equity

chandniwadhwani92
Finance Junkie
Posts: 166
Joined: Mon Oct 06, 2014 7:36 am

equity

Postby chandniwadhwani92 » Tue Nov 04, 2014 5:50 pm

An increase in share price will decrease expected return other thing being equal. plz explain it
Intrinsic value of firms share is the discounted preset value of its future cash flows an increase in required return used to discount future cash flows will decrease intrinsic value
Explain this sentence and intrinsic value of share

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

equity

Postby edupristine » Wed Nov 05, 2014 11:11 am

Intrinsic value is a measure of value based on the future earnings a company is expected to generate for its investors - it attempts to measure the total net assets a company is expected to build in the future.

Intrinsic value may or may not be necessarily equal to the market value of the share. Value investors use a variety of analytical techniques (like Dividend Discount model shown below) in order to estimate the intrinsic value of securities in hopes of finding investments where the true value of the investment exceeds its current market value.

One model popularly used for finding a company's intrinsic value is the dividend discount model.

The basic DDM is:

Value of stock = Dividend_1/(1+r)1 + Dividend_2/(1+r)2 +…..+ Dividend_n/(1+r)n
Where r = Required rate of return

As we can see in the above equation, Intrinsic value of the stock is inversely proportional to the required rate of return.

So an increase in required return used to discount future cash flows will decrease intrinsic value.


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