Question

What is the difference between intrinsic value and price in valuation theory?

Answer 1

Question:What is the difference between intrinsic value and price in valuation theory?

Answer:

Summary

Valuation Theory provides an understanding on how to value companies that employ nonstandard accounting procedures, particularly companies in emerging markets and those that require a wider variety of options than standard texts provide.

Intrinsic Value:intrinsic value is the fundamental value, which is generally not something that is readily provable. Intrinsic value is usually internal or private estimates of your company's value or worth. It is the value determined by incorporating all applicable information and data necessary to value your company, whether that information is generally available or only known to your company's insiders.

Market Value(Price):A company's market value is based on the expectation today of the company's future financial and operational performance. In layman's terms, market value involves the expectation of a cash payout at some point in the future and an evaluation of how risky that payout will be.

Differences between intrinsic value and Market Value(Price)

There is a significant difference between intrinsic value and market value, though both are ways of valuing a company. Intrinsic value is an estimate of the actual true value of a company, regardless of market value. Market value is the current value of a company as reflected by the company's stock price.Market value is generally driven by public, or external, opinions and expectations, whereas intrinsic value is driven by private, or internal, opinions and expectations. A company's financial goal is to maximize shareholder wealth, whether the company is public or private. This wealth refers to intrinsic value because the market value may or may not, at any given time, fully reflect a company's value. With private companies, fewer people hold the shares, so the intrinsic value may be much higher than the market value. A company can counter this when seeking additional investors by using an investment bank or public relations firm to actively publicizing the company and its achievements.