I already mentioned how he arrived at this number.He took cost of equity of that time and then took reciprocal it to get the no growth P/E.Cost of equity is not a stagnant number.It keeps on changing with risk premiums and risk free rates.As you said, It was derived hundred years ago.It means you are assuming cost of equity of U.S.A which was hundred years ago.You took average.But,Average multiple already has growth premium.why would you double count the growth?.Argument is simple no growth P/E is 1/Ke.That’s why you add growth multiplier.By your method, Overvalued may seem undervalued.I will advise you to look at the modified formula of Graham.I have seen lot of people using no growth P/E of 7 and growth multiplier of 1.5.There is no thumb rule for growth multiplier.It is really subjective and we really don’t know how did he arrive at growth multiplier of 2.Eps is an accounting number.I really don’t care about EPS.TTM P/E can be misleading.Assume company has done significant capex financed with debt.It will curtail the EPS and due to depressed earnings company may seem Overvalued.It doesn’t reflect true earning power of company at all.Economic value added method works best for me and I’m comfortable with that.Furthermore,Average multiple of sector is not a good measure.Whatif whole sector is overvalued like defense then cheapest in that sector may seem undervalued.
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