Question

What kind of calculation is used for Intrinsic Valuation? What are the 3 components of this calculation?

Answer 1

Intrinsic value of a share is the value of share which is calculated after taking into account it's asset and liability, according to the book value. Intrinsic value of a share is important because it is important to determine whether the share is undervalued or overvalued in the market according to the intrinsic valuation. There are three kinds of techniques which are used for intrinsic valuation-

1. Discounted cash flows method-in discounted cash flow method, the cash flows available to the firm are discounted at present value and the intrinsic value of a share is calculated according to the free cash flows of the firm. It is assumed that firm is the combination of overall value of its cash flows.

2. Dividend growth model-under dividend growth model intrinsic value of a share is calculated according to the the value of dividend and growth in value of overall dividend. A firm's value is calculated on the basis of the payment of dividend in its future life time so it is calculated after taking the growth rate in perspective as well as the expected rate of return of shareholders in perspective.

3. Residual method-this type of valuation is best upon the difference in Earning per share and per share book value. The difference is then discounted to arrive at an intrinsic valuation of the company.this valuation method is focused at arriving at intrinsic value by adding per share book value with the discounted residual income.