Question #4 - Reading 19 Equity Valuation - Applications and Processes

Reading: Reading 19 Equity Valuation - Applications and Processes

PDF File: Reading 19 Equity Valuation - Applications and Processes.pdf

Page: 3

Status: Correct

Correct Answer: A

Shared Context

- Why is the introductory paragraph in Article One incorrect? A) Most analysts believe that at some point intrinsic and market value will converge. B) The harder intrinsic value is to estimate the greater the potential divergence of market and intrinsic value. C) Markets cannot be constantly informationally efficient as this would mean that intrinsic and market price would always be identical.

Question

Using Heller's suggestion of an analyst intrinsic value which is $1.20 too high in the illustrative example for Article One, calculate the valuation error and the actual mispricing: Valuation error Actual mispricing

Answer Choices:

A. $1.20 $0.15

B. $1.35 $0.15

C. $0.15 $1.20

Explanation

Valuation error = IVanalyst – IVactual = 1.20 Actual mispricing = IVactual – price = (25.20 – 1.20) – 23.85 = 0.15

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