Rebalancing and Reconstitution of an I ...
Index managers must consider when the index should be rebalanced and when the... Read More
The market value is the current buying or selling price of an asset. Intrinsic value, on the other hand, represents the value investors would assign if they fully understood the asset’s investment qualities.
In an efficient market, market values should closely align with what investors perceive as the intrinsic value of assets. However, in relatively inefficient markets, significant disparities can exist between market and intrinsic value. In such cases, investors often compute their own estimates of intrinsic value to determine if assets are overvalued or undervalued.
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:
- Overvalued.
- Fairly valued.
- Undervalued.
Solution
The correct answer is C.
Due to your belief that Ford stock is worth $1.25/share more than it is currently selling for, you believe that the market is undervaluing the stock.