Question

The goal of the managers of a publicly owned company should be to maximize the firms 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 $8.79 per share, but Mandalays Inc.s stock is trading at $1.59 per share on the New York Stock Exchange (NYSE). Considering the analysts expectations, the stock is currently: O overvalued O In equilibrium O Undervalued The following graph shows a stocks 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) 401 38 36 34 32 30 28 26 24- Actual Stock Price Intrinsic Value 20-t 2000 2001 2002 2003 2004 2005 YEARS

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Answer #1

The goal of the managers of a publicly owned company should be to maximize the firm's intrinsic value

(Substitute options are: value, share price, share value, shareholders' value - all these options are correct).

This is the first and primary goal of finance managers - to create wealth for the shareholders, maximize firm's share price or intrinsic price.

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The trading price is far lower than expected price. Hence, the stock is undervalued.

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In the first half of the graph, the traded price < intrinsic value; hence the stock is undervalued in this zone.

In the second half of the graph, the stock is overvalued.

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