How to calculate stock value.
Intrinsic value of a stock is an important aspect, considered by value investors before deciding to invest in the stock. Finding out the intrinsic value of a stock helps investors decide if a stock is “overvalued” or “undervalued.”
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Here are several ways to determine intrinsic value of a stock.
- Dividend Discount Model
- Residual Income Model
- Discounted Cash Flow
Management (MBA) Questions on this topic:
Q) Fusion Limited’s dividend is growing at a rate of 12% per annum. This growth rate is expected to continue for 3 years. Thereafter, the growth rate will decline to 8% for the next 2 years. After that, the year on year growth in dividends is expected to be a stable 6% rate forever. If the last dividend was Rs 6 per share and the required rate of return on equity is 20%, what is the fair value per share.
Q) Alpha limited is investing $500 million in a new project. The present values of the future after tax cash flows resulting from the project is $750 million. The company has 100 million shares outstanding, having market price of $45 per share. Assuming, the project being independent of other expectations about the company, Calculate the effect of – The new project on the value of the company on the company’s stock.
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