Chapter 1 An Overview of Financial Management 13raised. Management should provide information that helps investors make better
estimates of the! rm’s intrinsic value, which will keep the stock price closer to its
equilibrium level. However, there are times when management cannot divulge
the true situation because doing so would provide information that helps its
competitors.^6
(^6) As we discuss in Chapter 2, many academics believe that stock prices embody all publicly available
information—hence, that stock prices are typically reasonably close to their intrinsic values and thus at or close
to an equilibrium. However, almost no one doubts that managers have better information than the public at
large, that at times stock prices and equilibrium values diverge, and thus that stocks can be temporarily
undervalued or overvalued (as we suggest in Figure 1-3).
SEL
F^ TEST What’s the di# erence between a stock’s current market price and its intrin-
sic value?
Do stocks have known and “provable” intrinsic values, or might di# erent
people reach di# erent conclusions about intrinsic values? Explain.
Should managers estimate intrinsic values or leave that to outside security
analysts? Explain.
If a " rm could maximize either its current market price or its intrinsic value,
what would stockholders (as a group) want managers to do? Explain.
Should a " rm’s managers help investors improve their estimates of the " rm’s
intrinsic value? Explain.
R&D
breakthrough
Actual stock
price
Intrinsic
value
Stock
undervalued
Stock
overvalued
1983 1988 1993 1998 2003 2008
Stock Price and
Intrinsic Value ($)
Graph of Actual Prices versus Intrinsic Values
F I G U R E 1! 3