Intrinsic Value Calculator (Discounted Cash Flow)
Use this calculator to estimate the intrinsic value of a company's stock based on its projected free cash flows (FCF). This model uses a simplified Discounted Cash Flow (DCF) approach, projecting FCF for 10 years and then calculating a terminal value.
Intrinsic Value Calculation Results
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Intrinsic value refers to the true, underlying worth of an asset, such as a company's stock, based on its fundamental financial health and future earning potential, rather than its current market price. It's what an asset is "really" worth, as opposed to what the market is currently willing to pay for it.
The Discounted Cash Flow (DCF) Method
One of the most widely used methods to estimate intrinsic value is the Discounted Cash Flow (DCF) model. The core idea behind DCF is that the value of a business is the sum of all its future free cash flows (FCF), discounted back to their present value. Free cash flow is the cash a company generates after accounting for cash outflows to support its operations and maintain its capital assets. It's the cash available to distribute to all security holders (debt and equity).
How This Calculator Works
This calculator employs a simplified 10-year DCF model with a terminal value calculation. Here's a breakdown of the inputs and their significance:
- Current Free Cash Flow ($): This is the starting point for your projections. It represents the company's FCF from the most recent period.
- FCF Growth Rate (Years 1-5, as decimal): This is the expected annual growth rate of FCF for the initial five years. Companies often experience higher growth in their early stages or during periods of strong market expansion.
- FCF Growth Rate (Years 6-10, as decimal): This is a more conservative, often lower, growth rate for the subsequent five years, reflecting a more mature business phase.
- Terminal Growth Rate (as decimal): After the explicit 10-year forecast period, it's assumed the company will grow at a constant, perpetual rate. This rate is typically low, often aligning with long-term inflation or GDP growth, as companies cannot grow at high rates indefinitely.
- Discount Rate (WACC, as decimal): The Weighted Average Cost of Capital (WACC) is commonly used as the discount rate. It represents the average rate of return a company expects to pay to finance its assets. It's used to bring future cash flows back to their present value, reflecting the time value of money and the risk associated with those cash flows.
- Cash & Equivalents ($): This is the company's current cash on hand. It's added to the enterprise value to arrive at the equity value.
- Total Debt ($): This is the company's total outstanding debt. It's subtracted from the enterprise value to arrive at the equity value, as debt holders have a prior claim on the company's assets.
- Shares Outstanding: The total number of common shares currently issued by the company. This is used to convert the total equity value into a per-share intrinsic value.
Calculation Steps:
- Project Free Cash Flows: The calculator projects FCF for the next 10 years using the specified growth rates.
- Calculate Present Value of FCFs: Each year's projected FCF is discounted back to its present value using the discount rate.
- Calculate Terminal Value: This represents the value of all FCFs beyond the 10-year forecast period. It's calculated using the Gordon Growth Model, assuming a perpetual growth rate.
- Calculate Present Value of Terminal Value: The terminal value is then discounted back to the present.
- Determine Enterprise Value: This is the sum of the present values of the 10-year FCFs and the present value of the terminal value.
- Calculate Equity Value: Cash & Equivalents are added to the Enterprise Value, and Total Debt is subtracted to arrive at the Equity Value.
- Calculate Intrinsic Value Per Share: The Equity Value is divided by the number of Shares Outstanding to get the intrinsic value per share.
Example Scenario:
Let's say a company has:
- Current FCF: $10,000,000
- FCF Growth Rate (Years 1-5): 15% (0.15)
- FCF Growth Rate (Years 6-10): 7% (0.07)
- Terminal Growth Rate: 3% (0.03)
- Discount Rate (WACC): 10% (0.10)
- Cash & Equivalents: $5,000,000
- Total Debt: $20,000,000
- Shares Outstanding: 10,000,000
Using these inputs, the calculator would project future cash flows, discount them, add the present value of the terminal value, adjust for cash and debt, and finally divide by shares outstanding to give an intrinsic value per share.
Limitations and Considerations:
The DCF model, while powerful, relies heavily on assumptions. Small changes in growth rates, the discount rate, or the terminal growth rate can significantly alter the intrinsic value. It's crucial to use realistic and well-researched inputs. This calculator provides an estimate and should be used as one tool among many in a comprehensive valuation analysis.