Question

Why do Investors and Companies Care about Intrinsic Value?

The intrinsic value of a firm is determined by the size, timing, and risk of its expected future free cash flows (FCF). There are two models used to estimate intrinsic values: the discounted dividend model and the corporate valuation model.

The discounted cash flow (or DCF) approach describes a method of valuing a project, company, or asset using the concepts of the time value of money. All future cash flows are estimated and discounted to give their present values. The discount rate used is the appropriate cost of capital and may incorporate judgments of the uncertainty (riskiness) of the future cash flows.

The corporate valuation model - involves estimating the worth or price of a company, one of its operating units, or its shares. There are many reasons for the valuation: the purchase or sale of the business, mergers, and acquisitions, buy-back agreements, expanding the credit line, or tax matters. Please answer with used answers.

Answer 1

• Intrinsic value is defined as real value of particular aspects. It's one of the way to determine the true value of particular asset. Intrinsic value of a particular asset or a company is it's actual value which is independent of the market value.
• Whenever intrinsic value of a firm or a company is determined many factors are taken into consideration such as future cashflow, risk, timing, management, size, growth of the company, competitive advantage, rate of return
• Intrinsic value defines company worth by estimating the actual value. Intrinsic value of company is foremost important value which is considered by investor and other companies while taking financial decisions.
• Investors and companies are important player of the today's competitive market. Investors are people who makes investment in the financial projects While making financial decisions, the investors and companies consider the intrinsic value of asset as the financial decisions taken at macro level have great impact on the current workings as well as future aspects. Determining intrinsic value of the company helps the investors in making successful financial decisions.
• Intrinsic value are determined by two models Discounted dividend model and corporate valuation model
• Discounted cashflow approach describe a method of valuing a project, company or asset using concepts of time value of money . All cashflow are estimated and discounted to give their present values. This method of valuing intrinsic value help investors in taking decisions whether to make an investment in particular stock or not. Whether it is worth to make an investment, whether to make investment for short-term or long term The investors can easily estimate the actual value of particular stock or a company . Intrinsic value is key factor in taking any type of financial decisions
• The second model is corporate valuation model involves estimating the worth or price of a company, one of its operating units or it's shares. Valuation of company is an important consideration in financial dealings from investment point of view .The value of company is also important to key personnel to set the value of company for selling company or for covering under insurance or for raising money from market or to qualify for loan.
• Whenever companies consider decisions regarding merger, acquisition, buyback, de-merger, expansion etc intrinsic value of the company plays major role . Intrinsic value determines the exact position of company which directly and indirectly helps investors and company to take decisions considering the other factors also.
• The financial decisions have great impact on the companies in achieving its objective , future working, increasing shareholders value , earning profits, increasing net worth of companies etc hence the investors and companies take due care while making financial decisions.
• Hence by estimating intrinsic value of companies, it's quite easy for investors as well as companies in considering financial decisions. As the intrinsic value of asset or intrinsic value of company can influence the decisions of investors and companies which have great impact on companies future growth as well profitability , stability hence they care much about intrinsic value.