Which of the following statements is most correct?
A) A firm's fundamental value is its market value.
B) A firm's fundamental value is the present value of its future free cash flows.
C) A firm's market price is usually greater than its fundamental value.
D) A firm's fundamental value is usually greater than its market price.
E) A firm's fundamental value is its book value.

Question

Quizplus · Accepted Answer

A firm's fundamental value is best represented by the present value of its future free cash flows, as this takes into account the expected future earnings and cash flows of the firm. Market value can be influenced by various factors such as speculation, rumors, or external events, which may not reflect the underlying value of the firm. While market prices may sometimes exceed fundamental values, this is not always the case. Book value, on the other hand, represents the value of a firm's assets minus its liabilities, and may not reflect the true economic value of the firm.

Which of the Following Statements Is Most Correct