CFA Level I · CFA Level I Exam · Introduction to Equity Valuation
An analyst estimates the intrinsic value of a listed company's shares at 48 per share, while the shares trade at 55 in an informationally efficient market. Which statement best describes the analyst's conclusion?
The shares appear overvalued relative to the analyst's estimate, because the estimated intrinsic value of 48 is below the market price of 55. A security is considered undervalued only when intrinsic value exceeds market price, which is not the case here.
- AThe shares appear overvalued relative to the analyst's estimateCorrect
- BThe market price must be the true intrinsic value
- CThe shares are undervalued and should be bought
Explanation
Intrinsic value of 48 is below the market price of 55, so by the analyst's estimate the shares are overvalued. Options B and C misread the comparison: the analyst's estimate differs from price, and an undervalued label would require intrinsic value above price.
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