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Intrinsic Value Formula (Example) | How to Calculate Intrinsic Value? - YouTube
Channel: WallStreetMojo
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hello everyone hi and welcome to the
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about this with your intrinsic value
formula watch the video till the end and
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like and that's given below welcome
everyone to this channel and today we
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are going to study a topic which is a
valuation topic yes we're going to study
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some of the valuation principles well we
have the intrinsic value formula which
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is again as I repeated that it's so
valuation formula intrinsic value of the
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business is basically the free cash flow
of the equity 1 2 and so on and so forth
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till n plus the last value that is a
terminal value which is all divided by 1
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plus R that is 1 rate of interest back
basically raise to the n the intrinsic
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value the stop is the intrinsic value
the business divided by the number of
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the outstanding share that will give you
a single valued well let's try and
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understand this in a much more detail
format first of all I'll make you
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understand for what is intrinsic value
formula what exactly this is see the
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intrinsic value formula is basically
this formula for Intrinsic values
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basically represents the net present
value of all the future FCFE of the
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company during the entire of course of
its existence so it is the reflection of
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the actual it is the reflection of the
actual worth of the business or underline
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the stock that is the amount of the
money that can be received if the whole
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business and all of its assets are sold
today so let me take you to the formula
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mathematically the intrinsic value
formula the business can be represented
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as we had we saw the dialog box okay
that was the part of the business this
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is a part of the value of the business
formula now when we talk about let me
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just write for you for biz refer the box
that is given in the website second for
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the stock how are you going to value
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well the calculation of the intrinsic
value the formula of the stock is done
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by dividing the value of the business by
the number of the outstanding shares of
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the company in the market so the value
of the stock derived by this way is then
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compared with the market price of the
stock which I give the stock is trading
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about at part or below the intrinsic
value so the intrinsic value of the
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stock Is is equal to the intrinsic
value of the business divided by the
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number of outstanding shares well let me
give you an explanation of this
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particular formula see the calculation
with this formula can be done using the
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steps I will please go through the steps
first to determined you have to determine
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the future FCFE for all the project to
do is based on the available financial
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plan so the projected FCFE can be
computed by taking the latest FCFE okay
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and then multiplied with the growth rate
so FCFE *G that is your growth
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step number 2 now the discount rate
what the discount rate is determined
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based on the current market return from
the investment with a similar risk of
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one so this discount rate is noted by R
3 now you what you need to do is you
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need to calculate the PV of all the FCF by discounting them using the
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discounting the rate step number 4 is
that you add up the pv of all the FCF
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calculated in step three so FCFE
123 to late and then you do add up
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the fifth step is the terminal value that
is computed by multiplying the FCFE of
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the last projected year bye factor in
the range of 10 to 20 beyond the project
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period run until the businesses shut
down 6 so 6 step will be now to
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arrive at the value for the entire
business and add up the value for the
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step 4 and discounted value of this
step i along with cash and cash
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equivalents if available step number
7 finally the intrinsic value of the
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shares can be derived by dividing the
value in the step 6 by the number of
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shares of the company
well let's study this with the help of
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the example to get much more detailed
explanation
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let us let us take an example of the
company let's say XYZ which is
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currently trading at the stock market
price somewhere close to $40 per share
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with total number of the shares
outstanding 60 million
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this is per share this is million
and cure let's say the analyst intends
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to predict the intrinsic value the stock
based on the available market
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information so the prevailing required
rate of return expected by the invest in
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the market that is the R is 5% so on the
other hand the free cash flow of the
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company the FCFE free cash flow of
the company is expected to grow at let's
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say 8% so the following you know so the
numbers that will that must be predicted
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and based on which the let's say FCFF
or let's say the FCFE that is the from
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the equity let's say it comes down to 95
dollars
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so FCFE is calculated using with the
help of your net income plus your
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depreciation plus Amortization less any
increase in the increase or decrease in
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the working capital less any increase in
the Capax - any sort of debt repayment
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of the existing plus any sort of fresh
debt that is raised okay so FCFF let's
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say FCFF comes down to 95 so now how
we are going to calculate so FCFE is
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95 the growth
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we'll add the growth in this sorry this
into 1 +
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let's
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you just have add this
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as number so it will come down as 102.60 so the projected
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FCFE is going to be 10204
financially year and let's say this is for
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financially year 20 FY20 then let's say for
21 is this will be 95 into you will
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multiply with 8 so you will increase 8% twice for 2 years which
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will give you closely around 110
okay and then for financially year 22
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let's say you added for 3 times and
you get around 119 and then 423 again
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you had it for 4 years you get 129
closely around that so now you will
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calculate the terminal value now the
terminal value is the factoring that is
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the last this into one divided by the
required rate of return that is 5%
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that gives you 2580 okay
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but now the terminal value is 2580 what you simply need to do is
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that this are all the projected of
values that is let me just copy this
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down here
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and all these values down here
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let's keep it as 102 and we
have the terminal value
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you
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which is standing at 2580
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so if you see the intrinsic value of all
of this will be
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how are we going to calculate it's just
that you have to divide each and every
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of them okay like I'll give you an
example 102/5 % so you will say 1
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+ 5 % ok raise to 1 + this
financially a 21 divided by 1 plus 5%
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raise to 2 plus this value
so that you will keep continuing till
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the time
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last one that's 129
okay this divided by 1+5%
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raise to 4
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okay and then at the last but not the
least because we have added all the
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values will be adding nothing but the
terminal value so we have added all the
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values we'll add the terminal value so that
will be this 2580 divided
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by 1+5%
raise to 5 that comes down too closely
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around 2427 so that is how
the value is determined now let me give
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you some of the relevance and the uses
of the intrinsic value see the value of
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the Investor built by developed by
purchasing the fundamental strong stocks
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at a price you have very three below the
fair value of the company so the idea
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behind the form below the intrinsic is
that the short of the market usually
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delivers the irrational prices okay so
but in the long run the market
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correction will happen such that the
stock price on the average will return
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to the fair value so I hope you have
got a fantastic idea regarding this
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particular topic if you have learn and enjoy
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thank everyone once gate for journey the
session cheers
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