How to Calculate PV of an Expected Stock Price
Original post by Jade Balle of Demand Media
The present value (PV) of an expected stock price is the amount you would realistically pay today if you expect the stock price to reach a certain level tomorrow. These calculations are used often by businesses and economists to compare cash flow at different times. You can calculate this amount using a basic financial formula for present value of a future amount.
Determine the expected annual rate of return for the type of stock you're investing in. To do so, research historical rate of return data for similar stocks, or a major stock market indicator like the average historical rate of return for the S&P 500. You can sometimes find this information listed in the annual reports of public companies and respected financial publications. Assume for the purpose of an example that the expected rate of return is 7.5 percent.
Subtract the estimated inflation rate for the period, which is also available by reviewing financial publications, to determine the real rate of return. For instance, if inflation is 2.5 percent, the real rate of return is 5 percent.
Use a simple formula to determine the present value of the stock price. The formula is D+E/(1+R)^Y where D is any dividends expected to be paid during the period, E is the expected stock price, Y is the number of years down the line, and R is the real rate of return you estimated.
Plug the numbers into the formula to complete your calculation. For example, if your expected stock price is $58 per share one year in the future, total dividends paid during the period equal $2 per share with a real rate of return of 5 percent. The present value is $2 + $58/(1+.05)^1 or $57.14.
About the Author
Jade Balle has been writing Web articles since 2004, covering everything from business promotion to topics on beauty. Her work can be found on various websites. She has a small-business background and experience as a layout and graphics designer for Web and book projects.