Question

The concept of market efficiency underpins almost all financial theory and decision models. When financial markets are efficient, the price of a security—such as a share of a particular corporation’s common stock—should be _______ to the present value estimate of the firm’s expected cash flows discounted by its appropriate rate of return (also called the intrinsic value of the stock).

Answer 1

Answer:

Equal to

Explanation:

When the price of a corporation's common stock is equal to the present value of discounted future cash flows, it will show a true representation of the value of the firm and in turn investors will have confidence in the company and its projected performance.

As new shares are issued from a company the company issues the shares at a forecasted future value based on the expected cash flows of the business.

For example if a company has estimated it will have cash flow of $12 million in the next one year, and it wants to issue 6 million shares. The value of the issued shares will be $12 million/6 million= $2. The firm is leveraging on it forecasted performance and cash flows.