Contents
- Index
Motivation
©2009 OS Financial Trading System
The relationship between intrinsic or fair value and market prices is controversial. The efficient markets hypothesis asserts that market prices generally provide an unbiased and the best estimate of fair values because they self correct when they deviate too far away from predicted equilibrium values. Behavioral finance argues that cognitive biases and other imperfections can prevent prices from self correcting. This debate spilled over into Congressional hearings on Capital Hill in October 2008 resulting in Alan Greenspan admitting he had placed too much faith in efficient markets which led him to overlook important fundamentals when implementing regulatory policies.
In this project we address these issues using a two stage abnormal growth free cash flows to equity (FCFE) model applied to companies that we expect are going concerns. You are required to adopt the role of an analyst/investor whose problem it is to assess whether the stocks you are working with are under, over or appropriately priced in the market place. The FCFE model attempts to assess the intrinsic value of a stock by estimating directly the future "economic dividends" that the stock can generate.