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Unformatted text preview: Answers to Chapter 1 Questions 1-5 A firms intrinsic value is an estimate of a stocks true value based on accurate risk and return data. It can be estimated but not measured precisely. A stocks current price is its market pricethe value based on perceived but possibly incorrect information as seen by the marginal investor. From these definitions, you can see that a stocks true long-run value is more closely related to its intrinsic value rather than its current price. 1-6 Equilibrium is the situation where the actual market price equals the intrinsic value, so investors are indifferent between buying or selling a stock. If a stock is in equilibrium then there is no fundamental imbalance, hence no pressure for a change in the stocks price. At any given time, most stocks are reasonably close to their intrinsic values and thus are at or close to equilibrium. However, at times stock prices and equilibrium values are different, so stocks can be temporarily undervalued or overvalued....
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This note was uploaded on 03/02/2011 for the course BMGT 340 taught by Professor White during the Spring '08 term at Maryland.
- Spring '08