How to calculate the fair value of a stock in a company.
A fair value is the genuine value of a stock or other security that is agreed between the seller and buyer.It can be calculated for the assets that are traded, but not the products being liquidated.If there are no obvious market prices, it can be difficult to calculate the fair value.The buyer will end up with a satisfying price and the seller will not be on the losing side.
Anna sells her stock to John at $50 per share.John thinks he can sell it for $70 per share once he gets them.John bought 1,000 shares at Anna's price.Both sides agreed on the price and the trade is beneficial for them.
You can find the last closing price for the stock you want to buy by using financial news.The last price of the company's stock was $30, so you want to buy 100 shares.The fair value of 100 shares is $3,000.
You want to look at investment that has a range of cash flows.You can't find anything comparable.How should the fair value of the investment be calculated?
It will generate $2,500 cash flow per year if it is an investment of $10,000.You have to write down the cash flows for 5 years.
If you want to calculate discounted cash flows for each year, you have to first calculate the rate of return.
The percentages need to be turned into whole numbers.Adding 100 to the number of percents is how it is done.100+6The discount factor can be calculated by rising to power of that year's number.To power of 1 for 1st, 2 for 2nd, and so on.
The next step is to divide the $2,500 cash flow by the discount factor.
$2,500 / 1,06 equates to $2,358, or 1,12 times $2,232, for a total of $1,984.
There are five discounted cash flows of $2,358, $2,232, 2,119, $1,984, and $1,866.Add the five numbers to the total.Do you remember the initial investment?Let's see what happens.The result was 541.The fair value of this stock is $531 using a 6% rate of interest.
You have to compare the P/E ratios of companies from the same industry.If you want to find the fair value for a utility, you have to compare the P/E ratio to other ratios in that industry.
The company is overvalued if it has a high P/E ratio.A low P/E ratio shows the company is worth more.If you hold a stake in a company that has a P/E ratio of 4 and the industry average is 2, you can be sure that your stock is overvalued.
Modification of the stock price to the average P/E ratio is the next thing to do.The P/E ratio on your stock is 4 while the average is 2.The current price is $8 and the earnings per share is $2.The P/E ratio formula is what we know about that.
One of the basic questions in investing is what security is really worth.You will find the answer, maybe not exactly, but you will be very close to it.Fair value calculations are essential to any investor.
The earnings that can be unstable will be estimated by the growth investors.Value investors buy stocks at a discount to their fair value.They will wait for the fair value of their investments to increase.Both kinds of investors need to know that their companies can fail.Keeping historical growth rates difficult will be difficult if the company gets bigger.