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CFA Level I Exam · Introduction to Equity Valuation

Equity Valuation and Intrinsic Value Explained

Updated 7 October 2026 · Fact-checked

Equity valuation estimates what a share is really worth. Intrinsic value is that estimate, based on the firm's fundamentals. Market price is what the stock trades at. If intrinsic value is above price, the stock is undervalued. If below, it is overvalued. Equal values mean fairly valued.

Understand Equity Valuation Overview and Intrinsic Value

Equity valuation is the process of estimating the value of a share or a whole company. Analysts do it to decide whether to buy, hold or sell, to set a price for an IPO or a deal, and to judge how well a firm is creating value.

Intrinsic value (also called fundamental value) is the value of an asset given a hypothetical complete understanding of its investment characteristics. In practice you never know it exactly. You estimate it from forecasts of cash flows, growth and risk. Two analysts can reach different estimates from the same facts.

Market price is simply where buyers and sellers trade today. It is observable. Intrinsic value is not. The core of the topic is the gap between the two. If your estimate of intrinsic value is above the market price, the stock looks undervalued. If it is below, the stock looks overvalued. If they match, it is fairly valued.

The gap links to market efficiency. In a perfectly efficient market, price reflects all available information, so price equals intrinsic value and no analyst can find mispricing consistently. In real markets, which are not perfectly efficient, prices can drift from intrinsic value. Active analysts try to find those gaps. A mispricing is only worth acting on if your estimate is better than the market's and the price later moves toward value.

Also remember that your estimate of value is itself uncertain. It depends on inputs such as forecasts and the discount rate. The market price may be the more reliable number if the market is efficient. The more efficient the market, the more you should doubt your own finding of mispricing.

Key formulas to remember

Mispricing (valuation gap)
Mispricing = Intrinsic value (estimated) − Market price
Positive means undervalued. Negative means overvalued. Zero means fairly valued.
Undervalued
Intrinsic value > Market price
The analyst's estimate is above price. Suggests a buy, if you trust the estimate.
Overvalued
Intrinsic value < Market price
The analyst's estimate is below price. Suggests a sell or avoid.
Efficient market
Market price ≈ Intrinsic value
Holds when price reflects all available information. Mispricing cannot be exploited consistently.

How to solve Equity Valuation Overview and Intrinsic Value questions

Use this order for any question on intrinsic value, market price and mispricing.

  1. 1Identify what is given: an estimate of intrinsic value, a market price, or a statement about market efficiency.
  2. 2Remember that intrinsic value is an estimate and market price is observed.
  3. 3Compare the two numbers. Subtract market price from intrinsic value.
  4. 4Classify the stock: positive gap is undervalued, negative gap is overvalued, zero is fairly valued.
  5. 5If the question mentions efficiency, ask how well price reflects information. More efficient means smaller or less exploitable gaps.
  6. 6Check whose estimate is used. A different analyst's inputs can change the conclusion.
  7. 7Pick the option that matches your classification and the logic of efficiency. Eliminate options that call price the 'true' value or treat the estimate as certain.

Quickest way: Two-number comparison

When to use it: Use when the question gives an intrinsic value and a price and asks for the conclusion.

  1. Circle the intrinsic value and the market price.
  2. Ask: which is bigger?
  3. Value above price means undervalued. Value below price means overvalued.
  4. For efficiency wording, choose the option where price already reflects information and mispricing is small or hard to exploit.

Common mistakes in Equity Valuation Overview and Intrinsic Value

  • Treating market price as the same as intrinsic value

    Price is visible, so it feels like the true value.

    Fix: Remember price is where the stock trades. Intrinsic value is your estimate of what it is worth. They differ whenever mispricing exists.

  • Reversing undervalued and overvalued

    Students compare in the wrong direction under time pressure.

    Fix: Always ask whether value is above price. Value above price means the stock is cheap, so undervalued.

  • Assuming intrinsic value is known with certainty

    A single number in a question looks exact.

    Fix: It is an estimate that depends on forecasts and discount rates. Different analysts can reach different values.

  • Believing an efficient market means price never changes

    Confusing efficiency with stability.

    Fix: Efficiency means price reflects available information. Prices still move when new information arrives.

  • Thinking a mispriced stock always gives a profit

    Students forget the price must move toward value.

    Fix: Profit needs your estimate to be right and the market to correct the gap. Neither is guaranteed.

Worked examples

Example 1

An analyst estimates the intrinsic value of a share at EUR 48.00. The share trades at EUR 42.00. Which is the best conclusion? A. The share is overvalued by EUR 6.00. B. The share is fairly valued. C. The share is undervalued by EUR 6.00.

Show the solution
  1. Intrinsic value is EUR 48.00. Market price is EUR 42.00.
  2. Gap = 48.00 − 42.00 = +EUR 6.00.
  3. A positive gap means intrinsic value is above price.
  4. So the share looks undervalued, according to this estimate.
  5. Option A reverses the direction. Option B needs a zero gap.

Answer: C. The share is undervalued by EUR 6.00.

Example 2

In a highly efficient market, which statement is most accurate? A. Market price will tend to reflect intrinsic value, so consistent mispricing is hard to find. B. Intrinsic value can be known exactly and differs from price. C. Prices never change once set.

Show the solution
  1. Efficiency means price reflects available information.
  2. So price should be close to intrinsic value.
  3. That makes consistently finding mispriced stocks difficult.
  4. Option B is wrong: intrinsic value is an estimate, not known exactly.
  5. Option C is wrong: prices move when new information arrives.

Answer: A. Market price will tend to reflect intrinsic value, so consistent mispricing is hard to find.

Exam tips

  • Read the direction carefully. Many wrong options simply reverse undervalued and overvalued.
  • Reject any option that calls intrinsic value certain or exactly known.
  • For efficiency questions, link efficient markets to price reflecting information and limited chances for mispricing.
  • With no penalty for wrong answers, always pick one of the three options. Eliminate the reversed-direction option first.

Practice questions from Introduction to Equity Valuation

Equity Valuation Overview and Intrinsic Value in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Equity Valuation Overview and Intrinsic Value: frequently asked questions

What is the difference between intrinsic value and market price?

Intrinsic value is an analyst's estimate of what a share is worth based on fundamentals. Market price is the price at which the share trades now. The gap between them signals possible mispricing.

How do you identify a mispriced stock?

Estimate intrinsic value, then compare it with the market price. If value is above price, the stock appears undervalued. If below, it appears overvalued. The conclusion is only as good as your estimate.

Why does market efficiency matter for valuation?

In an efficient market, price already reflects available information, so price should be near intrinsic value. This makes it hard to find mispriced stocks consistently. In less efficient markets, analysts have more opportunity.

Is intrinsic value the same as book value?

No. Book value is an accounting figure from the balance sheet. Intrinsic value is an estimate of worth based on expected future cash flows, growth and risk.