Question

In: Finance

First, spend a couple of sentences summarizing the Concepts in Action video you watched this week....

First, spend a couple of sentences summarizing the Concepts in Action video you watched this week. Then, answer the following.   In the Concepts in Action video you watched this week, the speaker mentioned, "A stock is fundamentally more difficult to value than a bond, because it’s less quantitative." Why do you think this is so (think about intrinsic vs. market value)?

Solutions

Expert Solution

"THE STOCKS IS FUNDAMENTALLY MORE DIFFICULT TO VALUE THAN A BOND, IT'S LESS QUANTITATIVE"

THE ABOVE STATEMENT IS ENTIRELY TRUE. THE STOCK ARE MORE DIFFICULT TO VALUE THAN BONDS AS TO FIND THE INTRINSIC VALUE OF STOCKS WE NEED TO HAVE THE FOLLOWING INFORMATION.

  1. PRICE OF SHARE
  2. DIVIDEND
  3. GROWTH RATE
  4. COST OF CAPITAL

SINCE THE FIRST STEP IS FINDING THE PRICE OF THE SHARE. IT IS DIFFICULT TO ASCERTAIN THE PRICE OF THE SHARE AS THE FACE VALUE IS FIXED BUT THE PREMIUM IS VARIABLE AND ITS CALCULATION NEED EXPERTISE.

SECOND IS DIVIDEND . DIVIDENDS ARE NOT FIXED FOR THE EQUITY SHAREHOLDER. THUS WE NEED TO MAKE ASSUMPTIONS FOR THE SAME WHEREAS FOR THE BOND THE RETURN VIA INTEREST ARE FIXED AND WHICH HELP TO DETERMINE THEIR PRICE.

THIRD IS GROWTH. THE GROWTH IS UNCERTAIN AS THE BUSINESS FUNCTIONS IN AN EVER CHANGING ENVIRONMENT. SO ASSUMPTIONS ARE NEEDED TO MAKE THE FLOW OF WORK GOING.

FOURTH IS COST OF CAPITAL. THE EXPECTATION OF THE INVESTOR MAY VARY FROM ONE INVESTOR TO OTHER SO DETERMINING THE COST OF EQUITY IS NOT A EASY TASK.

OVERALL, COMPUTATION OF THE FUNDAMENTAL VALUE OF THE SHARE IS MORE COMPLEX DUE TO LACK OF MATERIAL INFORMATION.

BUT FOR BOND THE SAME IS NOT THE CASE AS THEY CARRY A FIXED RATE OF INTEREST AND ITS COST TO COMPANY IS COMPUTED EASILY.


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