# How To Calculate The Intrinsic Value Of A Stock

Understanding the intrinsic value of a stock is crucial for investors looking to make informed decisions in the financial market. The intrinsic value represents the true worth of a stock based on its fundamentals, providing insights into potential investment opportunities.

### Formula

The intrinsic value is calculated using the Gordon Growth Model:

Intrinsic Value=Earnings per Share×(1+Growth Rate)Discount RateIntrinsic Value=Discount RateEarnings per Share×(1+Growth Rate)​

### How to Use

1. Input the Earnings per Share (EPS).
2. Enter the expected Growth Rate of the stock.
3. Specify the Discount Rate.
4. Click the “Calculate” button to get the intrinsic value.

### Example

Suppose a stock has earnings per share of \$3, a growth rate of 5%, and a discount rate of 8%. The intrinsic value would be calculated as follows:

Intrinsic Value=3×(1+0.05)0.08≈\$43.75Intrinsic Value=0.083×(1+0.05)​≈\$43.75

### FAQs

1. What is the significance of intrinsic value in stock valuation?
• The intrinsic value helps investors assess whether a stock is undervalued or overvalued, guiding investment decisions.
2. How often should I calculate the intrinsic value of a stock?
• It’s advisable to recalculate when there are significant changes in earnings, growth projections, or interest rates.
3. Can intrinsic value predict short-term price movements?
• No, intrinsic value is more focused on long-term fundamentals and may not reflect short-term market fluctuations.
4. Is the Gordon Growth Model suitable for all types of stocks?
• It is more appropriate for stable, dividend-paying stocks with consistent growth.
5. What happens if the discount rate is higher than the growth rate?
• A higher discount rate generally leads to a lower intrinsic value, reflecting increased risk.

### Conclusion

Calculating the intrinsic value empowers investors to make informed decisions, aligning their investment strategy with the true worth of a stock. Use the provided calculator to simplify the process and enhance your financial decision-making.