Posted in Finance, Accounting and Economics Terms, Total Reads: 1277
Definition: Intrinsic Value
1 Intrinsic Value of an asset: The intrinsic value is the actual worth of an asset, as perceived, rather than its current market value taking into regards to both qualitative and quantitative aspects affecting the business.
Value Investors use fundamental analysis to find out qualitative factors (management, past performance, business model etc.) and quantitative factors (Revenue, Ratios etc.) to find out the actual value of the firm. The intrinsic value can be either greater than or less than the market value implying firm is undervalued or overvalued respectively.
For example XYZ Company’s stock has a market value of Rs.100. However, it recently appointed new managers away from a competitor and launched a new product line under one of its famous brands. These changes are sure to increase XYZ’s competitive advantage; hence the intrinsic value of its stock would be greater than Rs. 100 now.
2Intrinsic Value of an Option: Intrinsic value of an option is the gain that one would get by exercising an in-the-money option or is otherwise zero in case of an out-of-the-money option.
For example a call option for a stock with market price Rs. 100 and strike price Rs. 96 has intrinsic value Rs. 4 and zero if market price drops below Rs. 96.