How to Value Shares of a Company

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Valuing shares of stock in a company is done by several different methods. One of the most common is to estimate the future free cash flows of the company and calculate the net present value of this amount and divide by the total number of shares of stock outstanding.

  • Estimate future free cash flows. Free cash flows are cash flows that are available for distribution to securities holders. This is the most difficult part of valuing stock, because it is impossible to know the precise value of future cash flows. Factors used to estimate these cash flows are historical data from the company and the investor's evaluation of how well the company will perform in the future based on market characteristics and company information.

  • Calculate the net present value of those earnings. The net present value of a perpetuity, such as the future cash flows of a corporation, can be calculated by dividing the value of those cash flows by the risk-free interest rate. The risk-free rate is primarily theoretical but is used in finance to discount future cash flows. So, for example, if you estimate that the future free cash flows of the company will be equal to $1 million and the risk-free interest rate is 5 percent, the value of the company will be calculated as $1,000,000 / .05 = $20,000,000.

  • Subtract debt and preferred stock. Once the value of a company has been calculated based on the free cash flow model, subtract the value of debt and preferred stock from this number. These values can be found in a company's financial filings.

  • Divide the value of the common stock by the total number of common shares outstanding. Now that you have the value of the aggregate amount of common stock in the company, divide this number by the total number of shares of common stock outstanding. For example, if the total value of the common stock is $500,000 and 50,000 shares are outstanding, the per-share value would be $10.

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