3. Stock prices and intrinsic values Aa Aa Benjamin Graham, the father of value

Question

3. Stock prices and intrinsic values Aa Aa 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. Based on your understanding of stock prices and intrinsic values, which of the following statements is true? O A stock's intrinsic value is based on true risk in the company. O A stock's market price is based only on true investor returns. 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? O A company that has been distributing a portion of their earmings every quarter for the past sik years 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

Explanation / Answer

1)

a stock's intrinsic value is based on true risk in the company

the above is the answer

because intrinsic value is the fair value of the company.

2)

first option is correct because its paying dividends which is the only cash flow in discounted dividend model.

the above are the answers

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