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CFA Level I · CFA Level I Exam · Introduction to Equity Valuation

A company's stock trades at 40 per share. An analyst's absolute valuation model gives an intrinsic value of 46 per share. Assuming the analyst's estimate is reliable, the stock is most likely:

The stock is most likely undervalued because the estimated intrinsic value of 46 exceeds the market price of 40. If the price moves toward intrinsic value, buyers would earn a positive excess return over the required return.

  1. Aovervalued, and should be sold
  2. Bfairly valued, because market price reflects intrinsic value
  3. Cundervalued, with a positive expected excess return from buyingCorrect

Explanation

Intrinsic value of 46 exceeds the market price of 40, so the stock is undervalued. If the market price converges to intrinsic value, a buyer earns an excess return beyond the required return.

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