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If the current market price is greater than the intrinsic value estimated using the DDM, the stock is overvalued. If it is equal to the intrinsic value obtained from the DDM, the stock is fairly valued. If it is less than the intrinsic value obtained from the DDM, the stock is undervalued.
Question
If the current market price is greater than the intrinsic value estimated using the DDM, the stock is most likely:
- Overvalued.
- Undervalued.
- Fairly valued.
Solution
The correct answer is A.
If the current market price is greater than the intrinsic value estimated using the DDM, the stock is overvalued.
B is incorrect. If the current market price is less than the intrinsic value estimated using the DDM, the stock is undervalued.
C is incorrect. If the current market price equals the intrinsic value estimated using the DDM, the stock is fairly valued.
Reading 23: Discounted Dividend Valuation
LOS 23 (p) Evaluate whether a stock is overvalued, fairly valued, or undervalued by the market based on a DDM estimate of value.
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