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Why do Investors and Companies Care about Intrinsic Value?

Why do Investors and Companies Care about Intrinsic Value?

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Expert Solution

Intrinsic value is the value calculated based on the projection of future cash flows to the firm. Investors and Companies care about intrinsic value because the intrinsic value of a stock tells us whether the stock is underpriced or overvalued.

Suppose if the intrinsic value of a stock is less than its current trading price this means that the stock is overvalued and an investor should not invest in that company whereas the intrinsic value of a stock is greater than its current trading price means that the stock is undervalued and will appreciate at price in future and therefore, is a good investment.

Investors should sell stocks whose intrinsic value is less than the current trading price and they should invest in companies whose intrinsic value is more than its current trading price.

Hence, the Intrinsic value should be looked into before investing. Therefore, Investors and companies care about the Intrinsic value

jeff jeffy answered 2 months ago
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