Market Value vs. Intrinsic Value

The market value is the price at which an asset can currently be bought or sold. The intrinsic value is the value that would be placed on it by investors if they had a complete understanding of the asset’s investment characteristics.

In an efficient market, market values should be an accurate reflection of perceived intrinsic value. In relatively inefficient markets, significant discrepancies may exist between market and intrinsic value to the point that investors in these markets may attempt to calculate independent estimates of intrinsic value to test if assets are being undervalued or overvalued.

Question

If you believe the per-share intrinsic value of Ford Motor Company (F) is $14.00 and it is currently selling at a market price of $12.75, you think the stock is:

A. Undervalued

B. Overvalued

C. Fairly valued

Solution

The correct answer is A.

Due to your belief that Ford stock is worth $1.25/share more than it is currently selling for, you believe that the stock is being undervalued by the market.

Reading 38 LOS 38b:

Distinguish between market value and intrinsic value

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