# Intrinsic Value Calculations by bet19912

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• pg 1
```									                               INTRINSIC VALUE (using Value Line's estimates)
Company Name:                  ABC Corp.
Market Information                           Current and Forecasted Information
Risk-free Rate (Rf)                2.0%       Earnings Per Share (last yr.)                 \$3.01
Expected Market Return (Retmkt)    6.0%       Earnings Per Share in 4 years                 \$3.80
Stock Information              Dividends Per Share (last yr.)                \$1.20
Beta                               1.25       Dividends Per Share in 4 years                \$1.76
Current Stock Price              \$52.00       Company's P/E Ratio in 4 years                18.00

Capital Asset Pricing Model
Required Rate of Return = Rf + Beta * ( Retmkt - Rf )
Required Rate of Return = 2.0% + 1.25 * ( 6.0% - 2.0% )
Required Rate of Return = 7.00%

Growth Rate of Earnings and Dividends
Earnings growth = (\$3.80/\$3.01)^0.25 - 1 or 6.0%           Dividend growth = (\$1.76/\$1.20)^0.25 - 1 or 10.0%
Earnings and Dividend Projections (4-year forecast period)
E(0) =\$3.01                                                 D(0) =\$1.20
E(1) = \$3.01 * (1 + 0.060) = \$3.19                          D(1) = \$1.20 * (1 + 0.100) = \$1.32
E(2) = \$3.19 * (1 + 0.060) = \$3.38                          D(2) = \$1.32 * (1 + 0.100) = \$1.45
E(3) = \$3.38 * (1 + 0.060) = \$3.58                          D(3) = \$1.45 * (1 + 0.100) = \$1.60
E(4) = \$3.58 * (1 + 0.060) = \$3.80                          D(4) = \$1.60 * (1 + 0.100) = \$1.76

Intrinsic Value (or Fair Price) Calculations
@ 7.0%
Year                 C.F.                PVF                           NPV
Current Price = \$52.00                                (52.00)
(1)              \$1.32         x     0.935         =               \$1.23
(2)               1.45         x     0.873         =                1.27
(3)               1.60         x     0.816         =                1.31
(4)               1.76         x     0.763         =                1.34
(4)            \$68.40          x     0.763         =               52.19
Fair Price        =              \$57.34

\$68.40      =         18.00    x                \$3.80
Price(4)    =           P/E(4)   x            E(4)

The fair price of the stock today is \$57.34. At a current price of \$52.00, you should buy the stock.
You should be willing to pay \$52.00 for a stock that is worth \$57.34. The expected rate of return on the stock is 9.7%.
Security Market Line

25.0%

20.0%                                               20.2%
Return (%)

15.0%                                                                              14.6%

10.0%                                           9.7%
9.0%

5.0%

0.0%
0.00   0.50               1.00                 1.50                 2.00           2.50
Beta

Security Market Line             Expected Returns
2.50   3.00

```
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