Financial Planner

Answer: A - To determine is the selling price of stock is too high the intrinsic value must be determined. Intrinsic value is the underlying value that a careful evaluation would produce. An efficient market would always price stocks at their intrinsic value; an inefficient market would not necessarily do so. Under the dividend discount model, the intrinsic value of stock is the present value of the stock’s expected future dividends, discounted at the stock’s required rate of return. If a stock trades above its intrinsic value, the stock should be sold. If a stock trades below its intrinsic value, the stock should be bought.