Lesson 2 of 7 · All lessons in this module
- Intrinsic value, mispricing and the three model familiesVideo lesson
- Perceived value, investor and issuer actions, and value ranges
- Book value, market value, ROE and the cost of equityVideo lesson
- Book value of equity: what it measures and how it misleads
- Market capitalisation, price-to-book and enterprise value
- Absolute valuation: present value and asset-based models
- Relative valuation and reconciling several models
This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 2 of 7 · 13 min
Perceived value, investor and issuer actions, and value ranges
Every investor holds a different perceived value for the same share; when perceived value and price diverge, investors trade and issuers repurchase or issue shares, and analysts express value as ranges and scenarios rather than one number.
In short
- The market price is observed; intrinsic value (the true present value of expected cash flows) is unobservable; each investor's estimate of it is a perceived value.
- Perceived values come from three approaches: naive (story-based), relative and absolute (fundamental) valuation.
- Investors buy undervalued shares () and sell or short overvalued ones; issuers repurchase shares they think are undervalued and issue shares they think are overvalued.
- If the price converges to value, the expected holding period return is ; it fails if the model was wrong or bad news arrives.
- Analysts compare a price range with value ranges, often weighting scenarios by probability, and show them in a football field (floating bar) chart.
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