Company quality is determined by the three preceding concept slide variables; (i.e. Business Risk, Financial Risk, and Earnings Visibility) Katsenelson recommends ranking each category by designating a score based on a holistic qualitative analysis of the underlying variables. The sum of the three scores ascertains company quality. The Basic P/E Point Designation model entails the assignment of one additional p/e point to fair companies, less than one additional point as a basis of personal subjective premium; (e.g. 10% Premium = 0.9) to great companies, and greater than one point to poor companies predicated on one’s ambiguous discount; (e.g. 20% = 1.2). Additionally, Katsenelson limits this basic P/E to a maximum premium of thirty percent, and assumes average interest rates. The initial base P/E concurrent with zero growth contracts and expands according to interest rate resurgence, and declination respectively. Thus, we may conclude that there are significant risks latent in implementing current interest rates rather than projection of future rates.
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