Fin534 Online Discussion Questions Week 4

Fin534 Online Discussion Questionsweek4 Discussion Questionsfrom The

From the e-Activity, determine whether stock prices are affected more by long-term or short-term performance. Provide one (1) example of the effect that supports your claim. From the scenario, value a share of TFC’s stock using a growth model method and compare that value to the current trading price of a share of TFC. Determine whether the stock is undervalued or overvalued. Provide a rationale for your response.

Paper For Above instruction

Stock market fluctuations are influenced by a multitude of factors, broadly categorized into short-term and long-term performance indicators. Determining which exerts a more significant influence on stock prices involves analyzing the underlying factors driving investor behavior over different time horizons. Empirical evidence suggests that short-term performance, particularly quarterly earnings reports, news releases, and macroeconomic data, can cause immediate but often temporary price movements. Conversely, long-term performance, reflected through sustained revenue growth, strategic positioning, and profitability, tends to influence stock prices more substantially over time.

In the short term, stock prices are highly sensitive to earnings announcements. For instance, a company reporting quarterly earnings that surpass market expectations often witnesses an immediate spike in its stock price, reflecting investor optimism about future prospects. An example of this effect is Apple Inc. when reporting its quarterly earnings, where positive results often lead to intraday or short-term stock price increases, regardless of broader market conditions. This short-term effect, while impactful, can be volatile and may not necessarily indicate the true intrinsic value of the stock.

Long-term performance, on the other hand, provides a more stable foundation for stock valuation. Investors focusing on long-term growth are likely to consider factors like revenue growth rates, earning consistency, market share expansion, and competitive advantages. Such fundamentals tend to stabilize stock prices over longer periods, revealing the company's true value beyond transient market sentiments.

Applying this understanding, evaluating TFC’s stock using a growth model—such as the Gordon Growth Model—provides insight into its intrinsic value based on expected dividends and growth rate assumptions. Suppose TFC’s current dividend per share is $2.00, with an expected growth rate of 5%, and the required rate of return (discount rate) is 8%. The valuation would be:

Value per share = Dividend per share / (Required rate of return – Growth rate) = 2.00 / (0.08 – 0.05) = 2.00 / 0.03 = $66.67.

If the current trading price of TFC stock is, say, $60, then the stock appears undervalued because its intrinsic value exceeds the market price, suggesting that the stock may be a good investment opportunity. Conversely, if the market price is above $66.67, the stock might be overvalued, indicating that the current price discounts in overly optimistic expectations or market speculation.

This valuation method underscores the importance of considering long-term growth fundamentals in assessing stock value, rather than reacting solely to short-term price movements driven by quarterly disclosures or market volatility. Investors seeking stability and growth should prioritize these fundamental analyses to identify undervalued stocks and avoid short-term market noise.

References

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