Question

In November 2006, Citigroup's stock (NYSE: C) was trading at $49.59. Following the credit crisis of 2007-2008 and by the end of October 2009, Citigroup's 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?
A) A stock's intrinsic value is based on true risk in the company
B) A stock's market price is based only on true investor returns.
You can estimate the value of a company's 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 company's stock?
A) 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
B) A company that has been distributing a portion of their earnings every quarter for the past six years
Which of the following describe the reason(s) why maximization of intrinsic stock value benefits society. Check all that apply.
A) Most investors appreciate the risk companies take to maximize their stocks
B) Successful companies benefit consumers
C) Most people have an important stake in the stock market.
D) People like to work for companies that minimize operating costs.

Answer 1

Answer:

1. A) A stock's intrinsic value is based on true risk in the company

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

3. B) Successful companies benefit consumers

C) Most people have an important stake in the stock market.

Explanation:

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

A) A stock's intrinsic value is based on true risk in the company.

The Intrinsic value of a stock takes into account the market sentiment of a given stock which means that I shows the riskiness of it.

2. Which of the following companies would you choose to evaluate if you were using the discounted dividend model to estimate the value of the company's stock?

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

The Dividend Discount Model uses constant dividends in calculation of stock price so a company that has been paid dividends is very much Preferred than one that isn't.

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

B) Successful companies benefit consumers

C) Most people have an important stake in the stock market.

Successful companies do indeed benefit consumers as they will pass on their wealth as well as paying workers better to stimulate growth.

Also a lot of people are invested in the stock market. Maximising Intrinsic value thus increases worth.

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