intrinsic value of a stock

intrinsic value of a stock questions and answers

Learn about intrinsic value of a stock at the number one young investor website Teen Analyst.

Q: valuing a stock using DCF method?
i am trying to value FLR - Fluor using a discounted Cash Flow Method. I have a WACC of 8.3% and a growth rate of 3.5%. My CF for 2006 is 4.43 and expected CF for 2007 is 5.45. What is the stock's intrinsic value today?

A: $126.72 with WACC of 8.3 and a growth rate equal to future inflation after year one. I do not think this is an appropriate valuation, however. I would place it at $77.84 because 8.3% is way too low of a discount rate given the likely risk in this firm. Please note that you should also consider discounting income instead. Income has the advantage, over cashflow, of being similar to the "annual worth method," and does not have the volatility that cash flows possess. It is true that only cash flow matters, but only cash flow directly to you. If you are not receiving the cash flows, book earnings also include a factor for depreciation. Since this firm has assets that will need replaced, depreciation does seem in practice to mimic the level replacement rate, in the absence of extraordinary inflation. If you do choose to use cash flows, be certain to model negative cash flows from replacement and maintenance costs.

Q: How do value stocks perform in a market crash?
I bet there is research on this somewhere, but I can't seem to find it. How do stocks selected on a value basis (i.e. selling at a 50% discount in a regular market, if there is such a thing) behave going into a market crash? Would the decline of, for example, Coca-Cola trading near intrinsic value be more or less the same as a stock 50% below its intrinsic value? If Coke got knocked down to 50% of value, how much would the value stock get beaten down by? Examples or Studies would be appreciated. Thanks

A: They usually do better that the overall market and the high-flying wall street "darlings". As far as examples or studies, oils, consumer goods and pharmecuticals usually do well in bear markets or at least better than average, look at long term charts of companies such as Exxon, Kimberly Clark or Royal Dutch Shell.

Q: Do expired Incentive Stock Options (ISO) qualify as a tax deduction?
I had a bunch of Incentive Stock Options (ISO) expire when I left my last employer. These options had been granted to me years before and I was fully vested but never exercised them. Can I write off the intrinsic value of the options at the time of expiration as a capital gains loss?

A: No. After all, you didn't pay tax on the intrinsic value when it was granted or vested.

Q: What is the current market price of Merton stock?
The intrinsic value of a warrant to buy 5 shares of Merton stock at $55 per share is $20. What is the current market price of Merton stock? Question 27 answers

A: The intrinsic value is max(0,stock price - strike price) so the stock price is $55 + $20 = $75

Q: Why do people buy stocks even when they are priced disproportionately to their dividends?
What i am baffled with is, if the actual value of a particular stock lies in its resale and not in its dividends then what is it that gives stocks thier intrinsic value.

A: What you look for in a stock is a rate of return, which is a combination of the dividend (set once you buy the stock, unless the Board changes it, as GM's did earlier this year) and the anticipted rise in market value. Ironically, after GM cut its dividend, its value went up. Common shares have appreciated nearly 70% so far this year - the reason is cash. Cash is king to an investor. The more cash a company has, the better it can weather any storm. The point is to have an investment with an expected rate of return greater than what you get elsewhere. Even if the dividend is small (usually 1%), that alone can often beat a savings account (now, after 14 rate increases, do they approach 1%). If you don't have a risk tolerance for the market, I suggest either a high-yeld savings account or money market account, or perhaps a TreasuryDirect account.

Q: What are the steps to get started on evaluating a stock?
i need to find intrinsic value. what models should i use? and numbers?

A: Discounted cash flow model. You can learn that from most investment / corporate finance text book. Or do the easy way. Find the earning per share (EPS) of the stock you are interested in, multiply by 15. If the current price is below that, it's a buy. If above, it's not a good deal.

Q: Do stocks have any intrinsic worth?
If I buy my house at least I know there is an intrinsic value to the materials (and I can live in it). Does stock have any actual worth, besides what some other guy is willing to pay for it? (Some stocks offer a dividend, but not all of them do.)

A: Yes they do. The value is in the cash flow that they will eventually pay to their owners. Some companies pay out current cash flow as dividends, others, even though they pay no dividends are reinvesting profits in additional businesses, or expansion, so that they can generate even greater profits in the future. I think share price is a poor indicator of intrinsic value. There are too many psychological factors at work in the market which cause shares to be worth more/less than their intrinsic values. They are worth what the underlying assets and businesses can be sold for, or what those are worth. Figuring out what those values are can range from easy to difficult. One easy industry to value is oil tankers, because the values of ships are easy to find online. Taking the balance sheet, replacing the book values of the ships with the actual values, and recalculating the balance sheet will get you darned close to the intrinsic value of this sort of company. On the other hand, the value of the next hot dot-com...where its eventual profitability is anyones guess...good luck to anyone, even an expert at accurately valuing those.

Q: LEAP stock Options?
What happens when you buy a plain stock option that is WAY far out of the money-but expires in 2-3 years? Is the quality for intrinsic value profitable? Say ABC stock shares trading up (2006) at $5.00 per share and buy a Call Option at $15.00 (Strike Price) that expires in 2008? Is this too far out of the money or not?

A: That is pretty far out of the money, but stranger things have happened! If it expires in 08 (probably Jan?) then you really only have about a yr and half for the stock to go up 200+%, plus what you are paying for premium. Keep in mind that your time premium will be whittled away, and quicker as it comes closer to expiration. However, if the stocks starts to move now, your volitily premium will go up, as the probablity of it reaching your strike becomes more realistic. It's not necessiarly a bad play, but I think it does carry a little more risk than something closer to the money. About a month ago, I bot a Jan08 MSFT 25 call when the stock tumbled, for 2.50. I just sold it for 3.90, as it came into the money. Personally I believe that as it goes further in the money, I will really only capitalize on the intrinsic value, while my time value would be wittled away. I prefer to go just outside the money in these types of plays. Hope this helped...Good luck! PS...whats wrong with LU? I really kind of like it,,,2+=200+?

Q: Hilton Hotel Buy-out....wherein lies the true value?
With the announced plan by the Blackstone Group, anyone who had been owning Hilton Hotel stock can expect a nice premium on their shares. The stock had risen to an all-time high, so nobody was about to buy more shares...and now a private equity group sees intrinsic value, and starts a new buying frenzy for hotels. My question (reiterated), is there value unseen in these stocks whereby the land they sit on may be in hot spots? If so, then the market could be heading higher, maybe a lot higher, if people start looking for choice property companies that haven't been discovered. (Point of information: Blackstone Group has the assistance of some top financial corporations in their purchase...Citi, Bank America, etc.)

A: The land the hotels sit on is of course the major attraction, but also the Hilton name is well know around the world and is reputable.

Q: many of my stocks are trading 50%+ below their intrinsic values....that is good.....right?
i know what it means,,,,i just dont know how reliable information like this can be.

A: It's good if it is trading for more than you paid for it.

Q: Stock question..The problem is below. Thank you.?
Use the option quote info. shown here to answer the questions Calls Puts Exp. StrikePriceVol.LastVol.Last Mar802302.81600.8 Apr8017061271.4 Jul801398.05433.9 Oct806010.2113.65 follow. The stock is currently selling for $83. a. Are the call options in the money? What is the intrinsic value of an RWJ call option? b. Are the put options in the money? What is the intrinsic value of an RWJ put option? c. Two of the options are clearly mispriced. Which ones? At a mininum, What should the mispriced options sell for? Explain how you could profit from the mispricing in each case. I dont understand what LAST is. And is the current price $83? How to know if its mispriced? Thank you.

A: Do your own homework

Q: As a dollar amount move of a percentage of stock price, do higher share priced stocks pay more on changes?
I noticed Google's price shifted $90 dollars and that the intrinsic value of a $500 call strike price, $50 above that day's start share price on earnings day, moved up from 10 cents to over $35 the next day! This all from a 18% move in stock price! If this had been Sprint, making an 18% move, the option's intrinsic value would never have moved that much in dollars, would it? Ten cents goes into 35 dollars 35000 percent?

A: If (1) GOOG and S had the same implied volatility (IV) (2) the options for each could be traded at their value, and (3) the options for each were purchased the same percentage above the stock price, then (1) the options for each will have the same percentage move in value, which in turn means (a) an option for a higher priced stock will have a larger dollar move, but (b) if the same amount is invested in each the number of dollars earned would be the same. The problem is that none of the conditions given are true. The first condition was "GOOG and S had the same implied volatility" which is not true. The IV for S is 72.07%. The IV for GOOG is 34.08% That will make the options for S more expensive. (Low priced stocks usually have lhigher IVs.) The second condition was "the options for each could be traded at their value" which is also not true. A 10 cent option for a $449.54 stock is trading at 0.02% of the stock price. For an option to trade at 0.02% of a $6.48 stock it would have to trade for 0.14 cents. However, if you try to buy a call option on S the order will be rejected unless it is a multiple of 5 cents. So even though the option's value is only 0.14 cents, you cannot buy it at that price. (There are some circumstances where you can get option prices down to penny increments, but even at one cent you would be paying over seven times the options value to buy it.) The third condition was "the options for each were purchased the same percentage above the stock price" which is also untrue. Options for S have strike prices $1.00 apart. One dollar is over 15% of the price for a $6.48 stock (as of Thursday's close). The strike prices for GOOG are every $10, about 2% of a $449.54 stock price. ------------------------------ Finally, I cannot let some of the misinformation in the first answser to your question go uncorrected. It said "Option pricing is most dependent on volatility. The higher a stock's volatility, the more expensive the option. Google is a more volatile stock than Sprint so its options will be more expensive." The price of an option does not depend at all on the previous volatility of a stock. It depends, in part, on the "implied volatility" of the stock which is, in simplistic terms, the amount of future volatility expected in the stock until the option expires. It is also worth noting that if you go by Beta (which measures one year volatility) or historical volatility over the last 20 days (prior to Friday's trading) S was more volatile than GOOG. The first answer also said "There are two components to an option price--the positive difference between the stock price and the option strike price and the time to expiration." The value of an option depends upon more than that, specifically Type of exercise (American or European) Stock price Strike price Type of option (call or put) Time remaining before option expires Stock dividend, if any Interest rates, and Implied volatility ---------------------------------- In summary, going by the mathematical model, the same number of dollars investing in calls on a $6.48 stock will make as much as if they were invested in calls on a $449.54 stock when the stock goes up the same percentage, all else being equal. On a per contract basis, the more expensive stock would make the same percentage but more dollars. In the real worlds, it is essentially impossible to make that happen.

Q: A warrant which does not expire until several years in the future and which provides its owner?
A warrant which does not expire until several years in the future and which provides its owner the opportunity to buy a stock which is rising in price will probably sell for Question 32 answers less than its intrinsic value. exactly its intrinsic value. more than its intrinsic value. less than or equal to its intrinsic value.

A: The answer is more. But more to the point, this is a Renting and Real Estate question how??

Q: Stock tips?
Hey, I'm an active trader/investor. Only knowledgeable, active, and successful traders please I want you guys to share the following info with me: 1- Name me some economic sectors that you think will have a huge growth in the next 2-10+ years. I am already into Solar energy, so discard that one. preferably sectors that already have companies moving from a completely R&D stage to positive and exponentially growing earnings. 2 -Name me your stock pics for those said sectors, and if possible, provide a brief justification as to why you're choosing that company over some other one in the same sector. You may want to provide URL's to articles supporting that bet (preferably, no commercial newsletter stuff, cause they are paid to publicize certain secutirites, regardless of any intrinsic value. Cheers and best wishes Salazar

A: Although solar remains a good play for the future; I continue to like names in the energy sector, these include: ME (Mariner Energy) VLO (Valero Energy) ATPG (ATP Oil and Gas) Mariner and ATPG are involved in some key deepwater projects in the Gulf of Mexico and both companies have rapidly rising reserves, as well as key personnel and equipment, some very sharp oil finding engineers. Valero has been beaten down off its highs while at the same time, refiners continue to be pushed to the brink of their limits, and it does not appear that they are going to build alot more in the near future, especially with pressure from environmental groups. Oil and energy prices continue to remain near historical highs and I feel it is only a matter of time before many of these stock prices catch up to their true intrinsic value.

Q: Stock advice?
Hey, I'm an active trader/investor. Only knowledgeable, active, and successful traders please I want you guys to share the following info with me: 1- Name me some economic sectors that you think will have a huge growth in the next 2-10+ years. I am already into Solar energy, so discard that one. preferably sectors that already have companies moving from a completely R&D stage to positive and exponentially growing earnings. 2 -Name me your stock pics for those said sectors, and if possible, provide a brief justification as to why you're choosing that company over some other one in the same sector. You may want to provide URL's to articles supporting that bet (preferably, no commercial newsletter stuff, cause they are paid to publicize certain secutirites, regardless of any intrinsic value. 3 - It's been pointed to me that I should pay close attention to where sovereign weath funds are placing bets, and just follow the money. Any sites/sources? Cheers and best wishes Salazar

A: Alternative energy is going to be huge in the coming years! There's a lot of ways to play this, solar stocks are just one way. Right now I prefer to get a more diversified approach, so I own GEX which is an alt. energy ETF with stocks from solar, wind, geothermal, energy efficiency, and other sectors. FTEK, which works in the cleaning up coal plants business, I think will also be huge. That could be considered alt. energy. Water and water infrastructure I believe will also have a lot of growth. I own some VE, which is more conservative, and am also looking to get into LAYN soon. There are water ETFs out there too, I believe PHO is one.