Intrinsic values and stock prices The intrinsic value of a company\'s stock, als

Question

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 expected future cash flows and the risks involved. 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 Which of the following statements best describes a marginal investor? O A marginal investor thinks that the firm's stock is priced too high, and she would only buy more stock if the price dropped sharply A marginal investor would buy more stock if the price fell slightly, would sell stock if the price rose slightly, and would maintain her current holding unless something were to change A marginal investor thinks that the firm's stock at the current price is a good deal, and she would buy more stock if she had more money to invest. 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 $11.52 per share, but Mandalays Inc.'s stock is trading at $19.57 per share on the New York Stock Exchange (NYSE). Considering the analyst's expectations, the stock is currently: Undervalued O In equilibrium Overvalued 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 on the graph to label the periods in which the stock was undervalued or overvalued STOCK PRICE (Dollars) 40 38 36 34 32 30 28 26 24 Actual Stock Price Overvalued Undervalued Intrinsic Value 20 2000 2001 2002 2003 2004 2005 YEARS

Explanation / Answer

1. Answer is B

Marginal investor is a represntative of all the investors whose action will reflect in the stock price. It is the marginal investor who will determine the stock price

2. Answer is C

As per the analyst, intrinsic value = 11.52

Current price of the stock = 19.57

So if we assume that intrinsic value is calculated using all the relevant information and it represents the price, share of the company is trading at premium to intrisic value. So it is overvalued

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