Chapter 20 : Future Value Per Share

Investing is a simple process of taking into account the present value and future value. The other major factor to understand here, is what you lose as a result of inaction. Consider what you can gain and what you can lose in your decision.

J.R. Rim

What is Future Value Per Share ?

The Future Value Per Share helps us to arrive at a target price during the forecast period, year after year, provided assumptions remain valid. Sometimes it takes years for stock prices to come close to intrinsic value.

Future Value Per Share is derived by the process of compounding the present value per share by the cost of equity used to discount the cash flows for that year.

Example of computing Future Value Per share for Black Bay Pizza

Continuing with the example of Black Bay Pizza, we now compute the future value for Black Bay Pizza in Table 15 as follows:

Table 15 - Computing Future Value Per Share

Year 0 1 2 3 4 5
Cost of Equity 10.5% 10.5% 10.5% 10.5% 10.5%
Present Value/Share 109 120 133 147 162 179

The Present Value Per Share for Black Bay Pizza as computed in Table 14 is 110.3 per share. I have used the cost of equity as 10.5% in computing the future value per share for Black Bay Pizza. Thus, I compound 110.3 by 10.5% each year to arrive at the expected future value per share based on our valuation assumptions.

Compound the present value per share by the cost of equity assumed in that year to arrive at the future value per share.