Investing Guide · Chapter 11
Understanding Sticker Price and How to Determine It
Learn to calculate the fair value of a business.
Sticker price is the fair value of a business, neither overpriced nor underpriced, that the market should ideally be selling it for. It's also called intrinsic value.
Four Essential Components
- Current EPS: A company's earnings per share, serving as the foundation for projecting future earnings
- Estimated EPS Growth Rate: Determined by examining historical equity growth, reflecting the business's capacity to generate surplus cash
- Estimated Future PE Ratio: Rule of thumb suggests doubling the estimated growth rate
- Minimum Acceptable Rate of Return: Typically 15% annually, accounting for inflation, taxes, and investment risks
The Calculation Process
Grow current EPS over 10 years, multiply future EPS by the projected PE ratio to find the future market price, then adjust for the desired return rate to determine the sticker price.
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