How to Calculate Intrinsic Value Formula
Introduction & Importance
Calculating intrinsic value is crucial for investors to determine the true value of a company’s stock. It helps make informed decisions and avoid overpaying for investments.
How to Use This Calculator
- Enter the earnings per share (EPS) of the company.
- Enter the expected growth rate of the company’s earnings.
- Enter the discount rate, which represents the risk of the investment.
- Click ‘Calculate’ to find the intrinsic value and see a visual representation.
Formula & Methodology
The intrinsic value (IV) is calculated using the Gordon Growth Model formula:
IV = Earnings per Share * (1 + Growth Rate) / (Discount Rate – Growth Rate)
Real-World Examples
Data & Statistics
| Year | Average EPS | Average Growth Rate | Average Discount Rate |
|---|
Expert Tips
- Consider using a lower discount rate for more stable companies and a higher rate for riskier ones.
- Regularly review and update your inputs to reflect changes in the company’s performance and market conditions.
- Remember that the intrinsic value is just one metric among many to consider when making investment decisions.
Interactive FAQ
What is the Gordon Growth Model?
The Gordon Growth Model is a formula used to calculate the intrinsic value of a company’s stock based on its expected future earnings growth.
For more information, see these authoritative sources:
Investopedia: Intrinsic Value Federal Reserve: The Intrinsic Value of Stocks SEC: What is Intrinsic Value?