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    Intrinsic Values and Stock Prices PDF

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    Phil Singleton
    The intrinsic value of a stock refers to its fundamental value based on accurate risk and return data, whereas the market price is determined by investor perceptions. A stock trading below its intrinsic value is undervalued, while one trading above is overvalued. The goal of company managers should be to maximize the firm's intrinsic value to increase stock price over the long run.

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    Intrinsic Values and Stock Prices PDF

    Uploaded by

    Phil Singleton
    262 views2 pages
    The intrinsic value of a stock refers to its fundamental value based on accurate risk and return data, whereas the market price is determined by investor perceptions. A stock trading below its intrinsic value is undervalued, while one trading above is overvalued. The goal of company managers should be to maximize the firm's intrinsic value to increase stock price over the long run.

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    5. Intrinsic values and stock prices.pdf

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    The intrinsic value of a stock refers to its fundamental value based on accurate risk and return data, whereas the market price is determined by investor perceptions. A stock trading below its intrinsic value is undervalued, while one trading above is overvalued. The goal of company managers should be to maximize the firm's intrinsic value to increase stock price over the long run.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    262 views2 pages

    Intrinsic Values and Stock Prices PDF

    Uploaded by

    Phil Singleton
    The intrinsic value of a stock refers to its fundamental value based on accurate risk and return data, whereas the market price is determined by investor perceptions. A stock trading below its intrinsic value is undervalued, while one trading above is overvalued. The goal of company managers should be to maximize the firm's intrinsic value to increase stock price over the long run.

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    © All Rights Reserved
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    Download as pdf or txt
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    Attempts: 3 - - Keep the Highest: 3 / 3

    5. Intrinsic values and stock prices

    The intrinsic value of a company’s stock, also known as its fundamental value, refers to the stock’s “true” value based on accurate risk and return
    data. The value perceived by stock market investors determines the market price of a stock.

    A stock trading at a price below its intrinsic value is considered to be undervalued. A stock trading at a price above its intrinsic value is considered to

    be overvalued.

    The goal of the managers of a publicly owned company should be to maximize the firm’s intrinsic value .

    Points: 1/1

    Explanation: Close Explanation

    A stock’s intrinsic value is an estimate of the stock’s “true” value based on accurate risk and return data. Maximizing a firm’s intrinsic value
    will maximize the average stock price over the long run, but not necessarily the current market price at each point in time. The primary goal for

    managers of publicly owned companies is to maximize the long-run value of the firm’s common stock. The best way for managers to achieve
    this goal is to focus on maximizing the firm’s intrinsic value.

    An analyst with a leading investment bank tracks the stock of Mandalays Inc. According to her estimations, the value of Mandalays Inc.’s stock should

    be $69.54 per share, but Mandalays Inc.’s stock is trading at $55.78 per share on the New York Stock Exchange (NYSE). Considering the analyst’s
    expectations, the stock is currently:

    overvalued

    undervalued

    in equilibrium

    Points: 1/1

    Explanation: Close Explanation

    A stock trading at a price below its intrinsic value is considered to be undervalued. A stock trading at a price above its intrinsic value is
    considered overvalued.

    Here, stock of Mandalays Inc. is trading at $55.78 per share, which is less than the intrinsic value of $69.54 per share, as determined by the

    analyst. Thus, according to this analyst’s estimates, the stock of Mandalays Inc. is considered to be undervalued.

    The following graph shows a stock’s actual market price and intrinsic value over time. The intrinsic value comes from another research analyst. Use
    the dropdown menus to label the periods in which the stock was undervalued or overvalued.
    Actual Stock Price
    30

    Intrinsic Value
    29

    28
    Stock Price and Intrinsic Value ($)

    A
    27

    26

    25

    24

    B
    23

    22

    21

    20
    2013 2014 2015 2016 2017 2018
    Years

    A Overvalued

    B Undervalued

    Points: 1/1

    Explanation: Close Explanation

    According to the graph, the analyst estimated the intrinsic value of the stock to be more than the market price of the stock between 2014 and

    2016. Thus, the stock was considered to be undervalued during that time period. However, according to this analyst, the market stock price
    exceeded the intrinsic value of the stock after 2016. From then until the end of 2019, the stock was overvalued.

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