Fair value is the value of transactions between two parties that are usually reflecting open and willing negotiations. Without any clearly analyzable market prices, it would be challenging to calibrate fair value. Generally, fair value calculations come under one of the three groups. The first is based on the use of market prices – quoted on a transparent and liquid exchange of some kind, such as a stock market. The second group makes the use of comparable prices for assets that are having enough resemblance with the asset undervaluation. This is usually applicable to homes and cars. While the third and the last group is theoretical which uses the discounted cash flow method to find out the fair value. For more details, you can also visit fairvalue-calculator.com
Calculate Fair Value with Comparable Information
In this, fair value is calculated by collecting comparable information of the asset. For instance, to determine the fair value of 1,000 shares of a company’s stock by using the Internet or a major newspaper, one has to find the last closing share price for the stock. This means, if the stock closed at a price per share of $55 yesterday, then the fair value of 1,000 shares would be 1,000 x 55 = $55,000. Similarly, the fair value of a house for sale can be determined by finding out the sales prices of similar houses nearby. So, about three homes that are recently sold for a given price, and these are resembling the home which is here being evaluated, then we can use the average of the three sales prices.
Calculate Fair Value with Cash Flows
When there is nothing comparable or similar, one can also use the discounted cash flow method for an investment that creates a series of cash flows.
Write down the cash flows of the investment. For instance, a $100,000 investment that produces $25,000 annual cash flows for five years will be written down as: (100,000); 25,000; 25,000; 25,000; 25,000 and 25,000.
Now, write down 1+ assumed rate of return that is expected for this investment next to each 25,000 payment. For example, if the assumed rate of return is 5%, then write down 1.05 next to each 25,000.
Raise each 1.05 to the power of each year of that cash flow using a calculator. For example: 1.05^1 = 1.05, 1.05^2 = 1.10, 1.05^3 = 1.16, 1.05^4 = 1.22 and 1.05^5 = 1.28.
Then, Divide each 25,000 cash flow by the corresponding discount factor for each of the five years. This provides five discounted cash flows of: 23,810; 22,676; 21,596; 20,568 and 19,588. Now add these five numbers to -100,000, the original investment. The result is 8,237, thus using a 5% rate of interest, the fair value of this specific investment is $8,237.
Free Fair Value Calculators:
- Simple Fair Value – use Earnings Per Share (EPS) & revenue growth (%) and intrinsic value
- Advanced Fair Value – enables to derive a precise fair value of the stock
- Auxiliary Calculators – adds a layer of historical average on the main calculators.