10-Step Calculation Process

How to Use It

1. Choose Years of Cash Flow

   Determine how many years of historical Free Cash Flow (FCF) data you want to include in your calculation. A range of 3 to 5 years is typically recommended depending on the company's stability.

   • For stable companies such as utility firms or well-established consumer goods companies, 3 years of FCF data is often sufficient due to their predictable cash flow patterns.
   • For volatile companies like tech startups or firms in emerging industries, opt for 5 years to account for fluctuations and obtain a more reliable average.
   • Tip: If you're uncertain about the company's stability, selecting 5 years provides a more conservative and comprehensive baseline.
2. Enter FCF Amounts

   Input the Free Cash Flow (FCF) amounts for each of the selected years. FCF represents the cash a company generates after accounting for capital expenditures, available for distribution to shareholders.

   • Where to find FCF data: Obtain these figures from the company’s annual reports, financial statements, or trusted financial data platforms like Yahoo Finance, Bloomberg, or the company’s investor relations website.
   • Example: For a 3-year period from 2022 to 2024, you might enter 1,000,000 GHS for 2022, 1,200,000 GHS for 2023, and 1,500,000 GHS for 2024.
   • Note: Ensure all amounts are in the same currency to maintain consistency in your calculations.
3. Select Growth Model

   Choose the growth model that best fits the company’s future cash flow projections, which will be used to estimate the stock’s intrinsic value.

   • Perpetual Growth Model: Appropriate for mature companies with stable and predictable growth rates. This model assumes cash flows grow at a constant rate indefinitely. Use this for firms in well-established industries with consistent performance.
   • Two-Stage Growth Model: Suitable for companies with an initial high-growth phase followed by a stable growth period. This model allows you to specify different growth rates for two distinct stages. Use this for firms in growth sectors like technology or biotech.
   • Tip: Research the company’s historical growth rates and industry trends to choose the most suitable model for accurate projections.

How to Use It

1. Choose Valuation Model

   Select the valuation model that aligns with the bank’s financial profile and dividend policy to estimate its intrinsic value.

   • Dividend Discount Model (DDM): Ideal for banks that consistently pay dividends. This model calculates value based on the present value of expected future dividends. Use this if the bank has a reliable history of dividend payments.
   • Residual Income Model (RIM): Best for banks that reinvest earnings into growth rather than distributing dividends. This model uses book value and excess returns over the cost of equity. Use this for growth-oriented banks or those with irregular dividends.
   • Tip: Check the bank’s dividend history and strategic focus (e.g., growth vs. income) to select the most appropriate model.
2. Set Forecast Period

   Specify the number of years for projecting the bank’s future financial performance, typically between 3 and 5 years.

   • 3 years: Choose this in uncertain or volatile market conditions where long-term forecasts are less reliable due to economic instability.
   • 5 years: Opt for this when market trends are stable and the bank’s financial performance is predictable over a longer period.
   • Tip: Consider current economic conditions and the bank’s historical performance to determine the most suitable forecast period.
3. Enter CAPM Inputs

   Provide the components required for the Capital Asset Pricing Model (CAPM) to calculate the discount rate, which adjusts future cash flows to present value.

   • Risk-Free Rate: Use the current yield on 10-year government bonds as a baseline. For example, in Ghana, find this rate on the Bank of Ghana website or financial news outlets.
   • Expected Market Return: Estimate the average annual return of the broader stock market, typically ranging from 10-15%, adjusted based on historical data or local market conditions.
   • Beta: Input the stock’s volatility relative to the market, available from financial websites or calculated using our Beta Calculator.
   • Tip: Use up-to-date and region-specific data for each input to ensure accuracy in your discount rate calculation.

How to Use It

1. Gather Historical Returns

   Collect historical percentage returns for both the stock and the market index over consistent time periods (e.g., monthly or weekly) to calculate beta accurately.

   • For public stocks, access return data from financial platforms like Yahoo Finance, Google Finance, or Bloomberg.
   • For Ghana stocks, check the GSE website or AFX Kwayisi.
   • Tip: Use 12-24 months of data to balance accuracy and relevance, ensuring the periods align for both stock and market.
2. Input Stock Returns

   Enter the stock’s historical returns as a series of comma-separated percentage values, reflecting the chosen time periods.

   • Example: For monthly returns over three months, you might input "5.2, -3.1, 4.7" (representing +5.2%, -3.1%, and +4.7%).
   • Note: Ensure the data is in percentage form and corresponds to the same intervals as the market returns.
3. Input Market Returns

   Enter the market index’s historical returns as comma-separated percentage values, matching the stock return periods.

   • Example: For the same three months, input "4.1, -2.8, 5.0" if those are the market’s returns.
   • Tip: Select an appropriate market index (e.g., GSE All-Share Index for Ghana, S&P 500 for the U.S.) based on the stock’s market.
4. Calculate Beta

   Click the "Calculate Beta" button to compute the stock’s beta value, which indicates its volatility relative to the market.

   • Result: The calculator will output a number (e.g., 1.2 means the stock is 20% more volatile than the market).
   • Tip: Verify the result aligns with the stock’s expected risk profile based on its industry and past performance.

How to Use It

• Discounted Cash Flow (DCF) - Best for firms with predictable cash flows

  Use this method for private companies with stable and predictable revenue streams to estimate their value based on discounted future cash flows.

  1. Input Free Cash Flows for 1–5 years: Enter projected FCF amounts for each year, sourced from financial forecasts or historical data if available.
  2. Provide risk-free rate, market return, and beta: Input these CAPM components to calculate the discount rate (e.g., risk-free rate from government bonds, market return estimate, beta based on industry peers or our Beta Calculator).
  3. Enter debt, equity, tax rate, and growth rate: Specify the company’s capital structure, tax rate, and expected long-term growth rate to finalize the valuation.
  4. Tip: Use conservative FCF projections and verify inputs with industry benchmarks for accuracy.
• Venture Capital Method - Ideal for early-stage startups

  Apply this method to value high-growth startups by estimating their worth at exit, commonly used by venture capitalists.

  1. Specify expected exit value, target return, investment amount, exit timeline, and dilution factor: Input the anticipated sale value at exit (e.g., based on comparable exits), desired return rate (e.g., 10x), initial investment, years to exit, and ownership dilution percentage.
  2. Tip: Research recent startup exits in the same sector to set a realistic exit value and adjust for market conditions.
• ARR Multiple - Suitable for subscription-based firms

  Use this method for companies with recurring revenue models, such as SaaS businesses, to estimate value based on revenue multiples.

  1. Input Annual Recurring Revenue (ARR) and ARR multiple: Enter the company’s current ARR (e.g., from financial reports) and an industry-standard ARR multiple (e.g., 5x–10x, depending on growth stage).
  2. Tip: Benchmark the ARR multiple against similar subscription businesses to ensure a market-relevant valuation.

How to Use It

1. Access the Calculator

   Visit the calculator online to begin the valuation process.

   • Go to the Multi-Method Valuation Calculator on our site.
2. Choose Weighting Scenario

   Select a predefined weighting scenario to determine how much each valuation method (DDM, DCF, P/E) contributes to the final intrinsic value.

   • Conservative: Weights are 30% DDM Base, 20% DDM Sensitivity, 30% DCF, 20% P/E. Best for dividend-focused firms with stable cash flows.
   • Balanced: Weights are 20% DDM Base, 20% DDM Sensitivity, 40% DCF, 20% P/E. Ideal for companies with strong cash flows and moderate growth.
   • Growth: Weights are 20% DDM Base, 20% DDM Sensitivity, 30% DCF, 30% P/E. Suited for growth stocks with high market potential.
   • Tip: Choose based on the stock’s characteristics (e.g., Conservative for mature firms, Growth for tech startups).
3. Enter General Parameters

   Input market and growth assumptions that apply across all valuation methods.

   • Current Stock Price (GHS): Find the latest price on gse.com.gh.
   • Number of Years for High Growth: Select 3–5 years based on the company’s growth phase.
   • High-Growth Rate (%): Estimate using historical data from annualreportsghana.com.
   • Terminal Growth Rate (%): Set to match long-term GDP growth, sourced from data.worldbank.org.
   • Discount Rate (%): Use the result from our Cost of Equity Calculator.
4. Enter DDM Parameters

   Provide dividend-related inputs for the Dividend Discount Model.

   • Base Dividend per Share (GHS): Current dividend from gse.com.gh.
   • Sensitivity Dividend per Share (GHS): Enter a higher dividend scenario for sensitivity analysis.
   • Tip: Use historical dividend trends to inform your inputs.
5. Enter DCF Parameters

   Input cash flow data for the Discounted Cash Flow model.

   • Current FCFE per Share (GHS): Calculate Free Cash Flow to Equity per share using our FCFE Calculator.
   • Tip: Ensure FCFE reflects the most recent fiscal year for accuracy.
6. Enter P/E Parameters

   Provide earnings data for the Price-to-Earnings method.

   • Current EPS (GHS): Earnings per Share from annualreportsghana.com.
   • EPS Growth Rate (%): Base this on historical earnings growth.
   • P/E Multiple: Use an industry average from afx.kwayisi.org/gse/.
   • Projection Years for P/E: Choose 1–3 years for earnings projection.
7. Calculate

   Click “Calculate” to process all inputs and generate the weighted average intrinsic value per share.

   • Result: Displays individual valuations from DDM, DCF, and P/E, plus the weighted average.
8. Interpret Results

   Analyze the calculated intrinsic value against the current stock price to determine if the stock is overvalued (price > intrinsic value) or undervalued (price < intrinsic value).

   • Tip: Test different weighting scenarios to see how sensitive the valuation is to method emphasis.

How to Use It

1. Access the Calculator

   Navigate to the Cost of Equity Calculator to start calculating the required return for shareholders.

   • Go to the Cost of Equity Calculator on our site.
2. Gather Financial Data

   Collect the necessary financial data to compute the cost of equity using both CAPM and DDM methods.

   • CAPM Inputs: Obtain the Risk-Free Rate from bog.gov.gh, Beta from our Beta Calculator, and estimate Market Return (e.g., 12–15%) based on historical market performance.
   • DDM Inputs: Source Dividend per Share and Stock Price from gse.com.gh, and estimate Dividend Growth Rate (e.g., 5%) from historical dividend trends.
   • Weights: Assign weights to CAPM and DDM results (e.g., 60% CAPM, 40% DDM, totaling 100%) based on data reliability.
   • Tip: Use recent data to reflect current market conditions accurately.
3. Enter Data

   Input the gathered values into the calculator’s form to compute the cost of equity.

   • Example: Enter Risk-Free Rate: 25%, Beta: 1.2, Market Return: 15%, Dividend: 0.12 GHS, Stock Price: 2.83 GHS, Growth Rate: 5%.
   • Note: Ensure all inputs are consistent (e.g., percentages for rates, same currency for monetary values).
4. Calculate

   Click “Calculate” to generate the cost of equity based on the provided inputs.

   • Result: Outputs individual CAPM and DDM values (e.g., CAPM: 30%, DDM: 9.24%) and a weighted average (e.g., 21.7%).
   • Tip: Verify results align with industry norms for the stock’s sector.
5. Use Results

   Apply the calculated cost of equity in financial models to assess investment viability.

   • Use the weighted cost as the discount rate in DCF valuations or as part of Weighted Average Cost of Capital (WACC) calculations.
   • Tip: Adjust weights if one method’s data (e.g., dividends) is less reliable.

How to Use It

1. Access the Calculator

   Navigate to the FCFE Calculator to compute cash flow available to equity holders.

   • Go to the FCFE Calculator on our site.
2. Gather Financial Data

   Collect financial data over a chosen period (typically 3–5 years) to calculate FCFE accurately.

   • For years (e.g., 2020–2024), gather Net Income, Net Capital Expenditures (Capex), Change in Working Capital, and Net Borrowing from sources like annualreportsghana.com.
   • Tip: Use 5 years for stable companies or 3 years in volatile markets to balance trend reliability and relevance.
3. Enter Data

   Input the financial data for each year into the calculator to compute FCFE.

   • Example: For Year 1, enter Net Income: 1,000,000 GHS, Net Capex: 500,000 GHS, Change in Working Capital: 200,000 GHS, Net Borrowing: 300,000 GHS.
   • Note: Ensure all values are in the same currency and reflect the same fiscal period.
4. Calculate

   Click “Calculate FCFE” to process the inputs and obtain the Free Cash Flow to Equity for each year.

   • Result: For Year 1 example, FCFE might be 600,000 GHS (1,000,000 - 500,000 - 200,000 + 300,000).
   • Tip: Check calculations against company financials to ensure accuracy.
5. Use Results

   Utilize the calculated FCFE values in financial analysis or valuation models.

   • Apply FCFE in Discounted Cash Flow (DCF) models to estimate stock value or calculate FCFE per share by dividing by outstanding shares.
   • Tip: Use multiple years’ FCFE to identify trends and inform long-term investment decisions.

How to Use It

1. Access the Calculator

   Navigate to the M&A Calculator to evaluate the financial impact of a merger or acquisition.

   • Go to the M&A Calculator on our site.
2. Gather Financial Data

   Collect financial data for both the acquiring and target companies to assess the deal’s impact on EPS.

   • Obtain EPS, shares outstanding, and expected synergies from financial statements or databases like annualreportsghana.com.
   • Tip: Use the most recent annual or quarterly reports for up-to-date figures.
3. Enter Input Values

   Input the required financial metrics for both companies and the deal structure into the calculator.

   • Acquirer EPS: Pre-deal Earnings Per Share of the acquiring company (Net Income ÷ Shares Outstanding).
   • Acquirer Shares Outstanding: Total shares issued by the acquirer before the merger.
   • Target EPS: Pre-deal EPS of the target company (Net Income ÷ Shares Outstanding).
   • Target Shares Outstanding: Total shares issued by the target before the merger.
   • New Shares Issued in Deal: Number of new shares the acquirer will issue to finance or complete the merger.
   • Expected Annual Synergy Value (GHS): Estimated annual earnings boost from cost savings or revenue increases due to the merger.
   • Tip: Estimate synergies conservatively to reflect realistic post-merger benefits.
4. Calculate

   Click the “Calculate” button to process the inputs and determine the deal’s effect on EPS.

   • Result: Outputs combined earnings, total shares post-deal, and pro-forma EPS.
5. Interpret Results

   Analyze the results to assess whether the merger or acquisition is accretive or dilutive to EPS.

   • Accretive: If pro-forma EPS exceeds the acquirer’s pre-deal EPS, the deal increases shareholder value.
   • Dilutive: If pro-forma EPS is lower than the acquirer’s pre-deal EPS, the deal reduces shareholder value.
   • Tip: Consider synergies and deal structure adjustments if the result is dilutive to explore value-enhancing options.

How to Use It

1. Enter Bank Details

   Provide the bank's name and Exposure at Default (GHS thousands), found in "Borrowings" from the Statement of Financial Position.

   • Bank Name: Identify the financial institution you're evaluating
   • Exposure at Default: Total borrowings from the bank's balance sheet
   • Tip: Use the most recent financial statements for accuracy
2. Input Risk Parameters

   Enter Net Impairment Loss and Loans and Advances (GHS thousands) from financial statements to calculate Probability of Default (PD). Enter Liquid Assets and Total Assets to calculate Loss Given Default (LGD).

   • Net Impairment Loss: From Statement of Comprehensive Income
   • Loans and Advances: From Statement of Financial Position
   • Liquid Assets: Cash and equivalents from balance sheet
   • Total Assets: From Statement of Financial Position
   • Tip: Ensure all values are in thousands of GHS
3. Provide Liquidity Metrics

   Input Current Assets, Current Liabilities, and Non-Pledged Trading Assets (GHS thousands) from the Statement of Financial Position to calculate Current, Quick, and Cash Ratios.

   • Current Assets: Cash, Non-Pledged Trading Assets, and Other Assets
   • Current Liabilities: Deposits from Banks, Customers, and Other Liabilities
   • Non-Pledged Trading Assets: From Statement of Financial Position
   • Tip: Verify these values match the bank's financial reports
4. Provide Financial Metrics

   Input Profit Before Income Tax and Interest Paid (GHS thousands) from the Statement of Comprehensive Income to calculate the Interest Coverage Ratio.

   • Profit Before Income Tax: From income statement
   • Interest Paid: From cash flow statement
   • Tip: These values indicate the bank's ability to service debt
5. Calculate and Interpret

   Click "Calculate" to compute Expected Loss, liquidity ratios, and Interest Coverage Ratio. Review the results and recommendations to decide if the bank is safe for fixed deposits or repos.

   • Expected Loss: PD × LGD × Exposure at Default
   • Liquidity Ratios: Assess the bank's ability to meet short-term obligations
   • Interest Coverage: Measures ability to pay interest expenses
   • Tip: Lower expected loss indicates lower credit risk