Finance: Corporation and Intrinsic Value

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Principles of Finance
HW# 1

Question# 1-1: If you bought a share of stock, what would you expect to receive, when would you expect to receive it, and would you be certain that your expectations would be met?

Answer: If I bought a share of stock, I would expect to receive a share of the company. Meaning either to vote in the company or receive paid dividends, depending on if I purchased common or preferred stock. I would expect to receive my share instantly. I would not be certain that my expectations would be met. The reason why, there is not a way to be positive that the stock value is accurate and the market value can change at any time.

Question# 1-2: If most investors expect the same cash flows from Companies A and B but are more confident that A’s cash flows will be closer to their expected value, which company should have the higher stock price? Explain.

Answer: If most investors expect the same cash flows from Companies A and B but are more assured that A’s cash flows, than it will be close to their expected value, which should have the higher stock price. The reason why is that Company A will have the highest stock price if it is closer to the investors expected value. It will be higher due to the lower supposed risk.

Question# 1-3: What is a firm’s intrinsic value? It’s current stock price? Is the stock’s “true long-run value” more closely related to its intrinsic value or to its current price?

Answer: A firm’s intrinsic value is an estimate of the stock’s “true” value which is calculated by a competent analyst. Current stock price is the market value price but may be incorrect information since the marginal investor determines the current stock price and may have “perceived” the date incorrectly. The stocks true long-run value is more closely related to the intrinsic value.

Question# 1-4: When is a stock said to be in equilibrium? At any given time, would you guess that most stocks are in equilibrium as you defined it? Explain....
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