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The stock price is $20 per share and the book value is $22. The growth rate...

The stock price is $20 per share and the book value is $22. The growth rate is 6% and the EPS is $2. Who might buy this stock and why?

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Expert Solution

In this case, it is given that the market value of the share is lesser than the intrinsic value of the share,so all those persons who are wanting to buy an undervalued stocks and value investor who are looking for capitalise upon the discrepancy of price and book value will be trying to buy this and maximize the benefit as they believe that market will be discounting the book value one day and the current market price will be trading at the book value so they will be gaining.

It is also seen that the company is maintaining a growth rate of 6% and Earning per share of $2 so the company is also continuously making profit and expected to grow and the company is overvalued because the book value is lower than the actual market value of share So, this difference is creating a window for value investors and those value investors who are looking for investing into an overvalued share for a longer period of time in order to gain from discrepancy of price and value, will be investing into this share.

jeff jeffy answered 2 years ago
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