Intrinsic values and stock prices

The intrinsic value of a company’s stock, also known as its fundamental value, refers to the stock’s "true" value based on accurate risk and return data. The value perceived by stock market investors determines the market price of a stock.

A stock trading at a price below its intrinsic value is considered to be undervalued. A stock trading at a price above its intrinsic value is considered to be overvalued.

Which of the following statements best describes a marginal investor?

-A marginal investor would buy more stock if the price fell slightly, would sell stock if the price rose slightly, and would maintain her current holding unless something were to change.

-A marginal investor thinks that the firm’s stock is priced too high, and she would only buy more stock if the price dropped sharply.

-A marginal investor thinks that the firm’s stock at the current price is a good deal, and she would buy more stock if she had more money to invest.

An analyst with a leading investment bank tracks the stock of Mandalays Inc. According to her estimations, the value of Mandalays Inc.’s stock should be $69.54 per share, but Mandalays Inc.’s stock is trading at $55.78 per share on the New York Stock Exchange (NYSE). Considering the analyst’s expectations, the stock is currently:

-in equilibrium

-undervalued

-overvalued

The correct answer to the first question is the number 1 A marginal investor would buy more stock if the price fells slightly and would maintain her current holding unless something were to change

The correct answer to the second question is : overvalued

Explanation:

Because the marginal investor is the one whose action determines a stock’s price is the investor who is most likely to be trading at the margin and therefore has the most influence of the pricing of its equity

The stock of this company is trading at $ 69.54 per share, that value is greater than the intrinsic one of $ 55.78 per share. Thus according to the analyst this stock is considered overvalued