# 1. What is meant by “intrinsic value”? How is it determined?

### Question Description:

1. What is meant by “intrinsic value”? How is it determined? The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Intrinsic value is determined as the discounted free cash flow of the business. The Hall Dental Supply Company sells at $32 per share, and Randy Hall, the CEO of this well-known Research Triangle firm, estimates the latest 12-month earnings are $4 per share with a dividend payout of 50%. Hall’s earnings estimates are very accurate. a. What is Hall’s current P/E ratio? b. If an investor expects earnings to grow by 10% a year, what is the projected price for next year if the P/E ratio remains unchanged? c. Ray Parker, President of Hall Dental Supply Company, analyzes the data and estimates that the payout ratio will remain the same. Assume the expected growth rate of dividends is 10% and an investor has a required rate of return of 16%; would this stock be a good buy? Why or why not? d. If interest rates are expected to decline, what is the likely effect on Hall’s P/E ratio? 2. What impact does the market have on well-diversified portfolios? What does this suggest about the performance of mutual funds? 3. What is the relationship between fundamental analysis and intrinsic value?