Company Analysis and Stock Valuation

Intrinsic Value of the Stock

 Present value of all expected future cash flows to the

stock investor
 Cash flows are discounted at the appropriate
required rate of return, k
 Expected future cash flows consist of:
1. cash dividends
2. sale price: proceeds from the ultimate sale of the stock
Company Analysis and Stock Valuation
Intrinsic Value of the Stock

 Intrinsic value is the analyst’s estimate of what a

stock is really worth
 Intrinsic value (IV) can differ from the current market
price (MP)
– If IV > MP: stock is underpriced => buy
– If IV < MP: stock is overpriced => sell or do not buy
Company Analysis and Stock Valuation
Market Equilibrium

In market equilibrium,
 Everyone has the same intrinsic value. So, intrinsic
value equals market price, i.e.,
IV0 = P0.
 Everyone also demands the same required rate of
return from the stock. So everyone has the same k.
In addition, expected HPR = k