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Intrinsic Value vs Market Value, Opportunity Cost Rate

Q1-3,

What is a firm's fundamental, or intrinsic, value? What might cause a firm's intrinsic value to be different than its actual market value?

Q2-2,

What is an opportunity cost rate? How is this rate used in discounted cash flow analysis, and where is it shown on a time line? Is the opportunity rate a single number that is used in all situations?

Q3-5,

What is operating capital, and why is it important?

Q3-6,

Explain the difference between NOPAT and net income. Which is a better measure of the performance of a company's operations?

Q3-7,

What is free cash flow? Why is it the most important measure of cash flow?

Solution Preview

What is a firm's fundamental, or intrinsic, value? What might cause a firm's intrinsic value to be different than its actual market value?

Intrinsic value is the Underlying value of a firm separate from its market value or share prices, and based on both quantitative factors (capital, earnings, revenue) and qualitative factors (management quality, intellectual capital, past record).

Reference: http://www.businessdictionary.com/definition/intrinsic-value.html

Market value is the value that someone else places on an asset - what that asset is worth to some other market participant. Intrinsic value is the actual value or worth of a firm. This fundamental difference in values supports the argument that the true value of a company is not necessarily reflected in the market valuations given to them by other market participants.

Reference: http://scottsambucci.blogspot.com/2008/02/market-value-vs-intrinsic-value.html

Intrinsic value takes the value of intangible aspects of a company into account. However, investors can never know everything about a company, and they can't always predict which factors will negatively affect a stock. Companies whose assets happen to be primarily intangible, such as technology and other companies with a lot of intellectual property may experience considerable differences between their market values and their intrinsic values.

Reference: http://www.streetauthority.com/terms/i/intrinsic-value.asp

What is an opportunity cost rate? How is this rate used in discounted cash flow analysis, and where is it ...

Solution Summary

The solution consists of 914 words that deals with concepts like intrinsic value vs market value, opportunity cost rate, operating capital, NOPAT vs. net income and free cash flow.

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