Which r in perpetuity formula to pricing a business?
In the equity markets, the P/E is usually somewhere around 15.  The P/E can be viewed as the inverse of the rate of a perpetuity. Since the average is 15, and the E/P of that would be 6.7%, r should be 6.7% on average. If your business is growing, the growth rate can be incorporated like so: As you can see, a high g would make the price negative, in essence the seller should actually pay someone to take the business, but in reality, r is determined from the p and an estimated g. For a business of any growth rate, it's best to compare the multiple to the market, so for the average business in the market with your business's growth rate and industry, that P/E would be best applied to your company's income.
"The fallacy in your question is in this statement: ""The formulas must exist, because prices can be followed real time."" What you see are snapshots of the current status of the stock, what was the last price a stock was traded at, what is the volume, is the price going up or down.  People who buy and hold their stock look at the status every few days or even every few months. Day traders look at the status every second of the trading day.  The math/formula comes in when people try to predict where the stock is going based on the squiggles in the line. These squiggles move based on how other people react to the squiggles.  The big movements occur when big pieces of news make large movements in the price. Company X announces the release of the key product will be delayed by a year; the founder is stepping down; the government just doubled the order for a new weapon system; the insiders are selling all the shares they can. There are no formulas to determine the correct price, only formulas that try to predict where the price may go." like any share, valuing facebook requires a projection of earnings and earnings growth to arrive at a present value for the right to share in these future earnings.   there are economic arguments to be had for facebook to see either a negative or positive future long term net income growth. given the uncertainty we can establish a very rough baseline value by treating it as a perpetuity (zero growth) discounted at historical equity growth rate (8%) with some very simple math. An annual net income of 900 million discounted at 8 percent in perpetuity is worth 11.25 Billion.  Now, take into account the fact that tech stocks trade at an inflated PE multiple of around 3 times that of a mature company in an established industry (PE x10-20 for average stocks and anywhere between x30-60+ for tech stocks), and I would expect the market cap for this perpetuity to be around 34 Billion.  A market cap of 34 billion is a share value of around 15.5, which is the point where I would take up a long position with fair confidence. I do think that the share deserves a premium for potential income growth (despite the current and potential future revenue losses) simply due to the incredibly large user base and the potential to monetize this. Of course, it wasn't worth the 22 dollar premium that IPO buyers paid but its worth something.  I think there is simply too much uncertainty for me to go long in the next 6 months unless it hits 15/share which may never happen. If the company can monetize mobile and show quarterly results in the next year I would consider a long position for anywhere from 15-20 a share. If I understand what you're asking, I think you're looking at the relationship wrong.  Yes, when one currency has a higher interest rate relative to another, it's value should, theoretically, appreciate.  For example, if the USD interest rate is 10% and the EUR is 5%, the USD should appreciate in value against the EUR.  However, the parity relationship tells you the price at which an investor would be indifferent to the difference in interest rates.  So using the formula for interest rate parity:  (1+r(USD))/(1+r(EUR)) = F/S   and plugging in the interest rates from above and a spot rate of $1.5/EUR:  (1.1)/(1.05) = F/(1.5)  The 1 year forward rate would have to be $1.5714/EUR in order for the investor to be INDIFFERENT between holding USD or EUR.  All this assuming interest rate parity holds.  I'm not big on Econ but this is how I understood it when studying for the CFA exam the past few months.  So please, someone correct me if I'm wrong. Personally the main disadvantages are perpetuation of the credit referencing system, which is massively abused and woefully under regulated, and encouraging people to think that it's ok to buy things you don't have the money to buy (either save up or question price/necessity). Need help with a finance problem I'm currently facing in my business.  My company might be going through an acquisition and I need to understand how the dilution works out for shareholders.  They currently have large shareholder loans (debt), and will be converting to equity pre-transaction.  For this case, if the original company value = $1 MM and the SHL value = $1 MM, I'm assuming that'd dilute equity by 50% for all shareholders if converted to equity at original company value.  Correct?  However, what if the $1 MM in shareholder loans were converted at the market value of the company, say $4 MM?    I might be confusing myself, but just want to confirm.. thanks! "Sometimes an assumptions is so fundamentally flawed that it essentially destroys the relevance and validity of any modelling outputs.  ""Obviously, we're assuming the company can pay it back""  Is one of those assumptions.  The person gets a notes stating that they will get $525 'IN ONE YEAR' You need to divide $525/(1+Cost of Capital)^n n being the number of periods to find out what the note will be worth today.  Google 'Present Value of an Annuity' to deal with debt that is more complex than you have $500 now and give me $525 in a year..." In my original question, I  was wondering if there was a mathematical convention to help in deciding on whether an equity offering OR debt offering would be a better choice. I should have clarified better in the question, I used Vs. which may have made it unclear. "If the time horizon is not indicated, this is just a ""fair price"". The price of the stock, which corresponds with the fair value of the whole company. The value, which the whole business is worth, taking into consideration its net income, current bonds yield, level of risk of the business, perspective of the business etc.. The analyst thinks the price will sooner or later hit the target level (if the price is high, investors will exit stocks, if the price is cheap, investors will jump in), but no one knows, how much time will it take."