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.

Answer 1

Answer(1): Differences between intrinsic and market values- Are as following:

1. Intrinsic value is the fair or actual value of the company's stock price while market value is the current market price of the share, traded on the exchange.
2. When intrinsic value is higher than the market value, company's share price is considered undervalued and if it is lesser than the market value then share price is considered as overvalued stock.
3. Intrinsic value is calculated on the basis of discounted cash flow and growth rate while market value depends on the demand and supply of shares, expectation of public and other market conditions.

Answer(2): Discounted Cash flow- It is the method of evaluating the investment opportunity by discounting the future cash flow with the help of required rate of return.

Application-

1. This method is used in choosing the best investment alternative. If the present value of discounted cash flow is higher than the cost of investment then this is a good opportunity.
2. This is used to calculate the intrinsic value of stock.
3. This method is also used in the time value of money concept.