Question

Discuss the concept of intrinsic value. Examine the relationship be between a firm’s intrinsic value and market value under the conditions of (i) efficient market and (ii) inefficient market

Answer 1

Intrinsic value of a company is regarded as the value of its Assets and liabilities and the overall revenue generating capacity based upon an investor's perspective.it can be calculated using various methods such as dividend discount methods , enterprise value method, comparative methods etc.

Intrinsic value is generally referred the value of the share while Market price is generally referred as the price of the share.

in an efficient market since all the informations have already been discounted and there is no furthur room for any discounting of previous informations, the market price are efficient so the intrinsic value would be equal to current market price in an efficient market.

In inefficient market, the value of share would not be equal to the price of share because the price is not reflective of overall informations and there is a scope for making excess return by penetrating through the difference in in value and price. So in inefficient market, intrinsic value and market price are different.