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

Which of the following best describes a reason that an analyst's estimate of intrinsic value is likely to differ from the market price of a company's shares even in a reasonably efficient market?

Valuation models rely on uncertain estimates of inputs. Forecasts of cash flows, growth rates and required returns are subject to error and differing judgment, so analyst estimates of intrinsic value can differ from market price even when markets are reasonably efficient and incorporate public information.

  1. AIntrinsic value is always set equal to book value
  2. BValuation models rely on uncertain estimates of inputsCorrect
  3. CMarket prices ignore all publicly available information

Explanation

Valuation models depend on forecasts of cash flows, growth and required return, which are uncertain, so estimates of intrinsic value vary between analysts. Intrinsic value is not defined as book value, and market prices do not ignore public information in a reasonably efficient market.

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