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Duxx201 -

Good question and I see your point. Of course, we do not know if, or when, other investors will bid up the stock so that market value and intrinsic value are in equilibrium.

In any event, the time value of money is in ER. To illustrate, let's examine a company that I am thinking of buying.

If my cost of equity (discount rate) is 9%, then IV is $226 and ER is 157%. The firm's current stock price is $88.

At 10%, IV is $201 and ER is 129%.

At 12%, IV is $182 and ER is 107%.

So as we see, a change in the time value of money assumption changes our ER.


Hewitt
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