What Do Intrinsic Valuation Models Tell Us?
All the approaches described in this chapter try to estimate the intrinsic value of an asset or business. However, it is important that we understand exactly what we are doing in the process. We are estimating what an asset or business is worth, given its cash flows and the risk in those cash flows. To the extent that the value is dependent on the assumptions we make about cash flows, growth, and risk, it represents what we think the intrinsic value is at any point in time.
So, what if the intrinsic value we derive is very different from the market price? Several explanations are possible. One is that we have made erroneous or unrealistic assumptions about a company’s future growth potential or riskiness. ...
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