Question

1.I offer some reasons that the intrinsic value that you might calculate with the methodologies learned might yield a price difference than what the stock trades at in the stock market. You can reference any method of valuation models in offering thoughts on why there might be differences between intrinsic and market value.

2.Discribe three different examples of analysis where you might use discounted cash flow.

Answer 1

Approaches to intrinsic value can distinguish value investors from growth investors. Although growth investors aggressively rely on earnings estimates that could be wrong, too high, or otherwise unreliable, value investors only buy stocks selling at a discount to their intrinsic value, and then patiently wait for the fair value of their investments to be realized. Even though both types of investors must face the prospect that their companies may falter, mature, or get so big that maintaining historical growth rates is impossible, most value investors buy stocks with the expectation that the stockprice will rise to match the intrinsic value of the company rather than the other way around.

Intrinsic value takes the value of intangible aspects of a company into account. However, investors can never know everything about a company, and they can't always predict which factors will negatively affect a stock. Companies whose assets happen to be primarily intangible, such as technology and other companies with a lot of intellectual property, may experience considerable differences between their market values and their intrinsic values.

2.Three examples of analysis where we use discounted cash flows are:

Capital budgeting: Using the Net Present Value method we decide to accept or reject a project. In this method we find out the present value of the cash flow expected in future by using discount rate.

Discounted Cash Flow (DCF) valuation is one of the fundamental models in value investing. The model is used to calculate the present value of a firm bydiscounting the expected returns to their present value by using the weighted average cost of capital.

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