Question

Determine whether stock prices are affected more by long-term or short-term performance. Provide one example of the effect that supports your claim. Value a share of TFCbs stock using a growth model method and compare that value to the current trading price of a share of TFC. Determine whether the stock is undervalued or overvalued. Provide a rationale for your response.

Answer 1

Performance of a stock in a market is a very crucial barometer for company's health. A company's stock price helps an investor to evaluate about his growth and earnings in the future. A positive performance by the stock in the market leaves an optimist impact on the investor and also states company's prospects.

Short term or long term both situations have an impact on stock performance.Stock price can either rise or fall in both short or long term. Although if we consider a short term situation things are very volatile here and hence stock prices can show a lot of fluctuations.

As long term itself states smooth and steady path volatility in stock is minimal here.  

Lets check if a stock is overvalued or undervalued with the help of an example:

Let's assume TFCbs Company intends to pay a $2 dividend per share (DPS) next year and you expect this to increase by 6% per year thereafter. Let's further assume your required rate of return on TFCbs Company stock is 10%. Currently, TFCbs Company stock is trading at $12 per share. Using the formula above, we can calculate that the intrinsic value of one share of TFCbs Company stock is:

$2.00/(.10-.05) = $40

According to the model, TCBbs Company stock is worth $40 per share but is trading at $12; the Growth Model suggests the stock is undervalued.

Thus from above example we can state that if conditions are stable or not so volatile in short term a stock can perform better than long run and can give a good return.

Short term performance of a stock can be better than long term, but keeping in mind various factors as:

• Market conditions
• Investors mind set
• Company financial status etc

Hence as per my call short term investor can perform well if he maintains a balance with all the factors.