Valuation
How to value a stock with projected EPS and an exit multiple
Most valuation tools hand you a number and hide the assumptions that produced it. This is the whole model written out β four steps, one worked example, and an honest account of what it cannot tell you.
Last updated: August 2026
The model behind the intrinsic value calculator is a reverse discounted cash flow with an exit multiple. Instead of asking "what return will I get at today's price?", it asks the more useful question: what is the highest price I can pay today and still earn exactly the return I demand? Everything above that price destroys your target return. Everything below it is margin of safety.
Step 1 β Project earnings per share
Start with trailing twelve-month EPS and grow it. Either compound it at an average annual rate, or type a figure for each year if you have your own model or analyst estimates.
EPSt = EPS0 Γ (1 + g)t
Two warnings. First, use a horizon you can actually reason about β four to seven years. Beyond that you are not forecasting, you are extrapolating. Second, for cyclical businesses the year-by-year mode is the honest choice; compounding a smooth growth rate through a cycle produces a peak-earnings valuation at exactly the wrong moment.
Be sceptical of the starting point too. If the trailing year contained a one-off gain, an impairment, or a pandemic, the base is wrong and everything downstream inherits the error. Use a normalised figure instead.
Step 2 β Put a multiple on the final year
At the end of the horizon you assume you sell. The terminal price-to-earnings ratio converts your last projected EPS into an exit price.
Pterminal = EPSX Γ P/Eterminal
This single assumption usually drives more of the answer than growth does, and it is where most valuations quietly become wish-fulfilment. A defensible terminal multiple is anchored to something: the company's own long-run average, the multiple of a mature peer, or a reasoned view of what the business will look like once growth normalises. A high-growth company will almost certainly de-rate as it matures β assuming today's 45Γ persists in year seven is a forecast about the market, not about the business.
Step 3 β Add the dividends
The trailing dividend yield you enter is converted into an implied payout ratio against current earnings, and that payout is held constant so dividends grow alongside EPS.
payout = (P0 Γ yield) / EPS0 β Dt = EPSt Γ payout
You then choose what happens to those dividends. Reinvested, each one compounds at your required return until the end of the horizon. Not reinvested, they simply accumulate as cash. The reinvestment assumption matters a lot for a high-yield, low-growth business and almost not at all for a company that pays nothing.
Step 4 β Discount everything back
Bring the exit price and the dividend stream back to today at the annual return you require.
Pfair = Pterminal / (1+r)X + Ξ£ Dt / (1+r)t
Note what r is here. It is not a weighted average cost of capital or a
theoretically-derived discount rate. It is your hurdle: the return below which you would rather
do something else with the money. If you would not get out of bed for less than 12% a year, put
12% in, and the model tells you what price delivers exactly that.
A worked example
A company earns $6.50 per share, you think it grows 9% a year, you expect it to trade at 25Γ earnings in four years, it yields 2.4%, and you want 15% a year.
| Year | EPS | Dividend | Cumulative dividend |
|---|---|---|---|
| 1 | 7.09 | $4.71 | $4.71 |
| 2 | 7.72 | $5.13 | $9.84 |
| 3 | 8.42 | $5.59 | $15.44 |
| 4 | 9.18 | $6.10 | $21.53 |
The exit price is 9.18 Γ 25 = $229.38. Discounting that plus the reinvested
dividends at 15% gives a fair value of about $146. If the market is asking
$180, you are being offered a 9% annual return, not 15% β the stock is not expensive in any
absolute sense, it is simply priced for someone with a lower hurdle than yours.
That reframing is the point of the exercise. "Overvalued" is not a property of a stock. It is a relationship between a price and the return you require.
How to read the outputs
- Fair value today β the maximum price that still delivers your target return.
- Margin of safety β how far below fair value the market sits, as a percentage of fair value. Positive is the cushion that protects you when your assumptions turn out optimistic.
- Return at current price β the annualised IRR you would actually earn buying at today's quote instead of at fair value. This is often the most useful single number on the page.
- Total return over the period β cumulative, not annualised, across the whole horizon with dividends included.
What the model deliberately ignores
It assumes a single flat discount rate. It ignores buybacks and dilution beyond whatever your EPS path already implies. It has no opinion on whether your growth rate or exit multiple is realistic. It cannot see a balance sheet about to break, a patent cliff, or a competitor about to arrive.
None of that makes it useless β it makes it a discipline rather than an oracle. The value is in being forced to write down, explicitly, what you believe about growth, exit multiple, payout and your own hurdle rate. Six months later you can look at those four numbers and check which one you got wrong.
The natural next step is deciding how much of a discount to that fair value you should demand before actually buying, which is covered in margin of safety and sensitivity testing.