1. What is the Common Stock Valuation Formula?

The Common Stock Valuation formula estimates the intrinsic value of a stock based on its earnings per share (EPS), required rate of return (r), and expected growth rate (g). This is a fundamental model used in financial analysis.

2. How Does the Calculator Work?

The calculator uses the stock valuation formula:

Where:

• \( EPS \) — Earnings Per Share in USD
• \( r \) — Required rate of return (discount rate) as decimal
• \( g \) — Expected growth rate as decimal

Explanation: The formula calculates the present value of all future earnings, assuming constant growth. The denominator (r - g) represents the capitalization rate.

3. Importance of Stock Valuation

Details: Accurate stock valuation helps investors determine whether a stock is overvalued or undervalued, guiding investment decisions and portfolio management.

4. Using the Calculator

Tips: Enter EPS in USD, r and g as decimals (e.g., 0.08 for 8%). Ensure r > g for valid results. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What's a good EPS value?
A: Higher EPS generally indicates better profitability, but compare within the same industry. Growth companies may have lower EPS but higher growth potential.

Q2: How to determine the discount rate (r)?
A: Typically based on the risk-free rate plus a risk premium. Often uses the company's cost of capital or investor's required return.

Q3: What if growth rate (g) exceeds discount rate (r)?
A: The model breaks down as denominator becomes negative. This suggests unsustainable growth that cannot continue indefinitely.

Q4: Are there limitations to this model?
A: Yes, it assumes constant growth forever. More complex models are needed for companies with changing growth rates.

Q5: Should this be the only valuation method used?
A: No, investors should use multiple methods (DCF, comparables, etc.) for comprehensive analysis.