Intrinsic Value Analysis

Intrinsic value analysis is so important for every investor who wants to invest their money in share market and also want to increase his share investment wealth because this analysis will directorate the investor when will he or she buy the shares and when will he or she sell the shares?

It is the basic principle, when the market value of shares will be less than its intrinsic value, investor must buy the shares. When the market value is more than its intrinsic value, it is the proper time to sell the shares. I repeat again

(A) Buy Shares of A Company = When = Market Value <  Intrinsic Value

(B) Sell Shares of A Company = When =  Market Value > Intrinsic Value

In Intrinsic Value analysis, we will explain the meaning, steps to calculate the intrinsic value and other fundamental concepts of its analysis.

Meaning of Intrinsic Value 

Intrinsic value of a company's stock is the real value which is calculated with fundamental analysis without calculating its market value. Forget what is the market value, just check the future earning's present value. When investor invests in the shares, it will be its fixed asset. Its value will be so high if it will generate high revenue within less period. Revenue of share investment is dividend. So, we will calculate the present value of future dividend for finding the intrinsic value of stock.

Steps to Calculate Intrinsic Value 

Simple formula for calculating Intrinsic Value

We are explaining the calculating of intrinsic value with three examples

1. # Mr. A wants to return 30% on his stock investment for every year for 3 years. Company will give dividend (estimated) 30%, 40% and 50% on its face value $ 10. So, he will receive the dividend first year $ 3, second year $ 4 and third year $ 5. At the end of year, he can sold it on $ 300

Intrinsic value will be 

= 3/1.3 + 4 / (1.3)^2 + (5+300)/ (1.3)^3 = $ 143.50

Intrinsic Value analysis in this case = If the market value of the share is below $ 143.50, then the share is below its intrinsic value, therefore well worth purchasing. If, on the other hand, the market value is higher than intrinsic value $ 143.50, it is the good time to sell.

2. # For different investors, intrinsic value may be different. For example,  Mr. A wants to return 30% on his stock investment for every year for 3 years. Company will give dividend (estimated) 30%, 40% and 50% on its face value $ 10. So, he will receive the dividend first year $ 3, second year $ 4 and third year $ 5. At the end of year, he can sold it on $ 300 but Mr. B  wants to return 40% on his stock investment for every year for 3 years. Company will give dividend (estimated) 30%, 40% and 50% on its face value $ 10. So, he will receive the dividend first year $ 3, second year $ 4 and third year $ 5. At the end of year, he can sold it on $ 300

Intrinsic Value for Mr. A = 3/1.3 + 4 / (1.3)^2 + (5+300)/ (1.3)^3 = $ 143.50

Intrinsic Value for Mr. B =  3/1.4 + 4 / (1.4)^2 + (5+300)/ (1.4)^3 

= $ 115.33

Intrinsic Value analysis in this case = When the market value of share will reach $ 143.50, Mr. A should keep it but Mr. B should sell for getting profit from his investment because Mr. B's intrinsic value is just $ 115.33 which is less than its market value.

3. # The price of share of a company is $ 170. Its profit in the year to 31st march 2013 had grown by 70% ( $ 20 Million). Its earning per share (EPS) which was improvement of 25%. If we assume that in the next 2 years its EPS will grow by 30%. This company's share's market value at the end of 2nd year will be $235. In 2013, company paid dividend of 25%. In 2014, it is the chance, company will pay the dividend of 30% and in 2015, it will give of 40%.

Intrinsic Value 

= 3.0/1.3 +(4.0+235)/(1.3)^2 =  $143.72

Intrinsic Value analysis in this case =  At 31st march 2013, market value of share is $ 170 but today intrinsic value is $ 143, so, investor who is expecting 30% return can sell the share because today market value is $ 170 which is more than its intrinsic value.

But same investor is expecting just 10% return or company's EPS will grow just 10%, at that time intrinsic value will be

= 3.0/1.1 +(4.0+235)/(1.1)^2 =  $200.24

So, in this case, investor must not sell his shares because his intrinsic value is more than current
market value. 

See Also 

  1. Investment Analysis 
  2. Decision Tree Analysis 
  3. Real Option Analysis

References :

  1. Finance Book (Topic Fundamental Analysis)



access account accountant Accounting accounting definitions accounting ebook Accounting education accounting procedure accounting process outsourcing Accounting Software advance advertising africa Amalgamation amendments announcements Annuity assets audit auditing Australia B.Com. balance sheet bank Bank reconciliation banking basic accounting BBA benefits best bill black money blog bloggers book keeping bookkeeping Branch Accounting - full tutorial budget Budget variance business businessman CA calculator canada capital capital budgeting career cash cash book cash flow statement Chiense children china class coaching coins college commerce commerce students company computer computer accounting conference Contact vinod kumar corporate accounting cost cost accounting cost center cost centre CPA credit credit card cs currency data Debit and credit debit cards debt debtor degree depletion depreciation documents dollar domain Downloads Dubai e-accounting earning education Education Loans email employee EPF ERP euromoney examination excel excise duty expenses facebook factor of loan fans feature fifo FII fiji finacle finance Financial financial accounting fire insurance flickr flow forensic forex formula france fraud free fun function fund GAAP GDP gdr germany gold goodwill goodwill accounting google google apps google apps google base google buzz google calendar Google docs google finance google fusion tables google talk govt. guide health Hindi Hindi Language history holding company How to treat FBT in Tally 9 HRA ICAI ICAWI ICICI Bank IFRS income income statement Income Tax India indian railway Indonesia inflation inflation accounting infographics information inspiration insurance insurance accounting interest international Internet Introduction of Tally 9 inventory investment invoice IT Japan Job costing journal entries keyboard kindle kuwait laptop law LBT learning lease lecture ledger leducation Leverage Analysis liabilities lifo linkedin loan logical point loss loss of profit M.Com. m.phil malaysia management accounting manual accounting manufacturing account market marketing mastercard material MBA MCA media migration mobile money ms word ms. excel multi currency in tally 9 Multicurrency Accounting mutual fund national security new and sacrifice ratio new york times new zealand news NGO nonprofit-accounting North Georgia Mountains NPV NSE odbc office oman online application online accounting otcei pakistan parents pay pal pdf pie chart pie chart of income pnb podcast ppf presentation price privacy policy prize money prof. vinod kumar profit profit and loss account project management provision purchase puzzles quickbooks Quote quotes quotes of svtuition rating agency ratio analysis RBI readers real estate rectification of errors remote control reports reserves responsibility accounting retirement revenue Revenue reserves review risk rupees salary sale saudi arabia saving sbi scholarship school SEBI security service tax share share trading Shares shri lanka singapore sms social accounting society solution South Africa stock stock exchange structure student students study subsidiary company svtuition swiss bank tally tally 9 Tally 7.2 Tally 9 Tally.ERP 9 tanzania tax Tax Accounting TDS teacher teaching technology test testimonial testimonials thailand tips trading trading on equity transaction trend trial balance tuition twitter UAE UGC - NET Commerce UK United Arab Emirates university usa valuation VAT Video Voucher and vouching wikipedia working capital youtube
Accounting Education: Intrinsic Value Analysis
Intrinsic Value Analysis
Accounting Education
Not found any posts VIEW ALL Readmore Reply Cancel reply Delete By Home PAGES POSTS View All RECOMMENDED FOR YOU LABEL ARCHIVE SEARCH ALL POSTS Not found any post match with your request Back Home Sunday Monday Tuesday Wednesday Thursday Friday Saturday Sun Mon Tue Wed Thu Fri Sat January February March April May June July August September October November December Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec just now 1 minute ago $$1$$ minutes ago 1 hour ago $$1$$ hours ago Yesterday $$1$$ days ago $$1$$ weeks ago more than 5 weeks ago Followers Follow THIS CONTENT IS PREMIUM Please share to unlock