Question

Many celebrated economists have likened the recent novel covid-19 pandemic to "the Great Depression" of the 1930s.One of the havocs this pandemic has caused is the general decline in the value of most stocks.As a student of corporate finance, what cardinal concept in finance will you attribute this to and what are the critical issues involved in this concept.

Answer 1

As corporate finance students, we may often look towards the tools of fundamental analysis to assess our investments. One such tool is the intrinsic value.

The intrinsic value refers to the self-generated value of any investment avenue. It helps us to understand if the investment is able to generate returns well, without the help of any external factors. Many times, we might feel that some market factors, like current Covid-19 pandemic, may have led to a stock being overpriced or underpriced. To check if our instincts are correct, we can use the formulas of intrinsic value to determine the fundamental value of the stock. Intrinsic value is an important aspect for value investors, who look for stocks that might be undervalued in the market.

DCF model is widely used for calculating the intrinsic value of stocks:

Discounted Cash Flow Model

In this model, an investment is valued by forecasting its cash flows for some years, and discounting them to calculate a present value. This model is based on the premise that an investment’s value is created through the cash it can generate, rather than just its supply and demand.

Many companies' projected earnings have taken a hit, thanks to the Pandemic, due to which their perceived intrinsic value may have fallen in the eyes of investors. This has resulted in market prices of most of these stocks falling.