The intrinsic or theoretical value of a share of common stock is based primarily

Question

The intrinsic or theoretical value of a share of common stock is based primarily upon the

Select one:

A. current value of all actual cash flows received.

B. future value of the cash flows expected to be received.

C. historic value resulting from past market prices.

D. present value of the cash flows expected to be received.

If the required rate of return (ke) goes up and nothing else changes, the company's stock price (Po) should

Select one:

A. go up.

B. go down.

C. remain unchanged.

D. need more information

Explanation / Answer

Answer is D. Intrinsic value of a share of common stock is based primarily upon the present value of the cash flows expected to be recieved.An investor buys or acquires an equity share in expectation of i) a stream of future dividends from the company and ii) resale price of the equity after sometime when the investor is no longer interested in holding the share. Hence, the caash flows play the important role in determining the interinsic value of the firm.

Answer is A. If the required rate of return (Ke) goes up and nothing else changes, the compnay's stoick price should go down. As the required rate of return increases, it means the risk of investing in the security has increaased, hence the market price will go down.

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