Intrinsic Value Formula

Table of Contents

What is an Intrinsic Value Formula?

Example of Intrinsic Value

What is an Intrinsic
Value Formula?
The formula for Intrinsic value basically represents
the net present value of all the future free cash flows
to equity (FCFE)
(https://www.wallstreetmojo.com/fcfe-free-cash-
flow-to-equity/) of a company during the entire
course of its existence. It is the reflection of the
actual worth of the business underlying the stock i.e.
the amount of money that can be received if the
whole business and all of its assets are sold off
today.
 f(x) Intrinsic value Formula

Intrinsic value formula for business and stock is

represented as follows –

#1 – Intrinsic Value Formula of a

Business
Mathematically, the intrinsic value formula of a
business can be represented as,

where FCFEi = Free cash flow to equity in the

ith year

FCFEi = Net income i + Depreciation &

Amortisation i – Increase in Working Capital i –

Increase in Capital Expenditure i – Debt

Repayment on existing debt i + Fresh Debt

raised i

r = Discount rate

n = Last projected year

#2 – Intrinsic Value Formula of a

Stock
The calculation of intrinsic value formula of stock is
done by dividing the value of the business by the
number of outstanding shares of the company
(https://www.wallstreetmojo.com/outstanding-
shares-stocks/) in the market. The value of stock
derived in this way is then compared with the
market price of the stock to check if the stock is
trading above / at par / below its intrinsic value.

Intrinsic Value Formula Stock = Intrinsic Value

Business / No. of outstanding shares

# Explanation of the Intrinsic

Value Formula

The calculation of formula of the intrinsic value of a

stock can be done by using the following steps:

Step 1: Firstly, determine the future FCFE for all the

projected years based on the available financial plan.
The projected FCFEs can be computed by taking the
latest FCFE and multiply it with the expected growth
rate.

Step 2: Now, the discount rate is determined based

on the current market return from an investment
with similar risk profile. The discount rate is denoted
by r.

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Step 3: Now, calculate the PV of all the FCF by

discounting them using the discount rate.

Step 4: Now, add up the PV of all the FCF calculated

in step 3.

Step 5: Next, the terminal value is computed by

multiplying the FCFE of the last projected year by a
factor in the range of 10 to 20 (can use reciprocal of
the required rate of return
(https://www.wallstreetmojo.com/required-rate-of-
return-formula/)). The terminal value represents the
value of the business
(https://www.wallstreetmojo.com/terminal-value-
formula/) beyond the projected period until the
business is shut down.

Terminal value = FCFE n * Factor

Step 6: Now, to arrive at the value for the entire

business, add up the value of step 4 and the
discounted value of step 5 along with any cash &
(https://www.wallstr
cash equivalents (if available)
eetmojo.com/)
(https://www.wallstreetmojo.com/cash-and-cash-
equivalents/).

Step 7: Finally, the intrinsic value per share can be

derived by dividing the value in step 6 by the
number of shares outstanding of the company.

e.g. Example of Intrinsic

Value Formula (with Excel
Template)

You can download this Intrinsic Value

Formula Excel Template here – Intrinsic
Value Formula Excel Template

Let us take an example of a company XYZ Limited

which is currently trading in the stock market at
$40 per share with 60 million shares outstanding.
An analyst intends to predict the intrinsic value of
the stock based on the available market
information. The prevailing required rate of return
expected by the investors in the market is 5%. On
the other hand, the free cash flow of the company
is expected to grow at 8%.

The following financial estimates are available for

CY19 based on which the projections have to be
made:

So, from the above-given data, we will first calculate

the FCFE for CY19.
FCFE CY19 (in millions) = Net income + Depreciation
& Amortisation – Increase in Working Capital –
Increase in Capital Expenditure – Debt Repayment
on existing debt + Fresh Debt raised

FCFE CY19 (in millions) = $200.00 + $15.00 –

$20.00 – $150.00 – $50.00 + $100.00

= $95.00

Now, using this FCFE of CY19 and FCFE growth rate

we will calculate the Projected FCFE for CY20 TO
CY23.

Projected FCFE of CY20

 Projected FCFE CY20 = $95.00 Mn * (1 + 8%) =
$102.60 Mn

Projected FCFE of CY21

Projected FCFE CY21 = $95.00 Mn * (1 + 8%)2 =

$110.81 Mn

Projected FCFE of CY22

Projected FCFE CY22 = $95.00 Mn * (1 + 8%)3 =

 $119.67 Mn

Projected FCFE of CY23

Projected FCFE CY23 = $95.00 Mn * (1 + 8%)4 =

$129.25 Mn

Now we will calculate the Terminal value.

Terminal value

(https://www.wallstreetmojo.com/terminal-
value/) = FCFE CY23 * (1 / Required rate of

return (https://www.wallstreetmojo.com/cost-
of-equity-capm/))

= $129.25 Mn * (1 / 5%)
 = $2,584.93 Mn

Therefore, the calculation of Intrinsic value for the

company will be as follows –

Calculation of Intrinsic Value for the Company

Value of the company = $2,504.34 Mn

After this, we will do the calculation of Intrinsic value

per share which is as follows –
Calculation of Intrinsic value per share

Intrinsic value formula = Value of the company /

No. of outstanding shares
= $2,504.34 Mn / 60 Mn
= $41.74

Therefore, the stock is trading below its fair value

(https://www.wallstreetmojo.com/fair-value-vs-
market-value/) and as such, it is advisable to
purchase the stock at present as it is likely to
increase in the future to attain the fair value.
 $ Relevance and Use of
Intrinsic Value Formula

The value investors build wealth by purchasing

fundamentally strong stocks at a price way below
their fair value. The idea behind the formula of
intrinsic value is that in the short term the market
usually delivers irrational prices, but in the long run,
the market correction will happen such that the
stock price on an average will return to the fair value.

% Intrinsic Value Formula

Video

& Recommended Articles

This has been a guide to what is Intrinsic Value

Formula. Here we discuss how to calculate Intrinsic
Value of Business and Stock using practical example
along with downloadable excel templates. You may
learn more about Valuations from the following
articles –

How to Calculate Free Cash Flow from

EBITDA?

(https://www.wallstreetmojo.com/free-cash-
flow-from-ebitda/)
Net Asset Formula | Explanation
(https://www.wallstreetmojo.com/net-asset-

formula/)
Excel Value Formula
(https://www.wallstreetmojo.com/value-
formula-in-excel/)

Enterprise Value Formula Calculation

(https://www.wallstreetmojo.com/enterprise-
value-formula/)
Net Asset Value Formula Calculation

(https://www.wallstreetmojo.com/net-asset-
value-nav-formula/)
Gordon Growth Model Formula Calculation
(https://www.wallstreetmojo.com/gordon-

growth-model-formula/)
Time Value of Money Formula Calculation
(https://www.wallstreetmojo.com/time-value-
of-money-formula/)
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