Securities Valuation: "The process of determining how much a security is worth. Security valuation is highly subjective, but it is easiest when one is considering the value of tangible assets, level of debt, and other quantifiable data of the company issuing a security."
RFR: "the "Risk-Free Rate" is the rate of return of a hypothetical investment with no risk of financial loss, over a given period of time. Since the risk-free rate can be obtained with no risk, any other investment having some risk will have to have a higher rate of return in order to induce any investors to hold it."
Unlike a typical bond loan that has a set period of payments, stock valuation is difficult to calculate because some of the components that are used to calculate the intrinsic value (or "net present value") are unknown.
The challenges of stock valuation, the NPV formula, and a very basic example:
We can find an accurate valuation if we have sufficient information to project into the future:
RFR: "the "Risk-Free Rate" is the rate of return of a hypothetical investment with no risk of financial loss, over a given period of time. Since the risk-free rate can be obtained with no risk, any other investment having some risk will have to have a higher rate of return in order to induce any investors to hold it."
Unlike a typical bond loan that has a set period of payments, stock valuation is difficult to calculate because some of the components that are used to calculate the intrinsic value (or "net present value") are unknown.
The challenges of stock valuation, the NPV formula, and a very basic example:
The general formula for NPV (net present value based on future expected cash flows) is:
...where r is the expected rate of return, Div is the expected dividend and P is stock price.
We can find an accurate valuation if we have sufficient information to project into the future:
You can do the calculations longhand but it is much more efficient to use a calculator to do the math for you. Using a Financial Calculator, you can solve for any of the variables in the NPV equation (find the future value (FV), find the number of payment periods (N), find the expected return (INT), etc.). Here is a link to finding these values with a Texas Instruments TI-84 calculator: http://www.tvmcalcs.com/calculators/ti84/ti84_page3
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