Benjamin Graham's Rule of Thumb was designed as a simple formula to emulate the more complex DCF method.
NB: It is not designed for companies with a below-par debt position.
Benjamin Graham was known for his thorough financial analysis of companies and is know as the 'father of security analysis'. While he was a master of complex valuation techniques, he realised that multi-stage valuation models could often be simplified. His original valuation rule of thumb was V = EPS * (8.5 + 2g) where V is the intrinsic value, EPS is the trailing 12 month EPS, 8.5 is the PE ratio of a no-growth stock and g being the growth rate for the next 7-10 years. This spreadsheet compares the results of this formula with a more involved two-stage DCF valuation.
The original formulation was made at a time when there was very little inflation, and growth could be assumed to be real growth. The AAA corporate bond interest rate prevailing at the time was 4.4%. The formula was later revised to incorporate the impact of different interest rate environments as:
In this case, Y is the current yield on 20 year AAA corporate bonds.
One important caveat to the use of Graham's formula is that he noted that it should not be used for companies with a below-par debt position. He wrote - "my advice to analysts would be to limit your appraisals to enterprises of investment quality, excluding from that category such as do not meet specific criteria of financial strength".
You can read more on Graham's Formula here.