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Intrinsic Value 7

This document outlines the process of estimating a stock's intrinsic value using the Discounted Cash Flow (DCF) model, which involves six key steps including cash flow measurement, projection, terminal value estimation, discount rate determination, and value addition. It emphasizes the importance of the margin of safety in value investing, where the estimated intrinsic value may differ from the market price. Additionally, it mentions the availability of an Intrinsic Value Calculator for educational purposes on tdameritrade.com.

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ozbornc
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31 views3 pages

Intrinsic Value 7

This document outlines the process of estimating a stock's intrinsic value using the Discounted Cash Flow (DCF) model, which involves six key steps including cash flow measurement, projection, terminal value estimation, discount rate determination, and value addition. It emphasizes the importance of the margin of safety in value investing, where the estimated intrinsic value may differ from the market price. Additionally, it mentions the availability of an Intrinsic Value Calculator for educational purposes on tdameritrade.com.

Uploaded by

ozbornc
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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2/6/22, 12:11 AM TD Ameritrade

Stocks: Fundamental Analysis

Estimating Intrinsic Value


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7 of 7

Estimating Intrinsic Value


In this lesson we’ve focused on the inputs of the DCF model to estimate a stock’s intrinsic
value. You learned how the inputs are either positively or negatively related to the stock’s
intrinsic value, and how changing the inputs affects the results of the model.

To review, estimating intrinsic value with the DCF model can be summarized into the
following six steps:

1. Begin with a measure of a company’s cash flow, like the trailing twelve months
(TTM) EPS.
2. Project the cash flow measurement for five years using an appropriate growth rate,
like the five-year historical growth rate.
3. Estimate a terminal value after five years using an appropriate exit multiple, such as
the industry average P/E ratio.
4. Determine the discount rate. For example, you might use the expected rate of
return, which you can calculate using the CAPM formula.
5. Discount each projected cash flow measure and the terminal value using the
discount rate.
6. Add the discounted values together to arrive at the estimated intrinsic value.

It may seem like only a few steps, but the math can get complex. Luckily, the math behind
this model is not the focus of your learning in the course. The Intrinsic Value Calculator can
walk you through the data you need and do the math for you.

Download the Intrinsic Value Calculator. Keep in mind, this is for educational purposes only.

All the information you need to estimate the intrinsic value of a stock is available on
tdameritrade.com. You’ll learn how to collect the data to input into your Intrinsic Value
Calculator in the next lesson.

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It’s important to remember that your estimated intrinsic value will likely differ significantly
from the current price. That’s okay. Recall that value investors search for stocks that, when
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2/6/22, 12:11 AM TD Ameritrade

compared to their market price, display a large margin of safety. The margin of safety, or
the difference between the estimated intrinsic value and the market price, will determine
whether the stock should be considered for a value investment or not. The next lesson will
address this analysis in detail.

You've reached the end of this lesson.

Think you have this content mastered? Check your understanding in the lesson quiz. Or,
continue on to the next lesson.

Begin Quiz Next Lesson

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Principles of Value Investing Quiz | 0%

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Principles of Growth Investing Quiz | 0%

Course Wrap-Up Quiz | 0%

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