Intrinsic Value
Intrinsic value is a model-based estimate of an investment's value under stated assumptions about future cash flows, growth, risk, capital structure, and discount rates. Different reasonable assumptions and methods can produce materially different estimates.
Frequently Asked Questions
What is intrinsic value?
Intrinsic value is an estimate produced from a valuation framework and explicit assumptions about cash flows, growth, risk, financing, and the discount rate. It is not directly observable, and different analysts can reach different estimates from the same company information. A margin of safety is a decision rule applied to an estimate, not proof that the estimate is correct.
How do you calculate intrinsic value?
Common approaches include discounted cash flow, dividend models, asset-based methods, and comparable-company or transaction multiples. A DCF requires a cash-flow definition consistent with the discount rate; for example, enterprise free cash flow is commonly discounted at WACC, while equity cash flow uses a cost of equity. Adding an unspecified risk premium to WACC can double-count risk. Multiples and PEG are relative valuation tools, not direct calculations of intrinsic value.
Why can market price differ from an intrinsic-value estimate?
Market price and a valuation estimate use different information, assumptions, horizons, liquidity conditions, and required returns. A difference does not prove that the market is irrational or that the estimate is correct. Reconcile definitions, update inputs, and test alternative scenarios before drawing a conclusion.