stockholders would want the current market price to be above the intrinsic value and my question...

stockholders would want the current market price to be above the intrinsic value and my question to you is wouldn't this create a possible overvaluation?

Expert Solution

Before investing we should know whether the stock is undervalued or over valued. To find it out, the first thing you should know is the intrinsic value of a stock and then compare it with the current market price. Market value is the current price of the stock. The current market value is determined by supply and demand. If the demand of particular stock is higher then the market value will be higher than the book value. Incase of intrinsic value this is determined by dedcting all the liabilities with the sum of assets. We can use the price to book value to know whether the stock is overvalue or undervalued. When Profit to book value compared with the return on equity we can understand the status of the share, whether it is undervalued or overvalued. Overvalued stock has a current price that is not justified by its earnings outlook.

If the current market price is higher than the intrinsic value then the stock is said to be overvalued. It will defenitely create an overvaluation of shares. Investors always look for undervalued companies to invest because there is a chance to increase the stock price.But, it’s not always right to avoid a stock which has lower intrinsic value than the current market price.Sometimes we should consider this thing also.

ThankYou.......

jeff jeffy answered 1 year ago

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