!

I'm not familiar with the Graham book, but I think part of the problem is either there are some typos in your numbers or you've miskeyed your calculator.

In his chart he shows Xerox of earning $.38 in 1963 and $2.08 in 1969. That is a 223% increase, meaning over 6 years it would be an Annual growth of 37.16%. However, in the chart it shows the Actual annual growth as 29.2%

Click to expand...

1) $0.38 to $2.08 is not a 223% increase, it's a 447% increase.

2) To get from 223% over 6 years to the annual growth rate of 37.16%, you've just divided by 6 and forgotten about the compounding.

3) Taking the correct 447% increase, the compounded annual growth is...

(1 + 4.47) ^ (1/6) = 1.327

ie an annual growth rate of 32.7%, which ties in reasonably well with the 32.4% you quote at the beginning. The difference is probably rounding error somewhere.

I can't see where they get the 29.2% growth from either, though. Good luck!

Sorry for the typo, I meant to put 447 %.

32.4% growth is the projected growth rate, 29.2% is the actual growth rate in that 6 years. However, looking at the earnings in 1963($.38) and the earnings provided in 1969($2.08) the actual annual growth rate is different than the book has in its chart which is 29.2%.

Maybe their definition of Annual growth is slightly different?