Uses of Multifactor Models and Interpr ...
Uses of Multifactor Models Multifactor models are mainly used for return attribution, risk... Read More
If the per-share value of equity obtained from the model is lower than the share price, the stock is overvalued.
If the per-share value of equity obtained from the model is higher than the share price, the stock is undervalued.
If the per-share value of equity obtained from the model is the same as the share price, the stock is fairly valued.
Question
Which of the following situations most likely results in a stock being overvalued?
- When the market price is higher than the intrinsic value.
- When the market price is less than the intrinsic value.
- When the market price is equivalent to the intrinsic value.
Solution
The correct answer is A.
A stock is overvalued when the market price is higher than the intrinsic value.
B is incorrect. When a stock’s market price is lower than its intrinsic value, the stock is considered undervalued.
C is incorrect. When the market price is equivalent to the intrinsic value, the stock is considered fairly valued.
Reading 24: Free Cash Flow Valuation
LOS 24 (m) Evaluate whether a stock is overvalued, fairly valued, or undervalued based on a free cash flow valuation model.