University Stock Valuation Assignment: Intrinsic vs. Market Price

This assignment delves into the concept of stock valuation, focusing on the disparity between a stock's intrinsic value and its current market price. It begins by defining both intrinsic and market value, explaining that market value is determined by supply and demand, while intrinsic value represents an analyst's estimated true worth. The paper then explores various valuation techniques, such as the dividend discount model, and discusses the assumptions and limitations inherent in these models. It highlights how factors like future project financing and potential earnings, often overlooked in intrinsic value calculations, can significantly influence market prices. The assignment references relevant academic sources to support its arguments, providing a comprehensive analysis of the factors contributing to the differences observed in stock valuation.

Running head: STOCK VALUE
Stock Value
Name of the Student:
Name of the University:
Author Note:

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Table of Contents
Reason for difference between intrinsic value and Current Market Price:................................2
References:.................................................................................................................................4

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Reason for difference between intrinsic value and Current Market Price:
The market value of the stock is the price of the share which is trading in the market
at any given point of time. The price is determined by the demand supply forces which is
trading at the market and cause movement in the price of the shares. The intrinsic value of the
shares is the price at which the shares of the company should trade in the market. This value
justifies an analyst estimates of the price at which it should be trading in the market (Payne,
Wong and Tyler 2018).
The analyst which estimates the price of the shares in the market uses various
valuation techniques to calculate the intrinsic value. The intrinsic value of the share can be
different as per different analyst estimates and is calculated using various assumptions. One
such model which is used for valuing the stocks is the dividend discount model. The model
assumes a growth rate of dividend and assumes the dividend to be constant for the life of the
company. Hence, it is then discounted at the cost of equity less the growth rate to derive the
intrinsic value. This provides an estimate for the price at which the company should be
trading. This however, is not applicable in the real life terms as various factors pertaining to
the company needs to be considered when determining the stock price. If a company is
expected to acquire a project which would require financing and the company can stop
paying dividends, thus as per the dividend discount model the value of the company would
reduce but the project in reality would create a greater value for the stakeholders. Thus this
can be one reason for difference between the intrinsic value and the market value of shares
(Gilbert, Scotti, Strasser and Vega 2017).
Also the intrinsic value can be easily classified as the value of the company assets less
the liabilities. Thus the remaining value is the theoretical value which the shareholders will
receive if the company liquidates. However, the potential possibility of earnings from the

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assets of the company and the future prospects which the company can acquire is ignored in
the calculation of intrinsic value. While the market value of the shares takes the possibility of
future earnings into account when determining the price of the share in the market (Jamal
2018).

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References:
Gilbert, T., Scotti, C., Strasser, G. and Vega, C., 2017. Is the intrinsic value of a
macroeconomic news announcement related to its asset price impact?. Journal of Monetary
Economics, 92, pp.78-95.
Jamal, A., 2018. Conveniently Conscious: How Conscious Capitalism Constrains Intrinsic
Value Creation In Businesses (Doctoral dissertation).
Payne, B., Wong, R. and Tyler, M., 2018. ON THE USE OF ENTERPRISE VALUE
MULTIPLES AS INDICATORS OF INTRINSIC VALUE IN EMERGING
MARKETS. Southwestern Economic Review, 45, pp.57-71.