The intrinsic value of a stock as we learned how to calculate it; dividend disco

Question

The intrinsic value of a stock as we learned how to calculate it; dividend discount model, corporate valuation (DCF), and valuation by multiples might be different than the actual stock price in the market. Also, let's discuss a little bit about real live stocks that trade in the market. Offer some reasons that the intrinsic value that you might calculate with the methodologies learned might yield a price different than what the stock trades at in the stock market. You can reference any method of valuation models in offering thoughts on why there might be differences between intrinsic and market values.

Discuss the performance of the stock over the last year and offer your thoughts being specific about why the stock has done well or not.

Explanation / Answer

There is bound to be a difference in the intrinsic value of a company and its market value as reflected by its stock prices. Intrinsic value is an estimate of the true value of an organization as calculated by one of the methods like the dividend discount model or the discounted cash flow (DCF) analysis or the multiple valuation technique.

Take the case of using the DCF method. The first step is to forecast and make projected income statement, balance sheet and cash flow statements. The projections are based on certain assumptions and certain variables which may not always be 100 percent accurate. There are assumptions made to calculate the terminal growth rate (the rate by which the free cash flow will grow beyond the explicit period). The assumption is made both on the basis of qualitative analysis as well as quantitaive analysis. It's very hard for the qualitatitive analysis to be accurate. Even small deviations in assumptions and qualitative analysis will cause a change in the intrinsic value. If the market, in reality, unfolds in a different way than as assumed by you, the intrinsic value will be different from the market value.

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