Intrinsic value

Definition

Intrinsic value is the perceived or calculated true worth of a stock, based on future earnings or dividends. It is often used by investors to determine if a stock is overvalued or undervalued compared to its market price.

5 Must Know Facts For Your Next Test

1. Intrinsic value can be estimated using Dividend Discount Models (DDMs).
2. It considers the present value of expected future cash flows, including dividends.
3. A stock is considered undervalued if its intrinsic value is higher than its current market price.
4. Calculating intrinsic value requires assumptions about growth rates, discount rates, and future dividends.
5. Intrinsic value helps investors make informed decisions about buying or selling stocks.

Review Questions

• How do Dividend Discount Models (DDMs) help in calculating the intrinsic value of a stock?
• Why might an investor consider a stock undervalued based on its intrinsic value?
• What factors are essential to estimate the intrinsic value of a stock?

Related terms

Dividend Discount Model (DDM): A method for valuing a stock by assuming that dividends grow at a constant rate.

Market Value: The current price at which an asset or service can be bought or sold.

Discount Rate: The interest rate used to discount future cash flows back to their present value.