Stock prices and intrinsic values

Benjamin Graham, the father of value investing, once said, In the short run, the market is a voting machine, but in the long run, the market is a weighing machine. In this quote, Benjamin Graham was referring to the key difference between the price and the value of a security.

In November 2006, Citigroups stock (NYSE: C) was trading at $49.59. Following the credit crisis of 20072008 and by the end of October 2009, Citigroups stock price had plummeted to $4.27. Several banks went under, and others saw their stock prices lose more than 60% of their value.

Based on your understanding of stock prices and intrinsic values, which of the following statements is true?

The intrinsic value of a stock is based only on perceived investor returns.

A stocks market price is often based on investors perceived risk in the company.

You can estimate the value of a companys stock using models such as the corporate valuation model and the dividend discount model. Which of the following companies would you choose to evaluate if you were using the discounted dividend model to estimate the value of the companys stock?

A company that has been distributing a portion of their earnings every quarter for the past six years.

A company that is in a high-growth stage and plans to retain all its earnings for the next few years to support its growth.

Which of the following describe the reason(s) why maximization of intrinsic stock value benefits society? Check all that apply.

Successful companies can avoid raising external funds in the financial markets.

Successful companies higher more employees.

Stock price maximization requires efficient, low-cost businesses.

Most investors prefer companies that can raise prices beyond reasonable levels.