Question
In: Finance
Why does the ‘valuation’ of a company play such an important role when determining the potential...
Why does the ‘valuation’ of a company play such an important role when determining the potential return of an investment opportunity? Please provide an example to illustrate your reasoning.
Solutions
Expert Solution
Valuation of a company will always be playing an important role in determining the total rate of return on investment because valuation of a company means that finding out the intrinsic value of the company and then comparing the intrinsic value of that company to that of the current market price of the company and accordingly deciding upon whether to invest into the company or not.
This type of investing is known as value based investing in which there is always a focus to find discrepancy between the price and the value of a security and these discrepancy are to be capitalised by the investors.
when the intrinsic value of the shares calculated is lower than the current market price of the share, then the shares are overvalued and value best investment will advocate for avoiding investment into those securities.
when the intrinsic value of shares calculated is higher than the current market price of the share then the shares are undervalued in nature, and the value based investment will advocate for investment into those shares to capitalise upon the difference.
For example it can be said that when calculation for the intrinsic value of the share is done by intrinsic value of Apple will come out at 400, and the market price of Apple is 300, then the shares would be purchased by the value based investor believing thatshare will have a upside in future because it is currently undervalued.
So it can be said that valuation is an important perspective of the investment and it is always a focus to capitalise upon the difference between the price and the intrinsic value of the share.
jeff jeffy answered 2 years agoRelated Solutions
How important a role does perception play in determining whether an employee is receiving equitable treatment?
What role does human capital play in growth and why is it important?
What role does editorial thinking play in data visualization? Why is it important or not important...
When determining the risk-bearing ability of an agricultural business, financial reserves play an important role. True...
What role does a firm's strategy play in determining organizational structure? Why are boundaries problematic for...
Why are action potentials so important? What role does astimulus play?
What role does the hormone leptin play in pregnancy in a woman why is it important
What role does myelin play, why is it important, and how is it made and maintained?
Why does Distribution play an important role in the Supply Chain of all companies?
What role does the Patella play in the patellofemoral joint complex and why is it important?
- 1. Consider the following nuclides: &
- In general, teams can be described three ways. Name and define each.
- JAVASCRIPT: Please create an array of student names and another array of student grades. - Create...
- Topic - Construction: Structural, loads, tension 1.) Explain why pure tension members are the most efficient...
- Procter and Gamble (PG) paid an annual dividend of $ 1.62$1.62 in 2009. You expect PG...
- locate a recent case of online child pornography. Write a summary of the incident and describe...
- #Python 5. Write function called evaluate() that evaluates the following Python expressions or assignments as specified:...