Question

f the three intrinsic value estimates for Stock X were different, you would have the most confidence in Company X's CFO's estimate. Intrinsic values are strictly estimates, and different analysts with different data and different views of the future will form different estimates of the intrinsic value for any given stock. However, a firm's managers have the best information about the company's future prospects, so managers' estimates of intrinsic value are generally better than the estimates of outside investors.

Answer 1

Ans.

It is not necessary that management estimates are better than outside investors as Managers use the most optimistic scenario in valuing the intrinsic value including higher sales growth, low costs as % of sales, not taking any contingent cash outflow in case of any legal liabilities, regulatory actions etc. Managers generally tend to forecast the good pictures of company performance in future as managers incentives and variable salary (inc. ESOP) are linked to company's stock prices. Due to this conflict of interest managers estimate about intrinsic value are not most accurate.

Hence we need to consider the different analyst estimates as they will be conservative and will use most achievable performance of the company in calculating the intrinsic value which generally will be lower than managers estimate. Analyst accounts for the current situation in economy, industry prospect and also company's competitive factors, all the contingent cash flow in the calculating the discounted free cash flows. Hence their estimates are more fair than the managers estimates.