Stock pricer (stock price estimator)
What this tool does (click to expand)
This tool estimates the fair value of a stock based on your assumptions about earnings, required return, and future growth. It projects earnings forward year by year, discounts them back to the present using your required return, and converts that into either a fair P/E ratio and a fair price if the EPS is provided.
Enter EPS if you want a dollar price. If you leave EPS blank, the tool provides a fair P/E ratio only. You can create multiple growth stages to model transitions from fast growth to stable long-term growth.
The permanent growth rate is used for the final stage when the company reaches a mature, stable growth level.
How to set required return
The required return is the annual return you expect for taking the risk of owning the business. If the business returns a value lower than that, you might as well invest in high-quality bonds instead. A simple way to estimate it is to start with the risk-free rate, usually the US 10-year Treasury yield, and then add an extra margin for the uncertainty of the company’s future.
Lending to the US government is extremely safe. Owning a business is not. Earnings can fall, management can make mistakes, recessions can hit, and shareholders can be diluted. Investors expect to be compensated for this extra risk.
Historically, broad stock-market returns have been around 3–6 percentage points above the US 10-year yield. That is why many valuations use a required return in the 7–10% range when the US10Y is around 4–5%.
If the business is very stable, you might choose a number near the low end. If the business is more uncertain or cyclical, you might choose a higher number. The required return is ultimately a judgment call, but using the 10-year Treasury yield as a base and adding a reasonable risk premium is a practical starting point.
Current US 10-year yield: US10Y
Future growth forecast
| Growth rate (%) | Years | |
|---|---|---|