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Fundamentals of Financial Management
Is it better for a firm’s actual stock price in the market to be under, over, or equal to its intrinsic value? Would your answer be the same from the standpoints of stockholders in general and a CEO who is about to exercise a million dollars in options and then retire? Explain
The best price of a firm’s shares is when stock’s worth of the company equals its intrinsic value as at a rate, there is no pressure to either buy or sell the shares in a hurry. In theory, the inherent worth and the actual trading value should equal although the intrinsic values are considered as the long run concepts. The executive role concerning shares is the maximization of a firm’s intrinsic value of the stocks and not necessarily its trading price. By so doing, the future average trading prices will also be maximized but not at all trading points around the trading periods. However, the shareholders would prefer undervaluing the share prices in the realization that should the executives be performing; then the trading prices need not be maximized at any point in time. Contrastingly, the CEO will prefer overvalued shares to benefit from the stock options at the present rates. Furthermore, the CEO will be retiring after making the decision, and so there will be no repercussions whatsoever unless he acted ultra vires during his term.
Explain whether the following statements ar…
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