5. Intrinsic values and stock prices

The intrinsic value of a companys stock, also known as its fundamental value, refers to the stocks true value based on accurate risk and return data. The value perceived by stock market investors determines the market price of a stock.

A stock trading at a price below its intrinsic value is considered to be undervalued. A stock trading at a price above its intrinsic value is considered to be overvalued.

Which of the following statements best describes a marginal investor?

a) A marginal investor thinks that the firms stock at the current price is a good deal, and she would buy more stock if she had more money to invest.

b) A marginal investor would buy more stock if the price fell slightly, would sell stock if the price rose slightly, and would maintain her current holding unless something were to change.

c) marginal investor thinks that the firms stock is priced too high, and she would only buy more stock if the price dropped sharply.

An analyst with a leading investment bank tracks the stock of Mandalays Inc. According to her estimations, the value of Mandalays Inc.s stock should be $55.78 per share, but Mandalays Inc.s stock is trading at $69.54 per share on the New York Stock Exchange (NYSE). Considering the analysts expectations, the stock is currently:

a) in equilibrium

b) undervalued

c) overvalued