Benjamin Graham, the father of value investing, once said, “In the short run, the market is a voting machine, but in the long run, the market is a weighing machine.” In this quote, Benjamin Graham was referring to the key difference between the “price” and the “value” of a security. In November 2006, Citigroup’s stock (NYSE: C) was trading at $49.59. Following the credit crisis of 2007–2008 and by the end of October 2009, Citigroup’s stock price had plummeted to $4.27. Several banks went under, and others saw their stock prices lose more than 60% of their value. Q1. Based on your understanding of stock prices and intrinsic values, which of the following statements is true? a. A stock’s intrinsic value is based only on the perceived risk of a stock. b. A stock’s intrinsic value is based on true investor returns. Q2. You can estimate the value of a company’s stock using models such as the corporate valuation model and the dividend discount model. Which of the following companies would you choose to evaluate if you were using the discounted dividend model to estimate the value of the company’s stock? a. A company that is in a high-growth stage and plans to retain all its earnings for the next few years to support its growth. b. A company that has been distributing a portion of their earnings every quarter for the past six years. Q3. Which of the following describe the reason(s) why maximization of intrinsic stock value benefits society? Check all that apply. a. The owners of stock are society. b. Consumers benefit when companies rise prices beyond reasonable levels. c. Workers prefer companies that minimize operating costs. d. Successful companies attract more talent.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter2: The Domestic And International Financial Marketplace

Section: Chapter Questions

Problem 1P

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Stock prices and intrinsic values

Benjamin Graham, the father of value investing, once said, “In the short run, the market is a voting machine, but in the long run, the market is a weighing machine.” In this quote, Benjamin Graham was referring to the key difference between the “price” and the “value” of a security.

In November 2006, Citigroup’s stock (NYSE: C) was trading at $49.59. Following the credit crisis of 2007–2008 and by the end of October 2009, Citigroup’s stock price had plummeted to $4.27. Several banks went under, and others saw their stock prices lose more than 60% of their value.

Q1. Based on your understanding of stock prices and intrinsic values, which of the following statements is true?

a. A stock’s intrinsic value is based only on the perceived risk of a stock.

b. A stock’s intrinsic value is based on true investor returns.

Q2. You can estimate the value of a company’s stock using models such as the corporate valuation model and the dividend discount model. Which of the following companies would you choose to evaluate if you were using the discounted dividend model to estimate the value of the company’s stock?

a. A company that is in a high-growth stage and plans to retain all its earnings for the next few years to support its growth.

b. A company that has been distributing a portion of their earnings every quarter for the past six years.

Q3. Which of the following describe the reason(s) why maximization of intrinsic stock value benefits society? Check all that apply.

a. The owners of stock are society.

b. Consumers benefit when companies rise prices beyond reasonable levels.

c. Workers prefer companies that minimize operating costs.

d. Successful companies attract more talent.

Please provide the correct solution. Thank you!

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