This online calculator evaluates potential investments by computing the present value of a stock's future earnings. A stock's intrinsic value is the present value of its future earnings and can be used to determine if a stock is over or under-valued. For stocks with no current earnings, visit our Projected Sales Stock Calculator. Visit our Finance Section for more personal finance, asset allocation, and investment information.Enter Values and Press Button,Read Your Results
Current Stock Price $ Based on your assumptions, over the next 10 years, this stock is projected to earn: % per year, and be worth: $ in ten years (pre-tax) (This amount includes re-invested dividends)
The stock's current intrinsic value is: $
Stock Price - Return & Intrinsic Value Based on Earnings
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Please note that this projection is very sensitive to your assumptions and makes certain simplifying calculations. You may want to perform a simple "sensitivity analysis" by varying your assumptions for "Growth" and "Discount Rate."
Earnings per Share $
Growth in Earnings during the next 10 years
(Over time, growth should approach 6-10% as competition and other factors come into play.)
Yr 1-3 %
Yr 4-6 %
Yr 7-10 %
Discount Rate %
(This is the interest rate used to compute present values.) 12% for typical stocks
15% for riskier stocks
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Intrinsic Value . Source: Investopedia
1. The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Value investors use a variety of analytical techniques in order to estimate the intrinsic value of securities in hopes of finding investments where the true value of the investment exceeds its current market value.
2. For call options, this is the difference between the underlying stock's price and the strike price. For put options, it is the difference between the strike price and the underlying stock's price. In the case of both puts and calls, if the respective difference value is negative, the instrinsic value is given as zero.
1. For example, value investors that follow fundamental analysis look at both qualitative (business model, governance, target market factors etc.) and quantitative (ratios, financial statement analysis, etc.) aspects of a business to see if the business is currently out of favor with the market and is really worth much more than its current valuation.
2. Intrinsic value in options is the in-the-money portion of the option's premium. For example, If a call options strike price is $15 and the underlying stock's market price is at $25, then the intrinsic value of the call option is $10. An option is usually never worth less than what an option holder can receive if the option is exercised.
In finance, intrinsic value refers to the value of a security which is intrinsic to or contained in the security itself. It is also frequently called fundamental value. It is ordinarily calculated by summing the future income generated by the asset according to a criterion of present value.
1 Options
2 Equity
3 Real Estate
Options
An option is said to have intrinsic value if the option is in-the-money. When out-of-the-money, its intrinsic value is zero.
The intrinsic value for an in-the-money option is calculated as the absolute value of the difference between the current price (S) of the underlying and the strike price (K) of the option, floored to zero.
For a call option
IVcall = max{0,S − K}
while for a put option
IVput = max{0,K − S}
For example, if the strike price for a call option is USD 1 and the price of the underlying is USD 1.20, then the option has an intrinsic value of USD 0.20.
The total value of an option is the sum of its intrinsic value and its time value.
Equity
In valuing equity, securities analysts may use fundamental analysis - as opposed to technical analysis - to estimate the intrinsic value of a company. Here the "intrinsic" characteristic considered is the expected cash flow production of the company in question. Intrinsic value is therefore defined to be the present value of all expected future net cash flows to the company; it is calculated via discounted cash flow valuation. See Valuation using discounted cash flows; John Burr Williams: Theory
As opposed to the book value, or break-up value, of a business, the intrinsic value is the value of a business' ongoing operations. Warren Buffett is known for his ability to calculate the intrinsic value of a business, and then buy that business at a discount to its intrinsic value.
Examples of 'Equity' includes Ordinary Shares and Preference Shares.
Real Estate
In valuing real estate, a similar approach may be used. The 'intrinsic value' of real estate is therefore defined as the net present value of all future net cash flows which are foregone by buying a piece of real estate instead of renting it in perpetuity. These cash flows would include rent, inflation, maintenance and property taxes. This calculation can be done using the gordon model. Source: Wikipedia
An intrinsic theory of value is any theory of value in economics which holds that the value of an object, good or service, is intrinsic or contained in the item itself. Most such theories look to the process of producing an item, and the costs involved in that process, as a measure of the item's intrinsic value.
For instance, the labor theory of value - the most influential of the intrinsic theories - holds that the value of an item comes from the amount of labor spent producing said item. For example, if a chair is produced by two workers in 6 hours, then that chair is worth 2 x 6 = 12 man-hours (this is a simplified case; the labor theory of value takes into consideration only the "necessary" amount of labor that must go into the production of an item, which may be less than the actual expended labor due to inefficiency).
Present value is the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk. Present value calculations are widely used in business and economics to provide a means to compare cash flows at different times on a meaningful "like to like" basis.
1 Calculation
1.1 Technical details
2 Choice of interest rate
3 Annuities, perpetuities and other common forms
Calculation
The most commonly applied model of the time value of money is compound interest. To someone who can lend or borrow for years at an interest rate per year (where interest of "5 percent" is expressed fully as 0.05), the present value of the receiving monetary units years in the future is:
This is also found from the formula for the future value with negative time.
The purchasing power in today's money of an amount C of money, t years into the future, can be computed with the same formula, where in this case i is an assumed future inflation rate.
The expression enters almost all calculations of present value. Where the interest rate is expected to be different over the term of the investment, different values for may be included; an investment over a two year period would then have PV of:
Technical details
Present value is additive. The present value of a bundle of cash flows is the sum of each one's present value.
In fact, the present value of a cashflow at a constant interest rate is mathematically the same as the Laplace transform of that cashflow evaluated with the transform variable (usually denoted "s") equal to the interest rate. For discrete time, where payments are separated by large time periods, the transform reduces to a sum, but when payments are ongoing on an almost continual basis, the mathematics of continuous functions can be used as an approximation.
Choice of interest rate
The interest rate used is the risk-free interest rate. If there are no risks involved in the project, the expected rate of return from the project must equal or exceed this rate of return or it would be better to invest the capital in these risk free assets. If there are risks involved in an investment this can be reflected through the use of a risk premium. The risk premium required can be found by comparing the project with the rate of return required from other projects with similar risks. Thus it is possible for investors to take account of any uncertainty involved in various investments.
Annuities, perpetuities and other common forms
Many financial arrangements (including bonds, other loans, leases, salaries, membership dues, annuities, straight-line depreciation charges) stipulate structured payment schedules, which is to say payment of the same amount at regular time intervals. The term "annuity" is often used to refer to any such arrangement when discussing calculation of present value. The expressions for the present value of such payments are summations of geometric series.
A cash flow stream with a limited number (n) of periodic payments (C), receivable at times 1 through n, is an annuity. Future payments are discounted by the periodic rate of interest (i). The present value of this ordinary annuity is determined with this formula:[1]
A periodic amount receivable indefinitely is called a perpetuity, although few such instruments exist. The present value of a perpetuity can be calculated by taking the limit of the above formula as n approaches infinity. The bracketed term reduces to one leaving:
The first formula is found from subtracting from the latter result the present value of a perpetuity delayed n periods.
These calculations must be applied carefully, as there are underlying assumptions:
That it is not necessary to account for price inflation, or alternatively, that the cost of inflation is incorporated into the interest rate.
That the likelihood of receiving the payments is high — or, alternatively, that the default risk is incorporated into the interest rate.
See time value of money for further discussion.