If, using the one-period model, you calculate a fair price (present value) of a stock to...

If, using the one-period model, you calculate a fair price (present value) of a stock to be $25/share, but the same stock is currently trading at $29.00/share on Nasdaq what should you do

Buy the stock as the present value of the stock is lower than the current stock price
	Sell the stock as the present value is higher than the current stock price
	Sell the stock as the present value is lower than the current stock price
	Buy the stock as the present value of the stock is higher than the current stock price

Solutions

Expert Solution

If, using the one-period model, you calculate a fair price (present value) of a stock to be $25/share, but the same stock is currently trading at $29.00/share on Nasdaq what should you do?

Answer: Sell the stock as the present value is lower than the current stock price

Explanation

Now we will check each options provided in the question

Data provided in the question

Current stock price = $29

Present Value = $25

1. Buy the stock as the present value of the stock is lower than the current stock price.

Buying recommendation for the stock is given when share current price is lower than the present value, so this buying is not recommended.

2. Sell the stock as the present value is higher than the current stock price.

This statement is wrong; in the given question present value is lower than the current price of the share.

3. Sell the stock as the present value is lower than the current stock price

Selling recommendation for the share is given when shares current price is higher than the present value of the share, so this is the correct answer.

4. Buy the stock as the present value of the stock is higher than the current stock price

This statement is wrong; in the given question present value is lower than the current price of the share.

jeff jeffy answered 1 year ago

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