Intrinsic value and capiatlization rate
- Thread starter mohitgupta1994
- Start date
- Tags intrinsic value
Your my age! Good thing you started early on in life AND chose fundamental analysis to start with. Capitalization rate is the required rate of return you would want from an investment to invest in it. This capitalization rate is in the sense that a rupee in hand right now is worth more than a rupee in hand in the future. Meaning if I gave you a rupee right now, you will invest it in FD and it will grow every year, and if i gave you a rupee 20 years from now. The rupee I gave you right now is worth more.
I dont know who this person is. Capitalization rate is arbitrary and a personal choice of the analyst. This is also called discount rate or return available on an appropriate benchmark.
I dont know who this person is. Capitalization rate is arbitrary and a personal choice of the analyst. This is also called discount rate or return available on an appropriate benchmark.
Read my the example I gave you over and over again.
Valuation is taken by two premises, first that stock value is the cumulative value of all future FCF or dividends. Future dividends must be discounted to the present with the use of capitalization rate.
If you buy a stock at 30% discount from intrinsic value obviously that will be your return. But how will you calculate the intrinsic value of the stock? Capitalization rate is used in that.
Valuation is taken by two premises, first that stock value is the cumulative value of all future FCF or dividends. Future dividends must be discounted to the present with the use of capitalization rate.
If you buy a stock at 30% discount from intrinsic value obviously that will be your return. But how will you calculate the intrinsic value of the stock? Capitalization rate is used in that.
Capitalization rate is used primarily in the RE industry where it is goes by Cap rate. In equity market unless you are talking about REIT it is discount rate.
It is the rate that represents your minimal acceptable return.
For instance lets say have two projects to work on A and B, A gives your 10% return and B gives your 15% return. Now each of these project has same payback period.
Now if you have decided that you will go with project A because it has higher return, you need money to execute it. Either now you might have your own money to use for this project, which might give you return say 5% if kept in bank or you might take a loan where you might be paying 8%.
So Cap rate or discount rate is the rate that represents best use of that money.
In public equity market use the term discount rate, the person you are referring is running HF in US so it might be okay for him to assume 4% as discount rate.
So if you find that a value for stock is 100 and its price is 70 so it is trading at 30% discount to its intrinsic value so you will buy it and hope that market becomes rational again and realize the true potential for that security and give you a chance to realize that gain.
It is the rate that represents your minimal acceptable return.
For instance lets say have two projects to work on A and B, A gives your 10% return and B gives your 15% return. Now each of these project has same payback period.
Now if you have decided that you will go with project A because it has higher return, you need money to execute it. Either now you might have your own money to use for this project, which might give you return say 5% if kept in bank or you might take a loan where you might be paying 8%.
So Cap rate or discount rate is the rate that represents best use of that money.
In public equity market use the term discount rate, the person you are referring is running HF in US so it might be okay for him to assume 4% as discount rate.
So if you find that a value for stock is 100 and its price is 70 so it is trading at 30% discount to its intrinsic value so you will buy it and hope that market becomes rational again and realize the true potential for that security and give you a chance to realize that gain.
firstly i will not blame anyone for my mistakes.
Secondly,
when I calculate the intrinsic value of a stock I use two rates. First is discount rate which I use to find the present value of future cash flow of each future year. Second is the capitalization rate which is used to find the residual value of the cash flow of the last predicted year.
Now if I take capitalization rate as the long term bond yield then what do I take discount rate as??
There is some difference between the discount rate and the capitalization rate in the method that jeeva ramaswamy has not mentioned but directly used.....
Help me in this please....
Secondly,
when I calculate the intrinsic value of a stock I use two rates. First is discount rate which I use to find the present value of future cash flow of each future year. Second is the capitalization rate which is used to find the residual value of the cash flow of the last predicted year.
Now if I take capitalization rate as the long term bond yield then what do I take discount rate as??
There is some difference between the discount rate and the capitalization rate in the method that jeeva ramaswamy has not mentioned but directly used.....
Help me in this please....
Capitalization rate to find the residual value is not a standalone rate. It's the difference between discount rate and the assumed rate of grown of FCF nth year onwards (simply r-g).
So,the residual value at the nth year will be FCFn / (r-g).
r = discount rate, g = assumed growth rate of FCF. The model only works if r >g
So,the residual value at the nth year will be FCFn / (r-g).
r = discount rate, g = assumed growth rate of FCF. The model only works if r >g
No idae at all about Financial Analysis. Got curious about this Capitalization think and found this link interesting for the basics ofcourse :
http://en.wikipedia.org/wiki/Capitalization_rate
http://en.wikipedia.org/wiki/Capitalization_rate
| Thread starter | Similar threads | Forum | Replies | Date |
|---|---|---|---|---|
|
Benjamin-Graham’s Formula for Intrinsic Value | Beginners Guide | 3 | |
| E | How to calculate the intrinsic value of a Stock? | Fundamental Analysis | 3 | |
| M | Intrinsic value of the stocks | Fundamental Analysis | 44 | |
| M | intrinsic value | Fundamental Analysis | 13 | |
| P | intrinsic value calculation? | Fundamental Analysis | 1 |