Question

1. Offer some reasons that the intrinsic value that you might calculate with the methodologies learned might yield a price different 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 values.

2. Describe three different examples of analysis where you might use discounted cash flows.

400 words please

Answer 1

1. Intrinsic value which is calculated using various different methodologies like dividend discounting model or discounted cash flow method or other relative valuation methods will not be exactly same in respect to the market value which is currently traded in the market because intrinsic value will be reflecting the value of the company as per the the books of accounts and other risk adjustment which are done in respect to the market price but current market price of the share is reflecting all such informations which are expecting the future performance of the company and the sentiments of the investors in the market along with the liquidity and other factors which the market is dependent upon so it is dependent not just upon the company but it is also dependent upon the overall economy so market has its own circumstances and situations and hence the share prices are valued differently than the intrinsic value and hence these price discrepancies are always advantages for the investors in order to make a rate of return which is higher than the market rate of return if they are able to determine the price discrepancy is in advance.

for example if you calculate the value of a company in respect to the discounted cash flow method the overall intrinsic value will be having a difference with the current market value of the company because current market value will be reflecting the sentiment of the investor in the market.

2. Different example of analysis when I will be using discounted cash flow method when I am expecting that the company is having continuous generation of the cash flow in the long run and I will be trying to adjust the cash flow in respect to the risk along with I will try to adjust the cash flow in respect to the overall growth associated with the company and hence the overall cash flows are determined in advance and these cash flows will be discounted at the present value in order to determine the current intrinsic value of the company which will be letter helpful in determination of whether the stock is undervalued or overvalued that I will be trying to make the investment accordingly after comparing it with the current market price.