V14:2 (63-64): Basis for Stock Worth by William N. Hosley
Estimating a company's value can be the initial filter for identifying trading opportunities. Here's a method to determine a company's value based on earnings growth rates and interest rates.
How much is a stock worth? The answer is simple: Whatever someone is willing to pay. That reply, while true, leaves a great deal to chance and provides nothing in the way of the advantage that all stockpickers seek. A theoretical value of a stock can be a valuable benchmark. In conventional accounting, the value of a stock is the present worth of the sum of all future earnings (per share) of the company discounted by an appropriate rate of interest.
However, the theory requires a forecast of the future earnings of a company. For a company with an established track record, there are some fairly straightforward methods to obtain at least a ballpark forecast of earnings. Determining an appropriate discounting interest rate can present a problem as well. Nevertheless, this theory and the application described presents another useful tool to help identify under- and overvaluations, not only for individual
issues but the whole market.