Intrinsic Value of Stock Calculator

Intrinsic Value of Stock Calculator

function calculateIntrinsicValue() { var currentFCF = parseFloat(document.getElementById('currentFCF').value); var fcfGrowthRate1 = parseFloat(document.getElementById('fcfGrowthRate1').value) / 100; var fcfGrowthRate2 = parseFloat(document.getElementById('fcfGrowthRate2').value) / 100; var terminalGrowthRate = parseFloat(document.getElementById('terminalGrowthRate').value) / 100; var discountRate = parseFloat(document.getElementById('discountRate').value) / 100; var sharesOutstanding = parseFloat(document.getElementById('sharesOutstanding').value); var cashEquivalents = parseFloat(document.getElementById('cashEquivalents').value); var totalDebt = parseFloat(document.getElementById('totalDebt').value); if (isNaN(currentFCF) || isNaN(fcfGrowthRate1) || isNaN(fcfGrowthRate2) || isNaN(terminalGrowthRate) || isNaN(discountRate) || isNaN(sharesOutstanding) || isNaN(cashEquivalents) || isNaN(totalDebt) || currentFCF <= 0 || sharesOutstanding <= 0 || discountRate <= 0 || (discountRate <= terminalGrowthRate)) { document.getElementById('result').style.display = 'block'; document.getElementById('result').innerHTML = 'Please enter valid positive numbers for all fields. Discount Rate must be greater than Terminal Growth Rate.'; return; } var projectedFCF = []; var discountedFCF = []; var cumulativePVofFCF = 0; // Project FCF for 10 years projectedFCF[0] = currentFCF; // Year 0 FCF for (var i = 1; i <= 10; i++) { var growthRate = (i <= 5) ? fcfGrowthRate1 : fcfGrowthRate2; projectedFCF[i] = projectedFCF[i – 1] * (1 + growthRate); var pv = projectedFCF[i] / Math.pow(1 + discountRate, i); discountedFCF.push(pv); cumulativePVofFCF += pv; } // Calculate Terminal Value (TV) at the end of Year 10 // FCF for Year 11 var fcfYear11 = projectedFCF[10] * (1 + terminalGrowthRate); var terminalValue = fcfYear11 / (discountRate – terminalGrowthRate); // Discount Terminal Value back to present var pvOfTerminalValue = terminalValue / Math.pow(1 + discountRate, 10); // Total Enterprise Value var enterpriseValue = cumulativePVofFCF + pvOfTerminalValue; // Equity Value var equityValue = enterpriseValue + cashEquivalents – totalDebt; // Intrinsic Value Per Share var intrinsicValuePerShare = equityValue / sharesOutstanding; document.getElementById('result').style.display = 'block'; document.getElementById('result').innerHTML = 'Calculated Intrinsic Value Per Share: $' + intrinsicValuePerShare.toFixed(2); }

Understanding the Intrinsic Value of a Stock

The intrinsic value of a stock represents its true, underlying worth, independent of its current market price. It's the value an investor would assign to a company based on a thorough analysis of its fundamentals, primarily its ability to generate future cash flows. Calculating intrinsic value is a cornerstone of value investing, helping investors identify undervalued or overvalued stocks.

Why is Intrinsic Value Important?

Market prices can be influenced by various factors like speculation, market sentiment, and short-term news, often deviating from a company's true economic value. By estimating intrinsic value, investors can:

• Identify Bargains: If the intrinsic value is significantly higher than the market price, the stock might be undervalued, presenting a buying opportunity.
• Avoid Overpriced Assets: If the intrinsic value is lower than the market price, the stock might be overvalued, suggesting it's a good time to sell or avoid buying.
• Make Informed Decisions: It provides a rational basis for investment decisions, reducing reliance on emotional trading.

How the Calculator Works: The Discounted Cash Flow (DCF) Model

Our calculator uses a widely accepted valuation method called the Discounted Cash Flow (DCF) model. The core idea behind DCF is that a company's value is the sum of all its future free cash flows, discounted back to their present value. Here's a breakdown of the inputs:

Input Definitions:

• Current Free Cash Flow (FCF): This is the cash a company generates after accounting for cash outflows to support its operations and maintain its capital assets. It's the starting point for projecting future cash flows.
• FCF Growth Rate (Years 1-5): The estimated annual growth rate of the company's free cash flow for the initial high-growth period.
• FCF Growth Rate (Years 6-10): The estimated annual growth rate for a subsequent, more mature growth period, typically lower than the initial high-growth phase.
• Terminal Growth Rate (Perpetual): The constant rate at which the company's free cash flow is expected to grow indefinitely beyond the explicit forecast period (Year 10). This rate is usually low, often reflecting the long-term growth rate of the economy or inflation.
• Discount Rate (WACC/Required Return): This is the rate used to discount future cash flows back to their present value. It represents the investor's required rate of return or the company's Weighted Average Cost of Capital (WACC). A higher discount rate implies a higher risk or higher opportunity cost.
• Shares Outstanding: The total number of a company's shares currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company's officers and insiders.
• Cash & Equivalents: The total amount of cash and highly liquid assets a company holds. This is added to the enterprise value to arrive at equity value.
• Total Debt: The total amount of money a company owes to creditors. This is subtracted from the enterprise value to arrive at equity value.

Example Calculation:

Let's consider a hypothetical company, "Tech Innovations Inc.", with the following data:

• Current FCF: $10,000,000
• FCF Growth Rate (Years 1-5): 15%
• FCF Growth Rate (Years 6-10): 7%
• Terminal Growth Rate: 3%
• Discount Rate: 10%
• Shares Outstanding: 5,000,000
• Cash & Equivalents: $20,000,000
• Total Debt: $15,000,000

Using these inputs in the calculator:

1. Project FCF: The calculator projects FCF for 10 years, applying the 15% growth for the first 5 years and 7% for the next 5 years.
2. Discount FCF: Each year's projected FCF is discounted back to its present value using the 10% discount rate.
3. Calculate Terminal Value: At the end of Year 10, the FCF for Year 11 is estimated (Year 10 FCF * (1 + Terminal Growth Rate)). This Year 11 FCF is then used in the Gordon Growth Model to calculate the Terminal Value, which is then discounted back to the present.
4. Sum Present Values: The sum of all discounted FCFs (Years 1-10) and the present value of the Terminal Value gives the Enterprise Value.
5. Adjust for Cash and Debt: Cash & Equivalents are added, and Total Debt is subtracted from the Enterprise Value to get the Equity Value.
6. Calculate Per Share Value: Finally, the Equity Value is divided by the Shares Outstanding to arrive at the Intrinsic Value Per Share.

For the example above, the calculator would yield an Intrinsic Value Per Share of approximately $40.00 (results may vary slightly based on exact decimal precision in calculations).

Important Considerations:

The DCF model, while powerful, is highly sensitive to its inputs. Small changes in growth rates or the discount rate can significantly alter the intrinsic value. It relies on future projections, which are inherently uncertain. Therefore, it's crucial to use realistic and well-researched assumptions and to perform sensitivity analysis by testing different scenarios.