How to Calculate Intrinsic ValueDiscounted Earnings, Instead of Just Cash Flow
Why You should Calculate Intrinsic Value
How to Calculate Intrinsic Value
- I set my investment horizon as long as ten years from 2007. So that in 2018 I can use the fund to finance my children's study
- I am confident stock ABC will continue growing 13 per cent per year for the next ten years (13 years records prove this stock able to grow 13 per cent EPS per year)
- I assume stock ABC will be having the same PER and dividend payout by end of 2017 (or early in 2018)
First of all, you need to forecast its share price ten years down the road. In this case, I project the price for the next ten years using 13 per cent per year growth.
Secondly, you need to calculate the total future value. This must include the potential dividend as well.
After having all these data, then only you can calculate the intrinsic value for stock ABC.
The intrinsic value above is because my goal is to get 12 per cent per annum from this stock. If so, current stock's price, which is $33.50, is acceptable indeed (stock price is below the intrinsic value).
It is better if before you calculate intrinsic value of your selected stock, assess your own risk profile first. This will help you to determine your realistic preferred return based on your need, ability and investing habits. Eager to buy stock? Hang on first! You need to have the fair value as another comparison. This is what mention by Warren Buffet's guru, the margin of safety