Question

Stock prices and intrinsic values

Benjamin Graham, the father of value investing, once said, “In the short run, the market is a voting machine, but in the long run, the market is a weighing machine.” In this quote, Benjamin Graham was referring to the key difference between the “price” and the “value” of a security.

In November 2006, Citigroup’s stock (NYSE: C) was trading at $49.59. Following the credit crisis of 2007–2008 and by the end of October 2009, Citigroup’s stock price had plummeted to $4.27. Several banks went under, and others saw their stock prices lose more than 60% of their value.

Based on your understanding of stock prices and intrinsic values, which of the following statements is true?

The intrinsic value of a stock is based only on perceived investor returns.

A stock’s market price is often based on investors’ perceived risk in the company.

You can estimate the value of a company’s stock using models such as the corporate valuation model and the dividend discount model. Which of the following companies would you choose to evaluate if you were using the discounted dividend model to estimate the value of the company’s stock?

A company that has been distributing a portion of their earnings every quarter for the past six years.

A company that is in a high-growth stage and plans to retain all its earnings for the next few years to support its growth.

Which of the following describe the reason(s) why maximization of intrinsic stock value benefits society? Check all that apply.

Successful companies can avoid raising external funds in the financial markets.

Successful companies higher more employees.

Stock price maximization requires efficient, low-cost businesses.

Most investors prefer companies that can raise prices beyond reasonable levels.

Answer 1

Question:- Based on your understanding of stock prices and intrinsic values, which of the following statements is true?

1. The intrinsic value of a stock is based only on perceived investor returns.
2. A stock’s market price is often based on investors’ perceived risk in the company.

Ans:- A stock,s market price is often based on investors perceived risk in the company.

Reason:-

1. I Choose 2nd option because it true and intrinsic value is fair value of share.
2. I Cannot 1st option because intrinsic value of stock is not based on perceived investor returns.

Question:- You can estimate the value of a company’s stock using models such as the corporate valuation model and the dividend discount model. Which of the following companies would you choose to evaluate if you were using the discounted dividend model to estimate the value of the company’s stock?

1. A company that has been distributing a portion of their earnings every quarter for the past six years.
2. A company that is in a high-growth stage and plans to retain all its earnings for the next few years to support its growth.

Ans:- A company that is in a high-growth stage and plans to retain all its earnings for the next few years to support its growth.

Reason:-

1. The using of discounted dividend model to estimate the value of the company’s stock is perfect and true option is the company with high-growth stage and uses all earning to support the growth of the company in future to retain high-growth.
2. I can't choose option 1st because the company distributing a portion of their earning so it cannot grow more compare to 2nd option company.

Question:- Which of the following describe the reason(s) why maximization of intrinsic stock value benefits society? Check all that apply.

1. Successful companies can avoid raising external funds in the financial markets.
2. Successful companies higher more employees.
3. Stock price maximization requires efficient, low-cost businesses.
4. Most investors prefer companies that can raise prices beyond reasonable levels.

Ans:-

• Stock price maximization requires efficient, low-cost businesses.
• Most investors prefer companies that can raise prices beyond reasonable levels.

Reason:-

1. The reasons that maximization of intrinsic stock value benefits society is successful companies higher more employees and also stock price maximization requires efficient, low-cost businesses and the main reason is most investors prefer companies that can raise prices beyond reasonable levels.
2. The option first is not choose because successful company cannot avoid raising external funds in the financial markets.It can raise external fund to more growth of stock.
3. The option second is also not correct because the successful company higher more employees is not right reason.