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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

Is it better for a firm’s actual stock price in the market to be under, over, or equal to its intrinsic value? Would your answer be the same from the standpoints of stockholders in general and a CEO who is about to exercise a million dollars in options and then retire? Explain.

Summary Introduction

To identify: Whether the actual stock price in the market can be  under, over, or above its intrinsic value  from the standpoint of the stockholders and CEO, who are about to exercise a million dollars in options and retire.

Introduction:

Intrinsic Value: An estimated value of the stock which can be determined by considering the exact risk and return. The intrinsic value can be estimated but cannot be measured precisely. The intrinsic value can be calculated by professional analyst on the basis of data provided by the company.

Market price: The market price is the current value of the stock in which it is traded in the market. It is available in the newspaper and websites.

Explanation
  • The intrinsic value can be termed as long run value which is totally based on the estimation.
  • Lower the market price of the stock, higher the gain to the stockholders. When shareholders purchase the underpriced stock it will be a gain for them. Thus, the shareholders expects lower market price...

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