Introduction

Contents - Index

Introduction
©2009 OS Financial Trading System

What is Intrinsic Value of IBM stock?
We define the intrinsic value of a firm's stock as the present value of future economic dividends discounted back at the firm's cost of equity capital. Formally, an economic dividend is the dividend that could be paid by a stock over some period of time without affecting the beginning period value of the stock. That is, it does not really matter whether or not a stock actually pays dividends when assessing it's intrinsic value.
Example: Google (GOOG) has recently traded around $430 per share even though it pays zero (accounting) dividends. What is important is that Google is generating free cash flows regardless of whether or not it chooses to pay an accounting dividend.
In this writeup we work through applying the free cash flow to equity (FCFE) approach to assessing intrinsic value. This approach attempts to assess intrinsic value directly by estimating the the future economic dividends generated from a stock.